Bookrunners: how many are too many?

Author: Danielle Myles | Published: 26 Nov 2014
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The large number of passive bookrunners appearing on European bond offerings has been queried by market veterans.

For investors it means fielding more calls on a single deal. But their interest in the development seems to stem primarily from its impact on secondary market liquidity, which is considered dire.

Passive bookrunners underwrite and sell the bonds, but aren’t involved in the structuring or allocation decisions. Originating in the US, the role has taken hold in Europe over the last two or three years.

But some take issue with the role, which corporates often use to accommodate relationship banking. There are queries as to whether having many underwriters – often with different and unclear titles – can give rise to accountability issues.

"My personal bugbear is that almost every second deal now has lists and lists of bookrunners – both active banks and passive banks," said Martin Egan, chair of the International Capital Market Association’s (ICMA) primary market practices committee, and BNP Paribas’s global head of market and origination.

Its impact on best execution and secondary market performance are creating concern, along with the fact many are added at a very late stage of the process. However the number and nature of bookrunners on a deal changes from issuer to issuer.

"We are pretty clear on this now; we will have active only," said Gary Admans, manager of BP debt capital markets, speaking at the ICMA's Primary Market Forum this month. The company maintains this approach, even though it means juggling five or six active banks on any deal.

"Overall our understanding is that passive banks don’t like the passive label as they want to see as being part of the market and allocations," he added

But while this strategy may work for a large and frequent issuer, it may not for companies that issue bonds once or twice a year.

If an infrequent issuer has a large number of relationship banks, and a limited number of other business lines through which they can offer fees, passive bookrunners can seem a feasible option.

It’s telling that the role came to the fore in the US in 2009, when there was a severe shortage of deals.

There is no strict rule regarding passive bookrunners’ role in the aftermarket. But it’s clear that relationship banking has led to insitutions appearing on a deal in which they don’t actively make a market.

And this is one of investors’ highest priorities in today’s troubled aftermarket.

"Secondary liquidity is clearly a consideration when going into a new deal and the presence of the large market making houses is clearly of importance," said Ketish Pothalingam, senior vice-president and portfolio manager at Pimco, speaking at the same ICMA forum. "If a new issue comes to the market which is likely to have poor secondary market liquidity due the deal not being actively traded, participation in such a deal would require a greater spread at issue."

Watch out for IFLR’s December/January cover story on liquidity in the secondary bond market.

See also

Reforms won’t solve bond allocation frustrations

LMA syndicated loan conference highlights

Highlights from IFLR’s 2014 capital markets forum