The large number of passive bookrunners appearing
on European bond offerings has been queried by market
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
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
"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
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
"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
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