Bond issuers left out in the cold

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It is often said that a week is a long time in politics – but in the debt capital markets 24 hours can seem like a lifetime as windows open at a moment’s notice for new bond issues with sentiment changing dramatically on a daily basis.

It has made life difficult for syndicate bankers, who are charged with pricing and executing new debt deals for leading companies and financial institutions.

Stephen Jones, head of European financing solutions at Barclays Capital, said: “Issuers need to take advantage of open windows. Every time a window has been open, it has been sensible to go as the market has always widened in the next week or month.”

Robert Whichello, head of European syndicate at BNP Paribas, adds: “The job of a syndicate manager is much less straightforward than before with much more pressure around decision-making.”

Research by Barclays Capital shows that this month the primary investment grade bond markets in the US and Europe have been open only on five days for key transactions. For example, on March 13 positive news on writedowns from ratings agency Standard & Poor’s and equity market gains helped issuers raise $4bn. The next day, with the US Federal Reserve announcing the first stage of the Bear Stearns bail-out, no significant deals were priced.

A year ago, the dynamics of the market were very different. Then, investment grade issuers could raise benchmark amounts – in the $500m-$1bn range – on most days with many bankers describing the market for issuers as “priced to perfection”. Order books were often oversubscribed five or six times, in spite of historically tight credit spreads that offered investors little in the way of returns.

“Times have changed a lot since the start of last year,” said Bryan Pascoe, global head of debt syndicate at HSBC. “When it comes to launching a bond in today’s market, it is essential to ensure equities are performing and make sure there are no negative headlines that could cause a sudden downturn in investor sentiment.”

Mr Whichello said: “This is not a market for the faint-hearted and the days of any bank being able to sell a deal are long gone.”

More than anything, the debt markets are taking their cue from equities, which are used as the main gauge of sentiment. Broadly, when equities are up, an issuance window opens. When they are down, the new issue market in effect shuts down for the big corporate deals as investors have little appetite to buy bonds.

Mr Jones said: “The debt markets are more sensitive to sentiment in the equity markets at present. Equities are certainly more important for this directional guide now than they were 12 months ago. The debt markets are very sensitive to asset prices.”

So far this year, issuers that have taken advantage of an opening in the market have managed to lock in lower coupon rates than those who have waited. This makes it even more essential to move quickly when a window opens.

However, moving swiftly requires preparation with syndicate bankers increasingly relying on their sales teams for information on what investors will buy and at what price. The days of opening a book at short notice and still being overwhelmed by orders are over.

In Europe, there is more reliance on a handful of large “real money” investors, such as the life and insurance funds, to price a deal as orders from hedge funds and specialist funds have fallen away. This has always been the case in the US, but in Europe, before the credit squeeze, up to 50 per cent of a deal was often bought by leveraged funds. That is down to about 25 per cent, according to HSBC.

Bankers say the balance of power, when it comes to finalising a price of a bond, has for this reason shifted towards these real-money investors, who can demand much higher coupon rates.

For example, Hellenic Telecommunications (OTE), Greece’s largest telephone group, a triple-B-rated issuer, priced a bond last month at 160 basis points over mid-swaps. In February last year Cemex Espana, the Spanish arm of the cement producer, also triple-B-rated, priced a bond at 62bp over.

However, investors say the erratic conditions make their jobs harder as well.

Dominic White, a fund manager at Morley Fund Management, said: “People might say we can get a better price, but that only works if you are using cash to buy paper. If you want to readjust your portfolio and sell something similar that you already hold, then you will make a loss on that as prices have fallen sharply.

“So it becomes a question of: do you want to use your cash or not?”

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