Banks fight for ‘block’ share deals

The trades reflect banks’ growing desire to take on risk

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Wall Street banks are vying to underwrite companies’ share sales in so-called “block trades”, a sign of their willingness to take on greater risks and use more of their own capital.

The volume of block trades, which are also known as “bought deals”, rose sharply in the first three months of this year to a quarterly high, according to Dealogic. Such deals are expected to remain a feature of the equity capital markets.

Block trades occur when equity underwriters buy a secondary offering of shares from a company at a discount to the current market price, and then and place those shares with investors in the market.

Those trades differ from other secondary share offerings that companies use to sell additional shares, because banks briefly own the block trade and hold it on their account until it is sold on. The banks also take on more risk, because the shares could lose value while the bank is still holding them.

There were 30 such trades in the first quarter, raising $12.2bn, the Dealogic figures show. That compares with 15 deals that raised just over $2bn in the first quarter of 2010. The busiest year for block trades was 2006, near the peak of the credit boom, when volume totalled $24.8bn in 115 deals.

The block trades, in which the bank puts its own capital to work on behalf of the issuer, reflect the banks’ growing desire to take on risk.

Evidence of their increased appetite has also been seen in the rise of financing for deals such as JPMorgan’s loan to AT&T to buy T-Mobile, or Nasdaq OMX’s bid to buy NYSE Euronext with financing from Bank of America Merrill Lynch and Wells Fargo.

“It speaks to the risk tolerance of the banks. Their performance has stabilised and they want to put risk capital to work to earn a return,” said Craig Orchant, co-founder of EA Markets, a capital markets advisory firm.

Recent spikes in equity market volatility following last month’s natural disaster in Japan, political upheaval in the Middle East and renewed debt strains in the eurozone have made the trades more lucrative for banks. “It increases the premium for us doing our job well,” said one banker, who was not authorised to speak on his bank’s fees.

The largest US block trade in the quarter was $1.5bn for Annaly Capital Management, a real estate investment trust. The lead bookrunner was Credit Suisse. Other large trades were completed for Hertz, the car rental group, and Avago, a technology company in which private equity groups were selling shares.

The top bank for global block trades in the quarter was Deutsche Bank with $2.2bn, followed by Morgan Stanley and Barclays Capital, according to Dealogic.

The speed at which shares are sold has accelerated. Last year, banks would often take weeks to place market offerings to sceptical investors. Now the percentage of equity offerings priced overnight has risen sharply. Dealogic said that overnight offerings were 48 per cent of all equity capital raisings in the US in the first quarter.

Brian Reilly, head of US equity capital markets at Barclays Capital, said sales by private equity groups of shares in their portfolio companies were creating a strong pipeline.

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