Syndicates bare teeth as European PP market hots up

Fri Mar 22, 2013 6:38am EDT

Related Topics

* Aggressive pitching in USD50bn private placement mkt

* Overbanking causes friction between dealers

* Defenders say market provides checks and balances

By Josie Cox

LONDON, March 22 (IFR) - Lukewarm corporate issuance volumes and overbanked public bond deals have driven syndicate teams to flex their muscles in the private placement market, where they can earn more fees and secure valuable league table credit at the same time.

Although private placements have historically been viewed as non-events, a EUR750m 20-year deal printed by Volkswagen this week sparked a vicious sparring match between several bond houses, highlighting just how competitive the market has become as an enticing source of lucrative business and glory.

Some syndicate officials who missed out on the mandate, labelled bookrunners Credit Suisse and Goldman Sachs as overly aggressive, claiming that they had won the print through predatory pitching.

Impartial observers, however, maintained that the contention was a by-product of banks being desperate to bag the biggest possible share of an ever-dwindling fee pool using whatever resources possible.

"Some bankers may become irritated if they are not mandated for a bond, but the nature of the private placement market is that less banks are involved so it's inevitable," said Kristen Roberts, partner at law firm Herbert Smith Freehills.

Looking at the raw data makes the rising tensions understandable.

Syndicated corporate issuance volumes are down approximately 12% year-on-year, and fees have fallen in sync.

In 2012, global non-financial investment-grade corporate debt issuance hit USD1.26trn, a 23% increase compared to 2011 and an all-time annual record. Fees, meanwhile, increased by just 9%. This is further exacerbated by the size of bookrunner groups rising.

It used to be the case that only benchmark transactions had multiple arrangers but - bar four deals - all public bonds sized EUR300m or above that have priced this year have featured three or more bookrunners, according to Thomson Reuters data.

On jumbo deals the spoils are shared even further. For example, some 23 banks were mandated for EDF's four-part EUR6.25bn-equivalent triple-currency hybrid in January.

BAD PRACTICE OR SOUR GRAPES?

In 2012, approximately USD50bn worth of US private placement transactions were executed, a 6% annual increase and a 12% rise on 2010 levels, according to Barclays data.

Last year, more than a third was from European corporates, and strategists expect this to rise. Competition for this growing business, some say, is leading to sharp practice and advice.

"Some institutions have no qualms when it comes to pulling the wool over the eyes of the issuer and the investors," one origination official said.

Several said that the 3.3% coupon paid by Volkswagen on its private placement was around 10bp tighter than it should have been, but it is hard to quantify this argument, given the nature of the placement. Both bookrunners declined to comment.

Other critics said that banks are hungry to secure league table credit. Credit Suisse and Goldman Sachs both rank in the lowest quartile of the top 10 corporate bond issuance tables at present.

The majority of observers, however, dismissed this as sour grapes.

One syndicate official active in the private placement market said that pricing a bond at a level deemed too aggressive would be pointless.

"It does happen that banks are willing to make a loss just to get league table credit, but that effectively counteracts the aims of being a syndicate banker," he said.

"If you end up with securities left on your balance sheet, it's the best proof that you haven't done your job well and that you haven't offered investors enough compensation."

Another official said that while it may be easy for syndicate bankers to direct the blame, the market itself was the ultimate litmus test for whether a deal was priced too cheaply.

"The market is a checks and balances system, and if the deal doesn't fly then no one wins," he said.

"There's no incentive for a banker to be more aggressive than he feels comfortable with, especially if he is underwriting the paper." (Editing by Alex Chambers, Philip Wright)

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