COMMENT: Allocation, allocation, allocation

Mon Mar 10, 2014 4:29am EDT

By Philip Wright

LONDON, March 10 (IFR) - It will come as no surprise to anyone with even a passing knowledge of the new issue bond markets, but investors are not happy with the way in which paper is allocated.

This is nothing new: grumbling has been a way of life for many portfolio managers for a long time now - perhaps ever since the very first portfolio manager.

But there is now the apparent possibility of the SEC getting involved, with Goldman Sachs announcing it is co-operating with an inquiry into "allocations of and trading in fixed income securities".

Others (including Citigroup and Morgan Stanley) have been approached, although it is unclear whether the SEC is serious about the probe or just going through the motions.

Bankers claim to be relaxed about the investigation, dismissing comparisons with the global research settlement that saw the industry hand over billions of dollars in fines for the deeply dodgy way banks allocated shares in hot internet IPOs at the tail-end of the last century.

Internal rules are now in place for bond sales, syndicate managers say, and they are confident that their working practices are beyond reproach.

They would not be human, though, if they weren't a little nervous. In the current climate, after all, goalposts are nothing if not moveable. And in certain sectors - rates setting, FX trading - what was once standard market practice might well now put people in jail.

Nonetheless, at the risk of failing to play the popular international sport of banker-bashing, it must be said that bond syndicate officials do face a rather thankless (though well paid) task.

Order books that are more often than not multiple times covered create a seemingly unsolvable conundrum. And the larger the transaction, the more problems it seems to throw up.

When Apple sold its then record-breaking US$17bn multi-tranche deal last April, it was swamped by more than US$50bn of demand from some 900 accounts, comprising about 2,000 separate orders. Five months later, Verizon's remarkable US$49bn offering attracted in excess of US$100bn - from 900 accounts and 3,000 orders.

PIECE OF THE ACTION

Everybody wanted a piece of the action. So what's a poor syndicate jockey to do when caught between a BlackRock and a hard place?

There are of course good arguments to be made for ensuring that even relatively small investors get a decent crack of the whip. But let's face it: when the big boys are putting in single orders of US$5bn - or even US$7bn, as they were rumoured to have done in the Verizon deal - then they are always going to be treated better, especially when a syndicate manager is under pressure to get bonds off the books quickly.

What is not required, though, is more regulation - not least because of the unintended consequences that often result. When it comes to allocating hot deals fairly, for example, a large part of the problem stems from the lack of liquidity caused by regulators clamping down on banks' trading operations in the first place.

Because investors - especially the biggest - know that they will pay through the nose to source bonds in the secondary market, if they can find them at all, the pressure to get a decent allocation in the primary sector has gone up, while the chance for smaller players to get looked after has diminished.

Is it fair that syndicate desks favour those with the biggest orders? Perhaps not. But as everyone's Mum never tired of saying, life's not fair. And nor is the process of allocating bonds.