Feb 15 (IFR) - Stable market conditions and intensifying
competition among the ECM divisions of Wall Street banks have
prompted a spate of secondary offerings structured as overnight
"blocks" or capital-committed trades, a sometimes controversial
but increasingly important trend that exposes banks to losses if
they mis-price deals.
Led by last Monday's US$1.8bn block trade in hospital
operator HCA, there have been 15 block trades -
hard-underwritten deals that involve banks directly buying
parcels of shares before quickly re-offering them to investors -
so far in 2013 in the US, raising US$8.7bn in total.
By volume, this is more than double the same period last
year, suggesting that 2013 will be another big year for block
trades if current trends continue.
"It is going to keep working until someone gets their face
blown off," said one ECM syndicate banker. "The marketed trade
has gone the way of the buggy whip."
As with the HCA deal, a significant proportion of these
transactions involves private-equity funds as sellers seeking
quickly to monetise their residual investments in companies they
have taken public in recent years and have owned since the
previous leveraged buyout boom. A number of frequent issuers,
including REITs, have also undertaken block trades to fund
Other notable deals in recent weeks include Apollo's sale of
a US$1.5bn stake in Dutch chemical company LyondellBasell
Industries, Bain Capital's sale of a US$500m holding in
industrial technology company Sensata Technologies,
Blackstone's US$321m sale of its remaining interest in hospital
staffing firm Team Health Holdings, and the KKR-led sale
of a US$930m stake in NXP Semiconductors.
Although the shift towards risk is a continuation of ECM
trends in 2012, block trading activity is certainly accelerating
in a rising stockmarket with declining volatility and general
investor bullishness towards equities. Add an influx of capital
into equity - domestic equity funds have enjoyed year to-date
inflows of US$10.8bn, according to Lipper - and the conditions
are ripe for this type of transaction.
TAKE THE CHEQUE
The 40%-plus of US follow-on stock issuance (including
foreign-domiciled companies listed in the US) conducted through
block trades so far this year compares with 24.5% last year, 18%
in 2011 and 4% in 2010.
Barclays and Citigroup have led the charge, with
capital-committed trades accounting for 41.3% and 37.1% of their
ECM volumes last year, according to Thomson Reuters.
JP Morgan (15.4% of 2012 follow-on underwriting volume) and
Goldman Sachs (21.3%) have in the past been less inclined to
engage in block purchases, instead advocating marketed stock
sales (although Goldman did lead last week's LyondellBasell
"Never confuse intelligence with a bull market. You have to
look at the risk relative to your balance sheet," said a Wall
Street head of ECM syndication. "We have seen appetite [to do
risk trades] go way beyond what we have ever seen before."
The block trade trend is certainly controversial in ECM
circles. This is not just because of the increased risks for
banks so soon after the financial crisis, but also because
blocks tend to be done at tight margins and are seen by some as
an exercise in buying league table credit.
In part, this is because the right to buy blocks is often
the result of an increasingly fierce competitive bidding
process, usually with at least three or four banks, but
sometimes as many as six.
The sponsors behind hospital operator HCA have been some of
the most visible beneficiaries. Having led a US$33bn buyout in
2006, KKR and Bain Capital took the company public at the
beginning of 2011 but have already cashed out twice in the past
three months, taking US$1.06bn on a block sale to Morgan Stanley
in December and US$1.8bn on the latest sale to Citigroup and
The banks purchased the 50m-share block at US$35.87 and
re-offered it to investors at US$36, a 1.8% discount to last
sale and a gross underwriting spread of US$6.5m or 0.4%.
Happily, shares of the hospital operator traded above re-offer
in the aftermarket, reflecting strong demand for hospital stocks
on expectations that they will benefit from healthcare reform.
"The sellers have achieved very attractive discounts, the
banks have been able to make justifiable fees and most of the
blocks - not necessarily the second they trade, but a week out -
have done well," another ECM head said of the recent spate of
In some cases, a successful verdict is less obvious. Morgan
Stanley sought to offload risks on a 15m-share purchase of
Sensata Technologies on Tuesday at US$33.45, versus a last sale
price on Tuesday of US$33.70. The stock closed on Wednesday at
US$33.26 and never traded above the re-offer.
Some of the selling pressure may have come from traders
shorting the stock on the assumption that it would trade down
and that they could cover their shorts in the placement.
That tactic doesn't always work - and such trading patterns
don't necessarily indicate that the banks involved are stuck
with stock. "Sometimes people attack the deal because they think
you're long," said one syndicate official close to the
situation. " often the deals are actually pre-sold."
A corollary of rising risk appetites is that private-equity
firms have been able to negotiate shorter lock-up agreements
with investment banks. HCA featured a 45-day restriction on
further insider selling, shorter than the 90-day restriction on
typical follow-on offerings, while Apollo has only a 30-day
lock-up on its remaining LyondellBasell holdings.