Feb 15 (IFR) - US investment banks are increasingly
embracing so-called block trades - direct purchases of large
chunks of company shares for resale - which are seen by some as
a risky and even controversial move in the wake of the financial
The trades allow sellers of shares to collect their proceeds
immediately while leaving banks to carry the risk, often just
overnight, of selling the stock into the market.
Typically, several banks compete to buy the blocks at an
agreed price before reselling the position at a "re-offer" price
above what they paid.
But in addition to potentially making less profit than by
underwriting a traditionally marketed sale of shares, the banks
risk a loss if they mis-calculate what investors will pay for
the shares later on.
Yet at a time when profits are under pressure, the chance
for a big score is increasingly tempting the big investment
banks to use the block trade option.
"The competition is as fierce as it has ever been in this
business," said one Wall Street banker.
Hospital operator HCA this week sold $1.8 billion of
shares in the 15th block trade so far in 2013.
Those trades have raised $8.65 billion - more than double
the amount in block trades over the same period last year,
suggesting the traditional marketing of follow-on offerings is
out of fashion right now.
More than 40% of this year's follow-on offerings - secondary
offers of shares from companies that are already listed - have
been block trades, versus less than 5% in 2010.
"The marketed trade has gone the way of the buggy whip," the
As was the case with the HCA deal, block trades often
involve private equity funds selling off large quantities of a
stock in a company they have invested heavily in to take public.
This week alone, in addition to the HCA trade, Apollo sold a
$1.5bn stake in Dutch company LyondellBasell Industries ;
Bain Capital off-loaded a $500m stake in Sensata Technologies
; and Blackstone sold its remaining $321m stake in Team
Although there appear to have been few hiccups with block
trades so far this year, the deals are seen by some in the
industry as controversial.
One issue is the increased level risk of in these trades so
soon after the financial crisis, which many have blamed on
excessive risk-taking by banks.
However, block trades seem to have caught fire. A rising
stock market, falling volatility, increased fund flows to equity
and eagerness by private equity firms to sell have combined to
reduce the risk of these deals going wrong.
"Never confuse intelligence with a bull market," said the
head of equities syndication at one US bank.
"We have seen appetite [to do block trades] go way beyond
what we have ever seen before."
BENEFITS AND RISKS
Few have benefitted from the heightened appetite for risk as
much as the sponsors behind HCA. Having led a $33bn buyout of
the company in 2006, KKR and Bain Capital took it public at the
beginning of 2011.
They have already cashed out on the investment twice in the
past three months - taking $1.06bn on a block sale of HCA shares
to Morgan Stanley in December, and another $1.8bn on Monday's
sale to Citigroup and Barclays.
In the latest sale, the banks purchased 50 million shares at
$35.87 per share and re-offered them to investors at $36 - a
1.8% discount to where the shares had closed on Monday before
the block trade.
That means the banks had a notional gross underwriting fee
of $6.5m - 13 cents per share - for the deal.
That is likely less than they would have made in the
traditional underwriting of a marketed share.
In a similar trade, Barclays and Credit Suisse paid $30.10
per share for 30 million shares of NXP Semiconductors,
and then sold them at $30.35 - a gross profit of $7.5m.
HCA and NXP shares both jumped again after the trades, so
the banks would have made more on any shares they held on to.
But banks don't always get the pricing right.
On Tuesday, Morgan Stanley offered 15 million shares of
Sensata Technologies shares at $33.45 - just below the closing
price that day of $33.70.
Sensata closed at $33.35 on Thursday, however, and has not
traded above Morgan Stanley's re-offer price since the trade.
Whether Morgan Stanley actually lost money on the trade is
hard to say. The bank's purchase price for the block is yet to
be disclosed, and it is unknown if it was left holding any of
But bankers argue that, in the main, recent blocks have been
good for all parties in the transactions.
"The sellers have achieved very attractive discounts, the
banks that have done the blocks have been able to make
justifiable fees and most of the blocks - not necessarily the
second it trades but a week out - have done well," said another
Wall Street banker.
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