European Commission calls for high-yield allocation transparency

LONDON, Nov 20 (IFR) - Regulators should push for transparency and fairer allocations in the high-yield market, the European Commission said in a report on Monday.

The report, by the Commission expert group on corporate bonds, said the high-yield allocation process is “not systematically communicated to other banks and to the borrower, and is thus more opaque.”

Unlike the investment-grade market, where typically all banks mandated to underwrite a trade participate in allocating the bond to investors, the high-yield allocation process is typically run by one bank, often labelled “lead left” or “billing and delivery” (B&D).

“This means that, even if in principle issuers can influence the allocation process, the extent to which high-yield issuers do so varies greatly,” the report added, emphasizing that this is particularly the case for smaller, less frequent borrowers.

Smaller underwriters have complained of late that they lack influence over the way deals in which they participate are run. Investors, on the other hand, have said that the opaque allocation process may be affecting their ability to push back on aggressive deal terms that have become more prominent in the high-yield market.

The report called on regulators to work with market professionals to replicate allocation methods from the investment-grade market in the high-yield market.

It pointed to self-regulated bodies such as the FICC Markets Standards Board (FMSB) which is a standard-setting body for fixed income, currency and commodities markets.

The report also warned about the Market Abuse Regulation (MAR), implemented in 2016, which imposes strict requirements regarding market soundings on issuers with debt listed on EU exchanges.

It said the requirements “are aimed at large, relatively liquid markets and do not take into account the specifics of more local, less liquid markets such as corporate bond markets.”

“Implementing these rules significantly restricts the willingness of potential issuers to carry out new issuances,” the report said. (Reporting by Yoruk Bahceli, editing by Alex Chambers and Julian Baker)