(Refiles for wider distribution)
By Shankar Ramakrishnan
NEW YORK, Jan 15 (IFR) - Allocations have long been one of the touchier subjects in the bond business, but there was little complaining about this week’s US$46bn deal, the second-largest ever, from AB InBev.
That marked a sharp change from Verizon’s record-setting US$49bn bond in 2013, which sparked a litany of complaints that resulted in an SEC inquiry into the allocation process.
Many on the buyside were unhappy that almost 50% of the Verizon bonds, which tightened 55bp-75bp from reoffer levels in a day, were allocated to only about 10 top investors.
These investors were believed to have made more than US$2bn in just a day - a hefty enough sum to anger second and third-tier buyers who had been shut out of the deal.
With AB InBev offering substantially less in the way of premium, however, there was much less upset on the buyside this time round.
“The Verizon deal came with a much larger NIC, but that was because Verizon was setting a precedent for this size deal,” one top fund manager told IFR.
“No one knew whether the market could absorb it.”
AB InBev did not leave as much on the table for investors, pricing its bonds 15bp-35bp inside initial talk levels, meaning concessions ranged from negative 5bp to plus 20bp.
One investor said he had halved his orders because the bonds did not offer enough compensation given the volatile market backdrop.
Another said: “We probably got 50% of our allocation in our area and basically dumped most of it, because we didn’t think it was going to perform in the short term.”
Even so, there were more orders for the AB InBev deal - the US$110bn order book was the largest ever - than Verizon, and it went to just half the number of accounts, 600 versus 1200.
That suggests that nothing has changed since the SEC inquiry, and that the lion’s share again will have gone to the top handful of accounts.
Nothing publicly resulted from the SEC inquiry, and bankers confirmed that their methods remain the same today.
“A bulk of the bonds do get sold to the top-tier investors, because they are that big and have big requirements,” one senior banker said.
“It is an opaque process. But you cannot expect a banker on the desk to start making a hundred calls to place a US$1bn bond if he can do that in 20.”
The banker said that, with shrinking syndicate desks and a growing volume of issuance, bankers were under pressure to quickly place billions of dollars of bonds in a day.
They were still focused on placing bonds with buy-and-hold investors and getting the broadest distribution - but that 20% of a deal typically still goes to roughly the top 10 players.
One fund manager at a top-tier firm told IFR about the AB InBev deal: “We expected to be treated well, and we were.”
He said the same anger about the Verizon deal was unlikely this time, in part because the AB InBev bonds widened in secondary trade after pricing.
Most of the seven AB InBev tranches were flat to 7bp inside re-offer levels by midday on Thursday, rebounding after first gapping slightly wider when the deal was priced.
In addition, bankers close to the AB InBev deal said, extra effort was put into ensuring the bond grew to US$46bn only if it made sense in terms of pricing.
“The company was clear that it wanted a better pricing outcome,” said one banker close to the deal. “(It) was prepared to do a smaller deal if it did not make sense.” (Reporting by Shankar Ramakrishnan; Additional reporting by Hillary Flynn; Editing by Marc Carnegie)