William John Market Report 19-06-21
William John Market Report 19-06-21Category: Reports
The EU’s NextGenerationEU programme financing launched last week (discussed in the Market Report on 10/06) with the sale of the bonds expected to be conducted by syndication.
A syndicated bond offering is a sales procedure whereby the European Commission, the body responsible for handling the bond sales on behalf of the European Union, instructs a group of banks to generate interest in the bonds with investors. Often as part of the syndication, banks underwrite the issuance, meaning if the bonds are not sold to a sufficient level whereby the required funds have been raised, they must purchase what’s left.
It is the common alternative to a Dutch auction process, where primary dealers (usually very large investment banks) submit bid prices. After the auction closes, the issuer will then divide up the bonds to the highest bidder and then work downwards until the targeted funds have been raised.
Syndications are often preferred to an auction as auctions can risk not drumming up enough demand and the bidding prices themselves can be too low. This was the case in 2009 whereby the Bank of England’s auction of 4.50% Treasury gilts dated until 2049 failed to hit the fundraising target, with a bid-to-cover ratio of 0.93. Hence, it is no surprise the Commission is entrusting the investment bankers to handle the sale themselves.
However, this week, it appears the Commission does not trust all investment bankers. According to a report released by the Financial Times on 15/06, 10 banks have been barred from taking part in the syndication because of historic antitrust breaches. Examples of such breaches include the operation of a “bond trading cartel” between primary dealers who exchanged bidding information in Bloomberg terminal chatrooms between 2007 and 2011, as well as Libor rigging and rigging of foreign exchange markets.
This situation illustrates the complicated nature of the relationship between primary dealers and issuers. The dealers have a responsibility to ensure smooth market operation and bid regularly for bonds in auctions or lead syndicated sales. Such punishment related to these breaches is likely to affect this relationship and given the list of barred banks includes some of the world’s premier institutions, this could prove costly for future issuances.
Conversely, it presents a phenomenal opportunity for their competitors as well as an incentive to avoid antitrust practices. It remains to be seen how long these banks will be barred from syndications in the future, however with hundreds of billions of debt sales anticipated in the coming years, it is likely these players will return to the fold if they can prove their practices have improved with greater transparency during bidding processes. In the words of the Executive Vice President of the Commission on 20/05, the Commission “will not tolerate any kind of collusive behaviour” and this is likely to set a new precedent for transparency and integrity for future syndications.
Any opinions expressed in these documents are those of William John and are provided for information only. E&OE.