Issuers and bankers have fought over fees forever, and issuers have mostly been on the winning side, at least in Europe. Top agencies now pay just 10bp, while some sovereigns expect banks to lose money for the privilege of handling their debt funding.
Competition, though, shows little sign of letting up — for every bank which decides, like the Swiss banks, that handling the lowest margin public sector issuers is too costly and not lucrative enough, there’s an Asian bank or local player that’s ready to step up and syndicate.
Issuers, at this point, are having to defend their need to continue paying new issue fees at all, with some arguing that a service they do not pay for is not worth having — and a service which issuers don’t pay for up front will end up costing more by another route.
But regulation is putting pressure on every single traditional route by which investment banks demonstrate their worth in the debt markets.
Classically, the reasons for hiring professionals has been market knowledge, execution capability, and secondary trading support, none of which can readily come from issuers themselves, even the most sophisticated.
Let’s take these in turn. The market knowledge of frequent issuers is excellent, but it’s unlikely to match or exceed specialist syndicate staff, who, after all, handle not just the deals for one issuer but for everyone.
That said, regulatory imperatives are making this harder. Hypothetical conversations about possible issuers and levels should still, in theory, be treated the same way under the Market Abuse Regulation — but in practice, sellside and buyside both have good reason to be nervous of regulatory caprice, and informal market colour and comment is harder than ever to come by.
One frequent issuer told GlobalCapital this was showing up in a wider spread of advice on levels for new issues — the product of a more difficult sounding regime.
That chimes with the warnings sounded by some syndicate desks before the regulation came in, which suggested that higher new issue premiums would be needed to compensate for the difficulty of accurately gauging the market under MAR.
Now, clearly the advice of investment banks is worth something — and it’s worth a lot more in the case of an unknown company’s IPO, or an untried capital security than it is for the latest benchmark from EIB. But regulation has certainly made it harder to justify frequent issuers paying investment banks for price discovery alone.
What about execution, then? Investment grade bonds for frequent issuers mostly moved away from hard underwrites years ago, while the increasing concentration of the buyside makes arguments about distribution harder to lean on.
Clearly, some banks have huge salesforce with depth and breadth of coverage in every European country. But when the top 25 buyers increasingly drive order books, this advantage erodes, and for frequent issuers with frequent investor contact themselves, it may scarcely be there at all.
Allocation matters, of course, but again, it depends on the issuer. The number of hedge funds desperate to flip their World Bank bonds to pocket the 1bp new issue premium is not large; but it’s more of an issue in a yieldy peripheral AT1.
Once the bonds are free to trade, you might expect the banks to start earning their fees, but here too, regulation and market structure conspire against them. Investors report increasingly illiquid secondary markets in credit, with banks frequently waiting to line up both sides of a trade before executing a “matched principal” transaction. Buyside traders are breaking up positions into smaller pieces, giving sellside traders more time to ‘work’ orders, and adapting to an environment where they can’t expect banks to bid their bonds immediately at a price they like.
Secondary market support used to be part of the implicit bargain — and it used to be a justification for mandating more banks on an issue. But issuers are taking notice of investor complaints — one official from BMW’s treasury team told GlobalCapital that banks should be paid less because they are failing to live up to this part of the bargain.
Know-your-costs
One area where investment banks can and do shine, however, is in their enormous investments in the past few years in compliance, know-your-client and anti-money-laundering provisions.
For all that frequent issuers have the pricing, market knowledge and investor understanding to do deals, they do not have counterparty lines with investors, and nor are they willing to go through the lengthy and expensive processes to acquire them. Regulation has vastly raised the costs of acquiring (“onboarding” in the quasi-English of the regulatory community) clients and banks are the ones that have been through the process. Besides, issuers do not have the booking systems or the connections to market infrastructure, nor the legal structures nor the software nor the processing capabilities.
All of this means that, even if the traditional roles of investment banks in doing deals for frequent issuers are eroding, their back office and compliance makes them as important as they ever were.