The deal for the Swiss firm, priced on Tuesday, looks like something of a classic of the bank capital genre. A dollar offering, open in Asian hours, from a storied private banking name.
With a strong market, a spicy yield, and technical support from limited supply, it attracted a $9bn book — the sort of demand that was de rigeur in the early days of the market.
The problem, however, was that the deal was only $300m. Pricing came in from 5.5% area to end at 4.75% — hardly likely to endear the syndicate group to investors, but reasonable given the lack of comparables.
The deal was Julius Baer’s first, and the bank is a very different beast to the two Swiss G-SIFIs — UBS and Credit Suisse — to which its AT1 issue will inevitably be compared.
The 30 times subscription level, even if a few orders dropped out on the journey 75bp tighter, will have given the issuer and syndicate a challenge. All bonds need to be allocated somehow, but a deal which is 30 times done needs more delicate treatment than most. Nobody is going to be happy, exactly — but managing and advising on who gets bonds is part of what a syndicate group gets paid for.
GlobalCapital can't say for sure that the $9bn of demand for Julius Baer necessarily had any order inflation in — we bring up the deal as an extreme example of a heavily subscribed deal — but if it did, this now exists in a bizarre, parallel regulatory world.
The Market Abuse Regulation, which came in last July, not only forbids investors from entering orders which do not reflect their real interest, but requires syndicate bankers or traders who suspect a client of entering such an order to report this to regulators.
The effect, on a strict reading of the rules, is to outlaw order inflation entirely. If you want an allocation of that precious $300m, among $9bn of other orders — well, put in for exactly what you want, and hope that the syndicate recognise that you are an investor of impeccable integrity and will be rewarded for your probity.
Certainly putting in for a larger size is not allowed… so surely nobody else will do that either?
But then, everyone needs to make a return, and if you don’t get decent new issue allocations, you’ll fall behind the market. What's a fund manager to do?
In practice, the market has come up with a sort of don’t-ask-don’t-tell, paper-bag-around-can-of-special-brew solution to the absurdity of banning a practice which remains prevalent.
Broadly, investors who extract the urine will be reported; everyone else will be fine. Put in for more bonds than your fund could possibly purchase, and you will be in trouble; follow your “order” with a winky emoji and expect an extremely po-faced response. Disclaimers and delicacy keep everyone’s nose clean.
But it’s never healthy to have a law which is so obviously and widely flouted, and which serves so little purpose in protecting investors or markets.
Only the prohibition of marijuana is comparably absurd, and the more enlightened enforcement agencies there have a tradition of turning a blind eye to allow the world to work a little more smoothly.
Before the introduction of the Market Abuse Regulation, there was already a system to figure out who got bonds — it was the professionalism and skill of syndicate bankers.
Then as now, order inflation occurred, but at least before MAR, it could be discussed in the open, and managed with elegance and discretion, on the basis of repeat business and market reputation. Investors that consistently lost out tended to grumble, but a hot deal will always create resentments, no matter what the regulatory regime.
Regulations work best when they are respected. That occurs when the participants in a market agree with the essential aims and structures imposed by the regulation, and are incentivised to work within the spirit, as well as the letter, of the law. MAR fails that test.