More than a few SSA deals over the last two weeks have been underwhelming, undersubscribed or, in BondMarker scoring, under par. But none of this is because issuers have become greedy on pricing or overoptimistic on size.
Apart from a few possible idiosyncratic reasons for certain deals falling short, it is clear that investors are finally shifting to address the looming end of the European Central Bank’s Public Sector Purchase Programme (PSPP).
Measly concessions that earlier in the year would have been enough to guarantee multiple times covered books are sometimes returning undersubscribed deals. High price thoughts that once would have been far too cheap are now thought sensible.
Borrowers, of course, have to get used to this new world, where investors are placing smaller tickets as they await a clear path on the direction of euro rates.
But this is also where syndicate banks can really start to show their value, after several years where the ECB provided maximum comfort for the SSA market.
That’s particularly true when coming up with fair value. Just as that calculation became a fine art at the launch of QE, so it will be again as cash spigot closes. That the ECB will reinvest cash from maturing assets makes the sums even more nuanced.
Banks must also be strong. Some issuers appear to be treating their new issue concession calculations as if nothing has changed since earlier in the year, despite their advisors’ protestations.
Those banks that stand firm on their advice and do not give in to overbearing funding teams will surely be rewarded — perhaps not with mandates in the short term, but certainly over the longer horizon.
The road to normalisation will also require solid vigilance from banks. ECB president Mario Draghi on Monday said he sees a “relatively vigorous” pickup in eurozone inflation — leading money market investors to place their money on an earlier first rate hike than before. The path to normalisation will be laden with such rocky steps.
Knowing how much time is left in the year to fund will also play a part in syndicate showing their value. Some bankers watched last year as spreads they thought would only tighten into December — before traders started to reduce inventory and liquidity dried up — but that began to happen in November. Some fret that it could start even earlier this year, perhaps as soon as the middle of October.
That means advice on when to finish the bulk of an issuer’s annual funding will be more important than ever.
And of course, while monetary policy will return to something resembling the pre-crisis times, liquidity never will — regulation has made certain of that. That will make the journey to a market-clearing price even more difficult.
Those banks that can impress during these turbulent conditions will the ones that benefit most in terms of justifying their fees.
To paraphrase Warren Buffet, you only find out who looks good swimming naked when the liquidity tide goes out.
