There is not much that has been certain about the primary bond markets in 2022. But if there are two things you can hang your hat on it is that the days of easy bond syndication into a market backstopped by central bank buying are over and that the volatility that has gripped the market this year is not going away.
There seems little that is transitory about the sort of inflation spreading across the globe like Japanese knotweed and the central bank effort to ramp up interest rates now threatens to choke the post-Covid recovery just as effectively as the invasive Fallopia japonica stifles all of the vegetation it smothers.
But another Japanese export, Nomura's international bond business, is also positioning itself to thrive in, what is to many in the markets, an alien environment.
In particular, the firm's primary bond business outside of its home market, led by Nick Dent, head of EMEA and Asia ex-Japan syndicate, has undergone something of a structural overhaul in the last couple of years.
This has been particularly true of its credit syndicate, which covers FIG, corporate and EM products. A couple of years ago, Dent and his colleagues spotted an opportunity to reorganise the desk in an unusual way — not only recapturing trading and risk management for the desk, rather than letting secondary market traders run it, but also covering investors directly rather than transmitting messages and receiving orders via the firm's sales staff.
Such a structure, Dent argues, lets the primary bond operation respond much faster to what its clients need through faster decision making taken on the desk rather than navigating trading floor diplomacy and the tangle of compliance problems thrown up by what information is private-side and what is public.
It was a radical step but appears to be bearing fruit. Dent says the bank has grown market share in credit since the rejig.
A quick scan of the Dealogic league tables for third party FIG in Europe and the Middle East; CEEMEA bonds; and European and Middle Eastern IG corporate bonds since 2019 does not reveal a compelling tale of a bank gobbling up the competition. It has increased market share in some markets in some years but not others.
But then Nomura is not a top 10 house in these markets, so it is quite possible that in the niches that it cares about, where it has targeted its efforts, it has seen results.
The main point though is that it believes its innovative syndicate structure, particularly covering investors directly, is working and that is sure to spark interest across the Street as primary bond desks run into their toughest markets for years.
In the following interview, Dent discusses his syndicate structure, in particular the direct access to investors and how he has incorporated ESG into the desk, as well as the tricky conditions that bankers, issuers and investors face as they return from their summer breaks and head into the final four months of the year.
GlobalCapital: The primary markets were a horror show heading into the summer — pulled deals, volatility and very difficult issuance conditions. If ever there was a sign that the art of syndication is back, surely that was it. It's certainly not the same market as the last few years where the central banks have provided a backstop for every deal, is it?
Nick Dent, Nomura: When we look back to the end of June and see the amount of deals that announced then pulled, that feels like a new thing. When we look back in time, whenever we hit bouts of volatility post-announcement or mid-execution, it always felt better to complete the deal rather than pull it. This could be either through risk mitigation, such as a smaller deal size or widening the spread, or simply underwriting the transaction and possibly using stabilisation in the secondary market. We have rarely used any of this in the past few years and almost forgotten given how long the bond bull run has lasted. Perhaps now certain deals take longer than just the execution day to sell down which would involve more risk being borne by the underwriting banks.
Pulling a deal has lost the shame factor perhaps. I can't remember the last time they were two pulled deals in the SSA market, for example, as happened in one week in June. Do you think that investors have changed their view of pulled deals, or did they ever care in the first place? Or is this more of a worry to syndicate desks and issuers?
I think it's more of an issuer-side question. Investors want to be part of a successful transaction that trades pretty well in the secondary market, despite all of this volatility. They don’t want to buy a half-baked deal that just never performs because it was never placed properly. Given the higher frequency of transactions, issuers will now need to take great care to manage their entry points and ongoing performance.
Do you expect this to be the shape of things to come — where you will have a number of pulled deals in some weeks but there will be other weeks where the primary market is OK?
It could be a bit more of a short-term phenomenon having that number of transactions in a short space of time that are pulled. There are a number of factors behind that. One is that the impact on the market of the volatility over the last few weeks or months has shocked everybody.
As the cycle turns, we'll get some good weeks again and then we'll have some issuance. And then we'll get into a regular flow of good days, bad days; good weeks, bad weeks. We haven't quite settled into that yet.
When we do there will be fewer pulled deals because the markets won’t be panicking. There'll be a rhythm to the market.
This will differ from market to market and asset class to asset class, but are banks sitting on mandates for longer or are issuers tending to wait before they award a mandate in the first place, given the volatility?
It's a good question. Actually, the pipeline is quite slim, so I think it's probably the latter — issuers are mindful to not lock banks into a lengthy mandate for now. At the moment it tends to be a case of having quite quick reaction times — yes, the market is good; yes, let's get mandated.
At this stage, it tends to be that the mandates awarded well ahead are not the full benchmark dollar or euro deals. The deals are maybe in the non-core currencies or for smaller sizes that might need a lengthier process to execute. But there’s not a big backlog of the benchmark transactions and issuers are not sort of screaming to get things done for now.
They're quite patient?
Despite everything that we've seen and everything that's been thrown at us. We've never been our own worst enemy — by which I mean there's never been a day where we've oversupplied market. It’s a sign that that there isn’t any panic around or too much funding to be done — we just haven't seen that at all. It's almost been quite a conservative approach.
People aren't running over each other with new issues. When there have been good markets there's been enough flow but not too much. The market has behaved pretty well.
Do you think that's because issuers’ borrowing requirements are coming down after the last couple of years? Or have they just grown used to dealing with volatility? Or do you think they just got out into the market earlier in the year?
There's much more funding to be done for the rest of the year but I think there was a good pace to issuance to start the year off. The bigger funders and the biggest users in the capital markets have been able to access different markets.
For a while dollar funding was looking better than euros, so borrowers were hitting dollars when they could. Then sterling came online and we found a quite a lot of volume in the currency across both rates and credit products.
Euros have been accessible for most of the year. Duration is coming down but it's still at multi-year highs. Deal sizes are probably smaller but access has been quite good.
If you're a multi-currency user, then you find lots of different pockets that you can hit, which spreads the risk out.
A lot of issuers though are not multi-currency. Especially the smaller, perhaps weaker, banks in Europe. Is it a different picture for them? Can they they diversify into new funding sources quickly enough, or do they just have to wait and take their chances as when they arrive?
In the FIG sector, as far as credit conditions go, banks are in pretty good shape. They've spent the last few years repairing their balance sheets. Capital provisions are very strong. A lot of FIG borrowers have pushed into ESG products, which have been highly accessible. So I don't think I've really noticed that much difference. We've got widening spreads across all the different credit curves but if you're a single currency borrower — a small European bank, say, looking at euros — you haven't really had your wings clipped too much.
Let’s turn to the syndicate set-up at Nomura. You have set your credit syndicate desk up in a different way to much of the Street. Can you explain how it works?
We've got three pods within the syndicate desk. We have our rates business, which has always been the gold standard for Nomura. We have our credit syndicate desk, covering FIG, corporates and EM and we have our ESG centre of excellence.
We set up our credit syndicate in its current guise about two years ago and it has served us well in these markets. Not that we knew when this would happen, but it was always pretty obvious that at some point that governments and central banks would cut off all of the emergency measures of the last few years and there would be a reset. We would go back to normality — however you want to describe ‘normality’ — but at the very least there would be volatile trading conditions.
The speed of how it happened was probably the shock, not the fact that it happened. Given the geopolitical events this year, I think that just sped up the process.
We've always based the philosophy on the desk around being close to the issuers and we've got strong DCM capacity. But you need to be just as close to the investor base. Our first thought was to find an edge with the speed and the quality of information that we can gather from the buy side. Working in conjunction with our salesforce, we wanted to break down the barriers and gain more direct feedback from fund managers or portfolio managers directly on the desk.
At the same time, we are thinking more laterally too. If you've got the ability to speak to the investor base directly, why wouldn't you overlay a bit more of a risk taking capacity on the syndicate desk too? We were quite lucky in that we had some personnel movement, so we had the ability to rebuild the desk at that time. So, part of that rebuild was thinking about if we were really going to write down what we wanted, then what would be on the wish list and how do we try and get as far down that list as we can.
Having direct investor access was the first thing on the list. Second, was having risk taking capacity, which at the time was a bit counterintuitive because syndicate desks across the Street weren't really taking on that much exit risk because the markets were in such great shape.
Since 2015, we haven't really seen a whole lot of underwriting capacity on primary desks but we just thought that, at some point, with increased volumes and a deteriorating market, we might find we needed it. So we looked to introduce more of a risk function on the desk.
The third thing on the list was new issue execution and so we went about filling those three individual seats.
We hired Vanisha Baker, who has years’ worth of sales experience, layering in a huge amount of sales knowledge. We hired Jonny Doyle, who was a credit trader within our own global markets franchise, again, with years of credit trading experience. And we hired Devan Kadodwala who has more than 10 years’ worth of deal execution under his belt.
We built this team around those three as the major columns. It gave us a little bit more of an edge in terms of how the markets were acting and in the last six months, it's really coming to its own because we have become a self-sufficient unit with no outside interference. We've got everything based around us in order to price, execute and trade out of whatever we would like to do and it has increased our market share.
None of us want a market like this but I feel the set-up is really engaged with market volatility — how we can shape our responses to an issuer and say ‘this is where we think we should target pricing,’ if screen prices aren't accurate at that moment.
Deal execution has never left the syndicate function but the return of the risk management — having traders on the desk — is a real return to ancient times. That, presumably, was a reasonably easy thing to persuade management to allow, I'm guessing, because syndicate is inherently a risk taking function, isn't it?
Yes, some people forget that. We are a fee-based business but included in those fees is the ability to support a new issue, create a stable market and work towards having that stability all the way through to the secondary market.
There's entry risk and exit risk on a new issue. The execution part is highly competitive but every syndicate desk is very well versed in it. Managing the exit risk is what I think going forward will be quite interesting had something which had temporarily disappeared.
How many pulled deals would it take before, potentially, a bank or a group of banks gets blamed for poor execution, for example? Is every bank set up the same in being able to take the exit risk either on the syndicate desk or as a straight pass-through to secondary trading? Does the bank have good secondary trading? There are lots of questions that we may have to answer over the next year or two as we run through this next cycle.
Everybody's got a different view and policy on it. Some will have to get back up to speed, some are on the ball.
Nomura’s DNA has always been around risk taking and being very comfortable with risk taking. So for us, it wasn't problematic in terms of setting out how we wanted to view the desk going forward. I think it'd be really interesting if we start to see a bit more hard underwriting on a portion of deals. There is the real chance of being left with a bond position even after you've done all the right things in syndication. That hasn't happened really for a few years.
It must help with your speed of decision making and what you can commit to if you have your own risk limits that you're handling on your desk and it's your responsibility, rather than having to rope in the secondary traders and have a painful negotiation with them about what they're willing to take and what they're not.
Yes, and often, a lot of those decisions are made on the private side because the deal that is to be executed hasn't actually been announced. This limits any ability without wall crossing to engage with a secondary desk on risk. It reduces that speed of communication and ability to make a quick judgement call.
The really new part, though, is the direct access to investors off the syndicate desk. How did you persuade sales to give that up?
There was an element that they would have to trust us and with the caveat that if it didn’t work, it didn’t work. It was experimental.
But we asked that they just trust us for a bit to see what happens. What we found was that, as a result of putting this test together, our market share across credit has increased. The sales force sees that; they see the flow to their account; they get paid on that. So we do nothing more than helping the relationship overall.
It's built on the syndicate-DCM relationship elsewhere. As a DCM person, are you happy for a syndicate person to speak to the issuer? Sure. There would be something wrong if not. That's always been a very close relationship between the two activities. A syndicate person is a DCM officer with the ability to take risk.
Ultimately, there's always been a bit more of a barrier when it comes to sales because most syndicate desks are run from investment banking franchises where you need Chinese walls between you and the global markets business.
And then you have silos, different management structures, different payment methods, and so on and it‘s hard to go clear all those hurdles and to introduce a bit of trust. But we're fortunate in many ways where we've got such a flat structure at Nomura that there's nothing really to break down like that — it's a straightforward, commonsense conversation: if we do this, our market share may grow. It's not going to shrink.
And our market share has increased over the past two years. You can't really put your finger on one particular reason why other than that we're just a content driven business. Hopefully, our content is the quality and the speed of that content has maybe just made that difference when we're looking for a mandate.
Where does your ESG centre fit in? Is that more of an issuer advisory type business? Or do they come up with trade ideas as well?
Well, ESG is interesting because we've never had to build a topic area into banking. Give me any product and I'll create a copy. But ESG is a topic area — and this is rarely discussed — that is quite hard to implement.
You start off by asking, well, where should it be based? Should it be separate? In advisory? Should it be in banking at all? Should it be in markets, or should it be in research?
But ultimately, all of the developments within ESG tend to happen in the primary markets. And the issuers are very well versed in ESG. They were the first to pick it up, they're the first to have all of their programmes ratified, get their second party opinions, and they are very much on top of regulations.
We see a lot of developments, whether it's the response bonds or social bonds that came through during the pandemic with dedicated use of proceeds, and now fast forward to setting higher standards and controlling data given some of the recent negative headlines on ESG investing. It's a bit like having a bank capital group, you just base it around the regulation and the product developments. And you can come up with a strategy around that.
When you look at the investor side, it's kind of all over the place, although not in a bad way. Every investor is different. Some have ESG criteria based purely at the portfolio manager level, others have councils or committees that every product goes through at a much higher level, and there are various layers in between all of that.
Therefore, the way that you think about it is a bit like with our credit syndicate structure. We also need to be close to the investors as well as the issuers. You’re at the least looking for a quorum where we can go back with ideas.
Again, to have that based on the syndicate desk means we can see all of these parts of the spider's web and they can all interact with each other.
Is your credit set-up something you would apply to your rates syndicate, for example? Would it work there, or is there no need for that sort of structure?
It happens already in rates. There's a lot more stability in terms of issuers and investors that has helped this part of the market along with less layers of differing product.
Because they are more frequent borrowers?
I think so, potentially less structural change helps. If you look across the Street, there are a lot of the rates syndicate managers who have direct contact with the buy-side for a number of years.
I always get the sense with rates, the market is tilted slightly in the issuers’ favour than the investors’. The way that we're set up is our for example, our rates syndicate and rates DCM all sit together. Perhaps given the speed and frequency of execution the difference with the rates market is that we tilt a degree towards the issuers, whereas in the credit market leaning towards the investors helps further understand the market dynamics, relative value and timing.