There’s a new trend among high grade corporate bond issuers of putting importance on how far they can tighten the spread on a new issue from initial price thoughts to reoffer. The bigger the tightening, the better the deal, they argue. But that metric does not give as much information on its own as they seem to think it does, and prioritising it encourages bad behaviour.
Corporate issuers have on the whole increased the amount they have tightened pricing during execution over the last year. In September 2023, they tightened syndicated benchmarks by 22.5bp on average during execution. Last week, it was 32.7bp, according to GlobalCapital’s Primary Market Monitor.
This is becoming a big deal for corporate treasurers, to the extent that at least one syndicate received a dressing down from the issuer last week for not managing to tighten a deal as much as a rival borrower had.
But spread moves on the day of execution are rarely a reflection of the good standing or skill of borrower, or its syndicate. The information is not useless but it tells you little in isolation.
Rather, generally speaking, the degree of tightening reflects what the market was like on the day. If sentiment sours in the US session, then it will affect how far an issuer in Europe can tighten the spread on its deal, regardless of how well the issuer and the syndicate prepared the ground.
The move from IPTs to reoffer, moreover, is a means to an end, rather than an end itself.
Maximising spread tightening for its own sake is sloppy and it winds up investors – two things that issuers should not want to be associated with.
New issue premiums, very much the ends to which spread tightening is the means, are a better measure of investors' view of an issuer's credit and approach to market.
For a start, they have improved for corporate issuers, falling to 6.2bp on average since the week of August 19 versus 14.7bp in September 2023. And one only has to look at UK water companies paying near 20bp in premium in the sterling market compared to an average 10.75bp premium over the last three weeks to see that investors demand more from companies in difficult sectors.
Meanwhile, relying on spread tightening during bookbuilding as a guide is unreliable because it can be gamed. It is easier to start pricing too cheap to drive up orders early in the process and then to ratchet in to the right level than it is to risk starting closer to what might be deemed fair value.
If issuers tell banks that spread tightening is what they value, those dealers have every incentive to start pricing wider and risk having the issuer pay a bigger premium at the end result.
Starting spread 20bp back of fair value, reoffer spread 10bp back, result happiness. Starting spread 40bp back of fair value, reoffer spread 15bp back, result no longer misery, but apparently ecstasy. It makes no sense.