Debt capital markets are tough playing fields at the best of times. This is especially true in the present environment where scoring a bonus has come to mean keeping your job. However, in this game team members can switch sides, so a move from selling to buying fixed income instruments should add a whole new perspective to the match between issuer and investor. Minati Misra did just that in June this year, when she left International Finance Corporation (IFC), after seven and a half years to join a hedge fund, Banco Santander New World Investments, where she is in charge of emerging markets. She may also consider fixed income instruments in the future. A change in pace was one of the initial attractions for Misra when she decided to take on the role, and she isn't surprised about the new set of challenges this has brought. She finds it exciting because investors dictate how liquid the market is, and they generally operate at a faster pace. Misra says: "As an issuer with a $4 billion funding programme, I would maybe do one big transaction in two weeks. As an investor I sometimes do 10 trades in the same day. When I'm buying something, I might have only half an hour to decide if it's good value for me." Such a difference in pace between issuers and investors is not always the case. One borrower says: "It depends on the type of issuer you are and how you want to use your programme. If you are in continuously offered products, then you would do just as many as someone in the role of investor. Some of the big frequent players would do at least one trade a day." The change from being a spread player looking for the cheapest cost of funds, to being a buyer chasing the best compensation for market risk, is one which brings its own priorities. Having practical knowledge of both sides of the bargaining game has its benefits. Misra says of the change: "Coming from the issuer-side of things has good advantages for me. Sometimes I know what levels an issuer would be getting, so I can tell if a particular deal really is good value for me." Having such an inside track on a trade's value would give some comfort to an investor, but the risk analysis which goes with it is still difficult. A bank only brings issues to market because it thinks it can sell them. Misra thinks this means that dealers have a certain bias. She says: "They [dealers] are usually very good at explaining the upside potential of a trade but not the inherent downside risk. Not all investors are fully aware of the risk associated with each particular transaction." That said, Misra is aware that investors must bare some of the responsibility for this. She continues: "In a way, this probably comes from both sides because investors don't usually have enough time to do the analysis." Tiina Lee, head of MTNs at Deutsche Bank, puts a lot of investor nervousness down to the fact that so many of them have been hurt by the recent volatility in the market. She agrees that the level of explanation given on each transaction can vary, but thinks dealers must draw a balance between selling a product and discussing the risk associated with it. Lee says: "We provide analysis on a trade for an individual investor by giving about five different scenarios explaining how much they will gain or lose under different circumstances. Even so, how well a trade is explained depends on the individual salesman and his relationship with the account." In comparing the two roles of issuer and investor, Misra also suggests that borrowers should provide more information to the market about individual transactions. She says: "Transparency in the structured MTN market is mostly down to dealers, but issuers also have a responsibility to those who buy their paper to explain the inherent risks involved. Perhaps this could be done in their documentation." Although MTN documentation is becoming increasingly sophisticated, detailed analysis of risk is not something all issuers feel they need to include in it. One issuer explains: "Any issuance you do, ought to be properly documented and accurately represent the characteristics of the trade. But I think investors have to take responsibility for their own portfolios and not fob it off on dealers and issuers." As credit risk becomes increasingly important for investors, there is no doubt they will also have to take more responsibility for this analysis themselves. Therefore a strong rating for an issuer will not guarantee its paper a favourable reception from investors. Misra says: "Investors have a growing concern about issuer credit risk as well as the general market risk involved, specifically in the emerging markets. They will be doing a lot more of this analysis themselves rather than just relying on what the rating agencies say, especially since so many got burnt in Asia and Eastern Europe." Whilst the roles of issuer and investor pull in different directions, it is in the interest of dealers to figure out the best way to create a win/win situation for all involved. Who has the easier task is debatable. But Misra shows no sign of regret for her move to the investor-side of the game. She says enthusiastically: "It's easier to be an investor because the market is demand-driven. A borrower has less flexibility. On the other hand, borrowers don't face the same risk of losing large amounts as investors. They definitely sleep better at night."
July 28, 2000
