CORPORATE NEW ISSUANCE: A MARKET READY FOR INNOVATION.
By Herb Werth, Managing Director, Buy Side Product Strategy and Marketing, IPREO.
As 2015 drew to a close, the growth in primary issuance of corporate bonds, a constant since 2008, was in doubt for the coming year. Market volatility reared its head early in the first quarter, and as a result, 2016 was off to a bumpy start. One of the trends we observed was that as markets became volatile, new issuance slowed to a virtual standstill; however, as the volatility dissipated, often many issues in the pipeline came to market simultaneously. This created a stop/start pattern with a number of very busy days for both syndicate banks and investors.
Continued low interest rates and the European Central Bank’s decision to invest in corporate bonds further fuelled a market hungry for new issues. As a result, a stronger and more consistent pattern of primary issuance emerged in the second quarter.
Both the stop/start pattern of the first quarter and the heavy, constant flow of deals in the second quarter present numerous challenges to both the syndicate banks and investors due to inefficiencies of the new issuance process, which are detailed below.
A flood of unstructured data
Let’s start by understanding what happens in the course of a single deal. When the issuer and syndicate banks decide to bring a deal to market, it’s announced by passing the terms and conditions of the deal to the banks’ sales teams, who in turn, send it on to their clients on the buyside. This is primarily accomplished through a text-based announcement email that is forwarded along in this process. Most deals have multiple active book runners, and in many cases, the salespeople at each of those banks overlap in coverage of the buyside. As a result, the buyside trader will receive the same information multiple times – once from each of the salespeople that are affiliated with each bank on the deal.
A far too manual process
The buyside trader needs to now take that information and distribute it within his firm, to the portfolio managers and analysts, and possibly also to the operations team that set the deal up in the firm’s compliance, order management and risk systems. If any updates to the terms become available, the trader needs to again quickly route that information to the appropriate parties. Sometimes this is accomplished by directly forwarding the information that is sent by the sellside banks, in other cases, the trader aggregates the deal information for that day into a spreadsheet and emails a summary sheet on regular intervals. A few buyside firms have even gone as far as to invest significant amounts of money in internal systems to capture and distribute this information to become more efficient.
Once the deal information is available to the portfolio managers, they decide if they would like to participate in the deal. This is often done via email, chat or phone back to their buyside trader. The buyside trader then needs to aggregate orders from multiple portfolio managers to determine his firm’s overall demand. Next, the trader communicates this information back to his sales coverage. Multiple banks means multiple salespeople, and consequently, multiple communications of the same information by the trader. When allocations are determined, the process reverses once again and emails and chats are used to inform the buyside trader of his firm’s allocations.
Clearly, the process of managing new issue participation on the buyside is quite cumbersome and time intensive. The buyside trader is put in a difficult position and is most concerned about missing inbound information from either the sellside (deal updates) or his investment teams (order updates). The existence of many deals at the same time, as discussed earlier, compounds the problem. Buyside traders can be shown five, ten, even twenty deals in a single day. That’s a lot of unstructured information and manual co-ordination. The largely administrative tasks of consuming deal information, co-ordinating with portfolio managers and communicating instructions to the sellside on a day with many deals in the market often leaves the trader with little time to do the rest of his job.
Room for improvement
Notwithstanding the workflow inefficiencies, deals get done. This is because the market has applied enough brute force to the problem, there is an established ‘protocol’ between the buyside and sellside, the sales person on the sellside serves a critical role, and banks are experts in the legal and regulatory aspects of running a deal and ensure that deals are brought to market properly.
Improvements can be made to lessen the strain on the buyside trader by drastically reducing the amount of time spent on clerical tasks and simultaneously lowering the risk that is inherent in a highly manual process. In particular, consensus is building around the following changes:
- Thoughtfully apply technology to improve the quality of deal-related communication so that information can be more easily consumed and organised.
- Improve the current methods of alerting market participants (especially the buyside trader) in order to reduce the risk of missing deal announcements, updates, and orders from portfolio managers.
- Increase the auditability and visibility of new issue related information.
- Exchange order and allocation information electronically, reducing the possibility of manual error.
- Reduce the massive administrative workload for both the buyside and sellside enabling them focus on more value-added activities.
The overall sentiment that we regularly hear is that the new issue market can benefit from thoughtful innovation. Technology can certainly help, but consideration needs to be given to those elements of the process that are working well today. The best solution will preserve those things that are working well while improving those areas that are not, and in the course of doing this, advance today’s market practices for the ultimate benefit of both issuers and investors.