Borrowers: It's the roadshow, stupid!

Were such roadshow gimmicks the keys to the success of their bond deals? It's hard to say. But they are part of an increasingly hyped marketing environment designed to interest investors when there's stiff competition for their attention and their money.

Consider Innova's aggressively structured $375 million deal, a 10-year bond that is non-callable for five years. Innova has a relatively weak rating - B2 by Moody's Investors Service and B minus by Standard & Poor's - and hit the market on March 26, one of the worst bond market environments of the past year, when a number of other issues were being pulled. But it had one thing going for it. It excelled at marketing itself, showing investors a video illustrating its programming and its relationship with global media companies Newscorp and MCI Cable. Then there was the Sky Entertainment-emblazoned cap.

"It's impossible to separate any one of these features. You could never say we saved five basis points or sold another 200 bonds by giving out baseball caps," says James Pelgrift, a managing director at Morgan Stanley, which lead-managed recent bond issues for the three companies. "But had we not done every step meticulously, had the company not been compelling on the road, there's a high likelihood that this deal couldn't have been done."

More like equity

Gone are the days when prices on bond offerings were driven solely by credit ratings, and priced off the treasury desk, with a few calls to key investors sewing up the deal. Now all but the highest-rated issuers must convince investors their deal is the one everybody wants. "Where things break down, it's usually because the issuer doesn't understand the value of marketing on the fixed-income side. They believe there is a rating and you're a spread to that rating. Today fixed income has become much more sophisticated worldwide, and much more equity-like," says Robert Swindell, managing director at Lehman Brothers.

If there's a lesson borrowers in the capital markets must remember, it's simple: "Bonds are sold; they are not bought," says William Rogers of Chase Manhattan Bank. "If they were bought, you could just put them on a screen, and investors would dial in and buy them." Adds Andrew Heyer, managing director in CIBC Wood Gundy's high-yield group: "Fundamentally you have to make people believe that demand outstrips supply."

It's a highly orchestrated and calculated process. From the writing of the prospectus, to pre-roadshow phone calls by investment bank credit analysts and salespeople, to the script for company management in the roadshow, the emphasis is on the story beyond the numbers of the company or country in question. "You want to get the investor hooked before price is even hinted at," says Pelgrift.

Spicing the red herring

The objective is to convince investors the deal will command a better price than other issues of similar rating, in similar industries or countries. Companies that aren't prepared to answer tough questions, drone on about past achievements or focus too much on potential negatives, may find investors switching off. And bankers who dwell on price too early or overhype a deal are likely to find themselves burnt when it comes to the final pricing, and stuck with a big chunk of the deal for months.

The first step in marketing an issue is writing the so-called red herring, or prospectus, which is distributed to investors a week or so beforethe roadshow. A legal-disclosure document, typically drafted by bankers and lawyers, it must include all the credit disclosures on such matters as covenants, and what happens if there is a default. The prospectus can be an effective marketing tool if it manages to capture investor attention. Too often, bankers say, that doesn't happen, especially when the documents are written by commercial banks with experience of writing factual credit documents rather than marketing prospectuses.

Pelgrift recalls a recent issue Morgan Stanley lead-managed for a company that had an existing Euro-medium-term note programme in place. "The basic disclosure document was there, but our job was to take that and turn it into a prospectus. We spent weeks correcting it, including the grammatical errors. Things were in there that weren't even sentences," he says. Moreover, the description of the company was historical - "what it used to be, all the milestones along the way. Investors don't frankly care at all about that. We had to turn a very stale, dry and backward-looking document into a forward-thinking one."

While bankers and lawyers are writing the prospectus, they are educating the salesforce, typically with a presentation by the fixed-income research analyst. That support is critical, particularly in complex deals. When Morgan Stanley launched the first Chinese private non-government issue last year, based on a portfolio of power projects, the deal was so innovative the bank sent its utilities analyst, Robert Packer, to feel out investors ahead of the roadshow by Chinese officials.

Although some banks prefer a blanket approach to target all potential investors through initial sales calls, others say targeting core investors is more important. The investor focus also depends on whether the issue is, say, a global bond being sold worldwide, or a high-yield issue sold to a few US investors. William Battey, managing director at Credit Suisse First Boston in charge of yankee new issues, argues that targeting investors is the best approach. He says, about 4,000 investors account for 80% of the $1.5 trillion invested in corporate securities. The key audience, however, is only 10% of that. "We attack those guys and get them excited on the deal."

When CSFB did a $1.9 billion 144A yankee deal for Petronas, the A1/A plus rated Malaysian oil company, there were 18 lead buyers out of 160 investors. "We spent most of our time on the top 18." Those key investors create the momentum critical for a deal to take off. Petronas bonds became the largest non-US corporate bond issue completed, and the first global 144A, with the tightest pricing among all Asian issues for a single A corporate credit, establishing a new benchmark for Malaysian risk in the global markets. That was all possible, says Battey, because the lead-managers convinced investors the emerging market issue should trade more like a western oil company, such as AA-rated Chevron.