Roundtable participants:
Carlo Buora, General Manager Finance&Administration, Pirelli María Ángeles García Jiménes, Director of Finance&Administration, Amena Stephen Hodge, Director of Finance, Shell International Georg Lambertz, Finance Director, RWE Dr Herbert Lohneiß, Managing Director, Siemens Financial Services
The inherent flexibility of the syndicated loan is facilitating the parallel growth of capital markets issuance, as has been seen in the US. What unique opportunities will Europe offer corporates for international debt raising relative to other markets?
Buora: The increasing number of capital market issues from corporates and banks has been a clear tendency since the end of 1999. Our focus was already primarily on Europe, due to the concentration of our investments there and to better brand recognition in both the Italian and wider European markets.
García: In our opinion Europe will offer the same opportunities as other geographical areas such as the US or Japan. Right now we seek funding mainly in Europe.
Hodge: I don’t feel any large capital market is “unique” anymore. That said, the US remains the leader in depth and liquidity and Europe will only match it if it, and the borrowers based within it, become as economically successful as the US.
Lohneiß: Siemens has a global focus and issues bonds (we don’t use the syndicated loan markets) in Europe and the US so we have never placed any particular emphasis on Europe. That will continue as we do not believe that Europe offers any unique opportunities compared to those other markets. It does differ from some other markets at present in that it will probably continue to be dominated by banks, which particularly applies to the Mittelstand. However, European corporate bonds will become more important and the euro will take over from the Eurodollar market.
Lambertz: Yes, Europe offers increasingly better funding opportunities. With RWE’s strategic focus on Europe we will be looking for funding primarily in euros. Nevertheless we are open to opportunities in any other currency as well. There is no unique opportunity attached to debt raising in Europe except from having a higher name recognition as an issuer.
The amount that can be raised through individual transactions in the syndicated bank finance market is expanding rapidly – if correctly structured and positioned within the context of a capital markets takeout. Is the availability of this scale of financing a welcome development from a corporate viewpoint?
García: Yes, since it affords access to greater volumes of financing in a simpler and more efficient manner.
Lambertz: Yes, it increases our flexibility in raising financing for bigger transactions.
Hodge: Well, we welcomed the entry of capital markets into the project financing world too in 1997 and 1998, and hope they return soon. The bank market is only important to us for project finance and very short-term acquisition-type finance. More important is to retain access to capital markets.
Lohneiß: In our opinion this type of transaction is an intermediate stage in the decline in importance of the syndicated loan market in Europe in the future. Bonds are generally a cheaper form of finance – one reason being that usually they are not subject to BIS capital requirements. (That said, a large percentage of all loans are now executed as 364-day transactions which also allows banks not to set regulatory capital against them).
Moreira: These kinds of hybrid loan-then-bond transaction are not part of our strategy. Our intention for the foreseeable future is to issue bonds to repay short-term debt, thereby lengthening our debt maturity profile. In this context, a bridge loan serves no purpose. Even should circumstances change, our NYSE listing and SEC registration should ensure that our disclosure will always be sufficiently current to quickly access the capital markets, without the need for a bridging facility.
Pinto: It is clearly reassuring to know that the loan markets can handle larger transactions since we are a highly acquisitive company and it is my job to ensure that funds are available!
A growing number of borrowers are adopting a pan-European approach to their bank borrowings. Is this a factor in your financing strategy or will you continue to rely on local lenders? How does this fit into your global financing activities?
Hodge: We are definitely adopting a pan-European approach. Pan-European treasury arrangements – whether financing or cash management or foreign exchange – have to become the norm for big companies
Buora: Since there is the potential for spread arbitrage between local lenders (bilateral agreements) in one country and similar transactions on the Euromarkets, corporates tend to move towards the most cost effective and so will continue to use local lenders. However I doubt that these windows will continue to exist in the same size and with the same differentials as today.
García: It is undoubtedly a factor we are considering in our approach to the markets due to the volume of financial deals that requires us to look towards international and pan-European markets. It is adequate as a way of obtaining resources, but it requires diversification in the range of banks we work with.
Moreira: Petrobras is in a somewhat different position to European corporations as local bank lenders represent a very small percentage of our total borrowing. First, few local banks can fund themselves on equal or better terms than Petrobras. Consequently most local banks cannot economically lend to Petrobras. Secondly, we borrow in dollars rather than in our local currency because of lower real rates and because, as an oil company, our revenues and assets are effectively dollarized.
Our global bank financing strategy could be described as “diversification”. We have a healthy mix of European, Japanese and American banks that are active lenders to Petrobras. Diversification protects us against any loss of liquidity that might arise from adverse developments to a banking system in one part of the world.
Lambertz: Yes, RWE’s focus may be primarily on Europe but we are also interested in speaking to potential lenders on a global basis. If a financing event comes up, we would be open to discussions in any direction.
What do you do to ensure you have optimal access to the bank finance market for current as well as future needs that may develop at short notice?
García: Continual communication is the key to maintaining an ongoing relationship with banks.
Lambertz: We take a relationship-based approach to keeping in touch with developments in the bank finance market. But in the end it is our credit quality that counts. At RWE we have opted for a long-term sustainable, stable rating that assures us ongoing access to the bank finance market as well as the bond markets.
Pinto: We keep an open door policy for new banks to join our relationship group, disseminate corporate information as soon as possible to our relationship managers, and give all of our relationship banks the opportunity to quote for non-lending business, such as derivatives.
Buora: In our case things are a little different as the availability of bank financing at short notice is largely the result of the parent of the Pirelli Group entering into committed credit facilities with banks. Such short- to medium-term committed credit lines, together with the portion of our liquidity placed in short-term investments, allows us to mobilize significant amounts of funds at just two day’s notice.
Moreira: Because of our volume of imports and exports of hydrocarbon products, we are able to maintain in excess of $4 billion of bank financing through bilateral, and to a lesser extent syndicated, trade facilities. Given the preferential treatment that trade finance has always received, there is no shortage of trade credit to Brazil. Even during periods of uncertainty, when credit to Brazil is reduced, the flight to the well-known names allows Petrobras to maintain its outstanding level of trade finance.
With respect to future needs, maintaining a substantial amount of unused committed lines for unexpected situations is prohibitively expensive. Banks must set aside country exposure to maintain a commitment. To compensate for the opportunity cost, they expect to get paid what they would make on a disbursed loan.
Thus rather than entering into formal commitments, we maintain a regular dialogue with our lead banks, engaging them when and if necessary.
Lohneiß: As Siemens concentrates on the capital markets rather than bank loans – the company is an active user of commercial paper and MTN programmes – we do not tend to think in these terms. Reliance on capital markets, however, does not exclude co-operation with banks for the necessary back-stop facilities.
Do you seek to have good access to those banks with the proven ability to structure and deliver large situation-specific financings?
García: Yes.
Pinto: Naturally
Hodge: Of course, but this is not an overriding priority.
Lohneiß: The good rating and name recognition of Siemens means that we have relatively easy access to the bank market and if necessary also to bank lines (although we are not using the latter for the time being).
Buora: Our group frequently happens to be involved in M&A transactions from the acquisition side, thus we must have good access to banks able to provide significant amounts of bridge financing. These kinds of relationships are absolutely crucial for the development of our businesses.
Moreira: There are a limited number of banks with the proven ability to deliver large financings at short notice. With those banks I think we share a mutual recognition that they have the ability and we have the need. Consequently, we seek each other out. We benefit from the fact that for a well-known company such as Petrobras, a large transaction is usually a high-profile transaction. To maintain their reputation as market leaders, these banks typically pursue such transactions aggressively.
Given the reassessment of bank relationships and the greater emphasis on returns, how much reliance do you place on bilateral bank lines, or are these being re-organized into syndicated bank financings? What are the advantages and disadvantages of this approach?
Buora: Bilateral relationships and syndicated financing are complementary and integrated tools for the financial management of a large industrial group. I do not see much scope for either of them to take the role of the other. The best flexibility can be reached by having one or two big, syndicated loans in order to meet extraordinary needs and, at the same time, a good number of bilateral relationships in order to match smaller, less predictable operations fast.
García: Bank consolidations will force companies to change old bilateral bank relationships and to develop different types of relationships with banks. This gives companies access to much bigger financial institutions but they will have to optimize funding capabilities in an efficient manner.
Hodge: Shell long ago decided to rely for main-line financing on capital markets and commercial paper and so we do not have to worry about these trends.
Lohneiß: Exactly. Siemens has no committed individual bank lines and uses syndicated bank financings exclusively for back-stop facilities.
Moreira: I think that emerging markets are still at a stage where relationship banking plays an important role, and bilateral lines are important to maintain those relationships. The relationship with a participant bank in a syndicate is often not as close as a bank with direct lines. In some cases, the participating bank tends to view the syndication agent, not the borrower, as the relationship. During the stresses that occur periodically within emerging markets, a relationship bank is more likely to maintain its support.
Our principal syndicated credits are for our letter-of-credit-backed commercial paper programme, which represents only $500 million of our total short-term debt of more than $4 billion. We do permit a form of syndication by allowing banks to sell our promissory notes on a secondary basis. This frees up the capacity of our lead lenders to underwrite additional amounts.
The issue of adequate returns for lenders has not been an issue, because while spreads have come down substantially on our borrowings, banks are still adequately compensated in relation to our credit quality.
Lambert: We have bank lines in place although they are undrawn. Due to a positive-net-cash position RWE has not yet regarded the existence of bank lines as a priority up to now.
Pinto: We use bilateral borrowings for our core bank debts (plus headroom) and are not averse to using syndicated debt should the need arise, for example, for a large acquisition.
How concerned are you at bank consolidation and the potential withdrawal of bank lending capacity? Do you review other sources and forms of liquidity insurance in addition to traditional bank lines? Are you becoming more wary of being over-reliant on one or two providers of debt finance for your core needs? Over time, do you expect to increase the amount of syndicated bank liquidity insurance to which you have access?
Moreira: Bank consolidation clearly decreases the total lending capacity of the system. When two of our relationship banks merge, the combined entity generally maintains less exposure than the two entities did separately. It is still not to the point where we could say that decreased lending capacity from consolidation has affected pricing, but it is a worrying trend.
The positive effect of consolidation is that as banks get larger and acquire a greater customer base to spread the cost of their services, the quality of service from their product groups has improved.
The Brazil market still does not have the range of products for liquidity insurance that are available in more developed markets. Our liquidity is based upon working with a large number of banks primarily through bilateral trade lines. Given each bank’s country limits to Brazil, and their need to spread their exposure among other relationships, no individual lender has a dominant credit position.
Pinto: Hypothetically there should be a reduction in lending capacity however we have not experienced this, on the contrary we are being approached by the resultant larger banks who are keen to flex their muscles. We are certainly not reliant upon just a few banks.
Lambertz: We continually review the situation and our first step has been to achieve a credit rating to gain access to the bond market. It is clear that consolidation in the banking industry leads to credit rationing in some cases but a company of RWE’s size and foreseeable financing needs will not be affected by this.
Hodge: You can argue about how much, but bank consolidation can only exacerbate the problems that have led us to concentrate on capital markets, except for projects and structured finance.
Lohneiß: Credit availability is not a major issue for Siemens and the consolidation in the bank industry has no particular bearing on this as long as this process does not lead to a decline of risk capital.
However, we do observe a decline of liquidity in the foreign-exchange markets given a smaller number of market participants.
Buora: In my view the consolidation process is still some way from causing an actual withdrawal of lending capacity, even if in theory this ought to be the case.
Also, even if it were, the increasing concentration in the banking sector is going hand in hand with the development of capital markets and in my opinion the mix of the two is much richer in opportunities than in threats as new instruments and solutions will more than make up for any potential contraction in bank lending.
So, I do not see much reason for concern in the consolidation process. I would be much more worried by the opposite, since small local or regional banks would not be able to provide solutions to global businesses.
There is one issue that does concern me – the increasing difficulty of maintaining a diversified portfolio of banking relationships when the number of agents in the market is shrinking and the risk of relying on very few of them for all your possible financial needs is increasing. This will be perhaps the most relevant incentive towards a greater use of capital market instruments in the future.
In this sense the ability and know-how of banks in approaching the capital market as well as in expanding their traditional, core activity will be one of the most important factors we look at when choosing our banking partners in future.
García: Bank consolidation could affect companies in as much as it affects market transparency. We explore opportunities brought about by the different markets. We tend to diversify our activities between banks. Obviously, we do expect to increase the amount of syndicated bank liquidity insurance we access as we have to finance our present and future investment plans.
Banks are now structuring and delivering increasingly sophisticated financing solutions. Has this changed your approach to the bank markets? How important is it to you that your lead banks understand and have a proven track record of efficiently selling credit?
Pinto: If a product suits our needs then we will use it; however these tend to be few and far between. We place an emphasis on our credit rating such that if a syndicated debt funded large acquisition does come along, we will be able to refinance it in the near term in the bond markets.
Hodge: The structured financiers have limited ability to tailor their products to our needs – there is far too much “one size fits all” – so our response to changes in the bank markets at one extreme has been to set up a structured finance unit in Shell Capital partly to alleviate this problem.
Lohneiß: As we try to use the most efficient forms of financing available in the markets – which leads us to the capital rather than bank credit markets – we clearly value banks’ track record in selling credit and we are a keen observer of league tables. As we do use structured instruments geared towards specific investor-segments – such as reverse convertibles, tri-bonds (a predecessor to Eurobonds) and exchangeables – the ability to sell complex paper is also important.
Moreira: Petrobras has large capital requirements in a part of the world where access to capital at a decent price is not always assured. Therefore sophisticated solutions for us are the norm rather than the exception. Our lead banks, by necessity, must be leaders in sophisticated solutions. It goes without saying that lead banks cannot successfully execute a transaction without the ability to efficiently sell down the credit – whether in loan syndication or the bond markets. A proven track record of execution and distribution is a prerequisite when selecting a bank.
García: Our relationship with banks will demand new products and services. The greater our suppliers’ qualifications, the more comfortable we feel.
Many advisory banks are actively pushing the one-stop shopping concept, bundling together provision of advice, arranging acquisition finance and capital markets take-outs for their corporate clients. Do you share this enthusiasm for one-stop shopping? Or do you prefer to award mandates separately to the most efficient suppliers of these products?
Hodge: We have very little time for one stop shopping. Some very long-term relationships are very nice to have, but they are the icing on the cake for us and an entry point for cross-sales for the banks. At the front line I want to see no cross subsidy between different banking activities, and this has been my position for 20 years. I think it may have its place at the consumer level. I cannot judge this, but I am sure that it offers nothing substantial to the Royal Dutch/Shell group.
Pinto: We use specialists wherever possible as we do not believe that one bank can be good at everything.
Lohneiß: There is another way of looking at this. As a global company we like to deal with global players in worldwide capital markets, based on a pragmatic approach. We are quite willing to give the whole range of our financing business to a relatively small number of global banks. For example, at present, Siemens transacts 70% of its financial business, including foreign exchange, interest rate and liquidity business, with 10 large banks.
Buora: I think I would expand upon that view of the market. As I said before, the concentration of roles and activities is mainly a consequence of the consolidation process, rather than an active policy pursued by the banks in place of specialization.
Therefore, in principle, there is no best solution between the one-stop-shop approach and the reliance on more, specialized intermediaries – that depends on specific knowledge and expertise which, case by case, can favour either the first or the second solution. So I feel neither enthusiastic nor wary of either of the two.
Lambertz: I think there can be a tendency to go for one-stop shopping as the threat of leakage of information is always bigger than the opportunity of having another alternative for the financing side of a transaction. Nevertheless, one-stop-shopping always has to be incentive based. There needs to be a monetary benefit in it for the client as well. There is no free lunch, but competitive banks will always be invited to the dinner table.
García: We elect one or other option, depending on the deal. However we do believe that companies will find the best balance of products and services from a long-term partner.
Moreira: There are other complications. We have many banking relationships as we have in excess of $4 billion in short-term trade lines. Our major lending banks expect to be given a chance to compete for assignment for which they are qualified. When we conduct a competitive process, we invite all qualified relationship banks to submit offers. We then select the most qualified institution at the best price. This process leads to working with a relatively large number of banks, but this is not a negative. We essentially pick the market leaders for a given product at the best price.
I might add that for a particular transaction, it may be more economical to bundle services, for example certain advisory assignments may lead to capital markets underwriting. This we will do, although as a state-owned corporation we must follow certain guidelines in selecting our service providers.
Last year many European corporations sold large benchmark offerings to establish themselves in the new corporate bond market, or did even larger deals to finance acquisitions. Going forward, do you intend to use the bond market in this way or with regular, smaller deals as a day-to-day source of funding?
Lohneiß: We are already familiar with this type of deal through our MTN-programmes. As our liquidity needs change we may also issue bonds from time to time. Our upcoming SEC filing will also allow us to tap the publicly listed US market.
Lambertz: This really depends on the financing situation. Generally the bundling of demand can help to improve the terms for a specific transaction. RWE has not been seeking financing for the time being. But in the case of a bond issue we will weigh the advantages of establishing a credit curve against the advantages of highly liquid bullet issues.
Buora: In the past our approach to the bond market has been mainly characterized by large, infrequent operations dedicated to raising capital for specific projects. In the future we will continue to issue bonds following this approach, but we will as well probably start to use the market to fund smaller, ordinary operations. This will be possible mainly because of the increased efficiency of the market in pricing credit standings: in the past we used to face large gaps between the pricing from banks and the ones on the bond market, but the bond market is increasingly bridging this gap.
Moreira: I think that before a large borrower such as Petrobras can begin efficiently issuing smaller deals to fund particular requirements or satisfy pockets of demand, we must establish our own yield curve. Since the Asian crisis, we have not tapped the bond market. As a result, we currently do not have a reliable yield curve that reflects our financial strength, our growing international profile and our improved disclosure, including SEC registration and US GAAP. Therefore, while eventually we may place smaller deals to meet certain needs, our current intention is to create an accurate yield curve with one or more benchmark offerings.
Hodge: I think that is an important point: you have to balance needs with the desire to establish benchmarks. One can’t always do what one would like to do from a market efficiency point of view.
Pinto: We have not established our own yield curve but will continue to use a mix of bond debt and bank debt to fund our business, as market conditions suit our requirements.
In your experience how efficient are the bond markets at pricing credits? Or do you believe that banks price credit more efficiently?
Lambertz: Bond markets as well as banks use fairly the same methodology to evaluate credit risk. Nevertheless bond markets show a tendency to over-react in cases of market turmoil. In such situations banks might have a clearer perception of the real credit risk involved with an individual borrower.
Pinto: I think that banks return on asset models have the ability to be overridden where there is a possibility of securing ancillary business, and hence bank pricing can be more of an art than a science.
Hodge: Banks are probably more efficient, but the herd instinct is strong in both banks and capital markets. For large corporates of course the banks start from an inefficient position because of the risk weightings of the Basle rules. I also think that if you include the credit rating agencies as part of capital markets, capital markets win hands down.
Lohneiß: I agree. In our opinion bond markets generally are more highly-developed in terms of transparency and there is good liquidity in primary markets. Because of this we see lower credit spreads in the capital markets than we do in bank credit markets.
Moreira: I don’t think it is possible to compare the two markets in this way. Because of our classification as Brazil risk, commercial banks do not lend to us on a long-term basis (i.e. five years or greater) without some form of structural risk mitigation. Institutional bond investors, on the other hand, have limited appetite for anything less than five years. Consequently, comparing the two markets is not an apple-to-apples comparison.
The only general comment I could make would be that bank financing at the short end of the curve is substantially less than at the long end, so I expect the long end will come in over time.
I should also add that I’m not sure there is even such a thing as efficient pricing of risks, there is only the market price. As an example our spreads on trade financing debt has declined from 400 basis points to 50 basis points during the last year. I would love to say that 50 basis points is the efficient number, but all I know for certain is that it is the market price. With respect to our bonds, the trading level of Brazilian sovereign bonds determines our spread levels. Our challenge is to get investors to focus on the positives of lending to Petrobras, relative to the Republic.
Recent well-publicized corporate actions have adversely affected investors in corporate credits. What, if anything, can you as issuers or potential issuers do to improve investor confidence?
García: Companies need a sound financial structure and they must be transparent.
Lohneiß: I agree, though it is worth pointing out that corporate credit spreads will remain volatile and mostly for external reasons which an issuer cannot control.
However, it is always important to entertain active communication with investors – such as roadshows – and to maintain an active secondary market in one’s own issues, as far as possible.
Lambertz: A corporate strategy always has to be accompanied by a sound financial policy. Financial objectives within a strategic framework have to be clearly communicated and once the objectives have been set they have to be adhered to.
Pinto: We have never been downgraded, however we believe that it is important to give the good news as well as the bad news as soon as possible so that credit analysts can model the impact.
Does the pressure on your company to manage for shareholder value, one element of which would be to increase leverage, not imply a downgrading of your credit quality and so a conflict of interest between your bond investors and shareholders?
Buora: Long-term stability and profitability cannot be reached without balanced attention towards the interests of all the stakeholders of a company. Depending on the particular contingencies that a company can face during its life, the interests of one party can temporarily be dominant, but I do not see the opportunity for a systematic bias.
Hodge: Nor me. I think the time has come and gone when there was mindless pressure for more leverage, driven by simple-minded journalists and/or low grade analysts who had just managed to complete corporate finance 101. I have had many discussions about debt levels and shareholder value over the years, but in the last year or two the debate has been very rational. There will never be a right answer on this, and certainly not “one size fits all”, and I think the markets now recognize this.
Lohneiß: We appreciate our current AA-rating and believe that this approach is consistent with maximizing shareholder value at this point in time.
García: As Amena is a start-up company, shareholder commitment is strong, so there is no issue on this subject.
Pinto: Our rating allows us to be sufficiently geared to increase shareholder value which we have done very successfully for many years.
Moreira: We are a capital-intensive company managed for shareholder value. Availability of debt capital at a reasonable cost increases shareholder value. Demonstrating our commitment to bondholders by maintaining a conservative capital structure enhances our access to debt capital markets. The cyclical nature of the oil business and the ability to react to new opportunities also requires a strong capital structure. Based on these considerations, I believe it is in our shareholders’ interest to act in a manner that is consistent with bondholders’ interests. For example we have stated a debt-to-total-capital of 40%, and fully intend to respect this target.
Lambertz: RWE has just achieved its first-time rating and has not needed to balance shareholder value and bondholder interests up to now. But should a transaction arise, we don’t see that the interests of both groups should inevitably be in conflict.
What lessons about deal structuring and execution have you learned from the transactions we saw last year? For example, do you believe price discovery and book-building optimize pricing over the long-term, or do they hand control to investors?
Moreira: For a company in our situation, which has not been to the bond market for some time and which is undergoing unprecedented changes both in its strategies and in its markets, price discovery and book-building for an inaugural issue will be essential. We are a story credit, with many positives that are under-appreciated. Our approach will be to explain ourselves fully to the universe of potential investors; and they will determine the price. I don’t see the price as being “controlled” by either the market or the underwriters. The price is the price, based on full disclosure to the universe of investors. We do think that investors will ultimately agree that relative to the sovereign, we represent real value.
Pinto: Long-term pricing is probably helped by bookbuilding, however there must be a balance which must be managed.
Lambertz: Investors will gain more and more control of the pricing process as banks strive to mitigate underwriting risk and e-book-building techniques prove more and more popular with investors.
Lohneiß: It is our opinion that book-building and price discovery will dominate the market in the future.
How do you monitor the support provided to your deals by lead managers in terms of follow-up research and maintaining liquidity? How sensitive are you to spread movements? Would your treasury deal in your own bonds, buying back if they become too cheap?
Buora: There is a constant follow-up on price and spread on our existing deals. Liquidity and support can be easily verified on information providers such as Reuters and Bloomberg. As all our capital market issues are to fund investments, we are not very sensitive to spread movements; therefore we do not trade systematically in our own bonds.
Hodge: We have never bought back our own debt in a major market, but one never says “never”.
Lohneiß: Siemens carefully monitors any of the support provided by its lead managers as far as fair pricing, volatility patterns, bid/ask spreads and research is concerned. If there is liquidity in the secondary market, we are quite willing to buy back our own issues.
Lambertz: We would monitor the support via market quotes provided by the lead managers. One of the main tasks of the lead manager is not only to indicate which sector of the market should be tapped, but also to make markets.
Moreira: Obviously we fully expect our lead managers to remain active in research and liquidity. That is why we choose strong relationship banks as our lead managers. We do not formally monitor their follow-up support, but we quickly know if they are not doing an adequate job by the price behaviour of our bonds, as well as comments from market participants.
We are also obviously sensitive to spreads, although we must recognize that much of our volatility is related to fluctuations in the spread levels of sovereign bonds. Our focus will be on the relation of our spread to the sovereign. Finally, as a state entity in a country with exchange controls, we have limitations to buying back our debt, regardless of how cheap we think it has become.
Pinto: It is vital to monitor spreads as they affect future issues. We will buy back bonds if they are cheap.
How important do you expect the internet to become as a tool for pricing and distributing your paper?
Buora: Research recently conducted by Greenwich Associates with 250 of the largest and most active US fixed-income investors reveals that 80% are either currently trading on-line or are considering doing so. This compares with 35% just six months earlier and is clear evidence that on-line trading is rapidly gaining acceptance among fixed-income investors. So the increasing role that the internet will play in the market has to be taken into consideration: on-line investors are a new segment which has to be specifically targeted and which can greatly contribute to the improvement of market efficiency.
Hodge: I’m not sure. I would guess that dedicated professional distribution will possibly become web based, but this will be no great issue as the transition from face-to-face dealing to electronics is happening in all markets. Getting really far out, one wonders if it will become worthwhile to seek to distribute paper very widely (to “consumers”) through the internet, but I doubt that it would be worth our while to set up the systems to do this ourselves, even though www.shell.com might be quite a good place to do it, given the ubiquity of the brand.
Lambertz: I am sure that the internet will increase in importance especially in markets that are based on bilateral trading (OTC) like the bond markets. But in the absence of a regulated exchange, making markets will still be of prime importance in order to maintain liquidity and keep bid/ask spreads tight.
Lohneiß: As Carlo [Buora] has made clear the statistical evidence suggests that the internet is being increasingly used as a trading platform for commercial paper and US Treasury. It seems reasonable to assume therefore that the internet will become an important tool for the pricing and distribution of corporate paper as well.
Moreira: This may be true but I think it will primarily be a means to facilitate communication and flow of information, and to simplify the credit distribution process. I’m not sure it will ever substitute for the traditional interaction between company, banker, and investor. Insofar as it broadens a company’s investor base, improves access to the company, and reduces transaction costs, it ultimately will have a positive benefit on the all-in cost of debt. I doubt, however, that the internet will change who the players are.
