Current debt syndication practices have been in place in Europe for well over eight years; such a long time that it’s easy to forget what previous customs prevailed. Back in the bad old days, syndication was a far wilder affair. There are those who look back longingly to earlier eras, arguing that you do not need to be a risk taker to work on syndicate any more. Syndication has descended into an administrative function, they say.
So what does debt syndication entail in the modern market? It is merely a matter of suggesting where a deal “might” price – with the official comfortable in the knowledge that a fully negotiated transaction following an extensive roadshow will take place.
This process dramatically cuts the risk inherent in classic underwriting of bond issues. Although cut-throat competition is often blamed for the fee-cutting that is so prevalent in today’s market, there is another reason why fees were higher 10 years ago (typically 2.5%) – it was to offset the substantial risk that a syndicate manager frequently took when selling down paper.
Syndicate managers were once kings of the new issue business. They were often forceful, some would say cavalier, characters who had an instinctive feel for what the market would digest. Of course the market often consisted of fellow, trusted, syndicate officials who would be lined up to take down a portion of risk and distribute it to their in-house networks.
So is syndicate now such a boring world? Well, in the past month or so there have been some punchy European corporate new issues reminiscent of the good old days.
Recent new issues for such companies as Hutchison Whampoa and Vivendi suggest that the age of the bought deal is not over yet. Syndicate officials are still sometimes willing to bid for corporate and financial business purely on price and at aggressive levels – especially when their bankers are putting on the pressure.
Take Hutchison, which, despite rumours that it had awarded a three-handed mandate, ended up selling a €1 billion 10-year via sole lead manager HSBC at a spread that was widely derided by market participants as too tight. It was marketed at Euribor plus 65 basis points but most participants thought it could only clear at plus 70bp to 75bp.
A short while later, Vivendi was struggling to find banks willing to take on its dual tranche deal at levels the French environment company considered appropriate – plus 49bp and 63bp over Euribor for a five year and seven year respectively. Eventually Citi and JPMorgan stepped up. One can only hope, for the banks’ sake, that they were not bound to anything like those underwriting levels, as the bonds eventually printed at plus 50bp and plus 68bp for a €700 million five-year FRN and a €500 million fixed-rate seven year.
The fact that these trades are noteworthy highlights the point that syndication is a different job nowadays. Every now and then – especially on deals that are not strategic – underwriters are willing to exert themselves for special clients, like Hutch, or for the purposes of winning market share. But the sheer size of deals these days makes it a far more risky business than when a benchmark was $300 million. The fact is, the new issue business might be more boring now but it is a darn sight more profitable.
