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How 2012 regulation transformed syndicate deal execution

New regulations have hampered an old technique employed by primary debt capital market bankers to guage investor demand: so-called pre-sounding.

Although significant levels of oversubscription mean issuers achieved extraordinary outcomes this year, the market has had to battle significant regulatory challenges.

BNP Paribas’ head of the emerging markets (EM) syndicate business, Nick Darrant, has warned high-profile Financial Services Authority (FSA) penalties had hampered the efficacy of so-called pre-sounding.

Pre-sounding refers to discussions with investors that take place before the announcement of a transaction to gauge their interest in a potential structure or transaction. According to a recent briefing from Linklaters, one risk of these discussions is that non-public, price-sensitive or inside information may be disclosed to the investor.

“A lot of investors have been unnerved this year and are not willing to be pre-sounded, a lot of them decline to be wall-crossed,” said Darrant.

What’s changed

High-profile penalties imposed by the Financial Services Authority (FSA) on David Einhorn, Greenlight Capital and others for market abuse have had a major impact on the practice.

Darrant added that even those who do pre-sound, aren’t committing to the same extent they were 18 months ago.

This is fine when the markets are strong because syndicate desks are a lot more confident in their convictions. But when the markets are more challenging it means they have to take a view.

“That’s where the risk lies going into next year,” said Darrant. “Where very few investors are willing to be wall-crossed but you still have to make that judgement call as to whether a certain deal works at a certain spread.”

In terms of communicating how the deal is progressing during the book-build, it used to be common practice for syndicate desks to send out regular updates.

“It was almost to fuel the inflow of orders and encourage a trade to go well,” said Darrant.

But this isn’t allowed any more. “We have to be very factual and do things by the letter of the law,” he said.

Releases have to be in a public format and sharing information internally among sales people and certain investors is not allowed.

Too many cooks

Speaking at the International Capital Market Association (ICMA) primary market forum this month, Darrant also drew attention to the potential issues posed by having different regulations and different supervisory bodies in place. Among other things, this can lead to conflicting views on what can and can’t be communicated to investors.

At present, UK and US practice differs with regards to whether key information has to be communicated on either an informal or a formal, public basis so that everybody has access to the data at the same time.

“If you’re printing a global deal there’s a conflict there because we’re meant to be marketing the transaction to investors in both Europe and the US so it’s unclear which rules you have to abide by,” said Darrant.

The full story is available online now at

See also

‘A legal guide to bond execution in 2013’
‘Has the Prospectus Directive regime permanently damaged European ECM?’

‘How to prepare bond documents for a Eurozone break-up’
‘Banking sector reform: a definitive guide to the latest developments’