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Borrowers beset by growing opacity

By Brian Mooyart

Primary markets have undergone several transformations in recent years: for example, the rise of the roadshow, electronic bidding, internet auctions and price guidance. The question that borrowers increasingly ask is whether the new tools have led to better terms for their funding. Has the new-issue market become more transparent and has that led to improved accuracy in pricing?

It is seductive for a borrower to see bids on his issue coming in on lead managers' screens. The price demand curve builds before his very eyes. But how real is it all?

The roadshow is surely one of the most direct points of contact a borrower can have with investors who tell the borrower whether they like the story and at what spread they will buy. But is this their best bid?

New tools may tempt the observer into thinking price formation for new issues is transparent. In fact much of it masks an opaque bidding process. Initial price guidance and spread talk introduce major distortions. The roadshow may be likened to a cattle market in which dealers form rings and will seldom have to give their best price. They will give what they want to pay, albeit investors may sometimes be mindful of competition to win attractive assets.