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Debt syndication: Risk takers no longer required

The return of hard underwriting on recent bond deals underscores how mundane and risk-free the business had become.

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.

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