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Debt markets: Bring back the syndicate!

The boom in the bond markets has quickly brought back some unwanted old habits.

It did not take long for the bond syndication process to revert to type. A year ago selling new issues was dangerous. The damage to an underwriter’s reputation from failing might be serious, although not as serious as for the prospective borrower, which would then need to fend off accusations that it had no access to the capital markets.

Failure to deliver a deal was not an option, which meant that syndication was reminiscent of days long gone. Cooperation between bond managers was crucial to success, as was persuading a number of core investors to agree to purchase the bonds before a deal’s official launch. Proper bookbuilding therefore returned. Syndicate structures started to change too, with certain frequent issuers implementing selling groups that played to niche domestic investor bases.

Then came the deluge of investor money during the course of the year. A rarely identified but substantial flaw in the capital markets occurs when there is a big mismatch between supply and demand. When demand outweighs supply, lead managers can become lazy. It is hard to blame them. Why should they search out pockets of demand in hidden corners? Is there a point to having an enlarged selling group when investor demand is overwhelming? There is little need to think about growing the investor base when even the biggest asset managers are allocated only a small proportion of bonds during book building.

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