Debt capital markets (DCM) teams have been frantically busy since mid-March. Investment grade corporates, banks, sovereigns and supranationals all rushed to issue bonds in the teeth of the Covid-19 lockdowns in order to secure term funding while they still could.
“The corporate debt market has seen record levels with a couple of $120 billion weeks in the US and €80 billion weeks in Europe,” says Barry Donlon, head of DCM EMEA at UBS. “After the initial seizures in commercial paper and closure of new issuance, high-quality companies reopened markets with large deals that have performed well, so helping stem the outflows from bond funds.”
Even with most bankers now working from home, primary markets have functioned well so far.
“I am impressed with how the infrastructure has held up. We still have some traders at their desks in the office or at backup sites, albeit social distancing. I’m not aware of anything that needs to be done to close the gap to how we used to execute deals prior to this,” says Donlon.
It doesn’t sound like the best moment to launch a new technology venture to transform the work flows and processes around DCM.
But when Euromoney catches up with Charlie Berman, founder and chief executive of agora Digital Capital Markets, he has just agreed a memorandum of understanding with another leading participant to collaborate on an ambitious programme to digitize the primary bond business.
Catalyst for change
Euromoney picks up plenty of anecdotal evidence that middle offices are being stretched and the mandated record keeping of the conversations leading up to deals somewhat improvised.
“We have a broad and large group of significant market participants collaborating with us all under non-disclosure agreements, including global and regional banks, custodians, issuing and paying agents, CSDs [central securities depositories] and other stakeholders,” says Berman.
“We expect our first product to be utilized in Q2/Q3 subject only to the current uncertainties of the global lockdown. I would say that, hideous though this pandemic is, it has served to reinforce in many people’s minds how outdated many processes are and is clearly a further catalyst for change.
“Many of those we are engaged with have commented how useful it would have been to have the agora software in the current situation, i.e. connecting all the relevant and various participants in a safe, secure and confidential environment and allowing them to share a common view of information and reach agreement even though everyone is working from home,” he says.
“The market has shown extraordinary resilience to cope with record deal creation, but it has required Herculean efforts from all involved and extreme pragmatism in the application of normal practices and procedures.”
I know the banks’ and other market participants’ challenges very well. I also know not to get in a knife fight with them- Charlie Berman, agora Digital Capital Markets
Berman is a veteran of the new issue business, who still recalls the first deal he worked on, a $500 million floating rate note for Ferrovie dello Stato Italiane in 1984, and the advances that followed. In 1989 came global bonds with a bridge built between the US Depository Trust Company and the European securities depositories, Euroclear and Cedel. But since then, for all the efforts of a handful of innovators like Origin and Nivaura, the process of creating new bonds has not changed much.
“It’s a tried and tested formal process and everyone knows their lines word perfect,” says Berman. “The verbal agreement reached on the pricing call regarding reference and all-in yields, dates, spreads, volumes etc. by the issuer and its bankers gets written up, typically by an analyst on the lead bank’s DCM desk, into a document with all the final terms. The document is then emailed around between participants who check and confirm they all agree with it. That alone can take hours. It can even slip into the next day.”
And it begins a process whereby bond agreements exist as natural language documents – in Word, PDF or Excel formats – being emailed between issuer, lead bank arrangers and investors, then on through a series of downstream service providers, which often extract key terms to load into their own systems, constantly checking and reconciling.
“I wouldn’t say that the system is broken at all, but it is very manual and has hardly changed in decades,” says Berman. “Given how technology has developed, is this really where we should be in 2020?”
The vision of agora is to create at the outset of a bond’s life a piece of structured data that all relevant participants see, confirm and sign and that can then be accessed only by approved entities.
“By operating on a confidential permissioned distributed ledger – in our case R3’s Corda platform – amongst our functionality will be the ability for an issuer and its banks to create a final term sheet delivered as a 100% accurate piece of structured data to all the downstream service providers,” says Berman.
This would remove much of the repeat manual data inputting, confirmations and error reconciliations that prevail today and achieve much higher straight-through processing.
“What’s important here is that we are not trying to create fully native digital assets,” adds Berman. “No bond custodian or clearer has to switch over from its existing systems to new ones. They can use this 100% accurate data, or the parts of it they need, within their own existing systems and if they do move to distributed ledger, can do so at their own pace.”
Bonds have been issued on blockchain already. The World Bank launched its A$110 million bond-i in 2018 and reopened it in August 2019 after some limited turnover in May last year. But bond-i has not been copied. It seems to work only within a tight loop of a handful of participants
Agora’s vision is more ambitious and aims eventually to encompass workflows across the entire lifecycle of a bond from origination to redemption. Those may eventually include buybacks, even redocumentation of bonds priced off Libor floors.
“If all we did was create a golden source agreed final term sheet at the outset, which was a natural language document being emailed between participants, that wouldn’t add very much,” says Berman. “A natural language document is dumb. But a piece of structured data can be smart. It can embed actions, such as paying out interest to its beneficiaries on coupon dates.”
Agora is a small startup, staffed by experienced bankers who understand the DCM and know everyone in them. Banks that would never join a platform initiated by a rival can at least collaborate with an independent aggregator that is not backed by any of the big underwriters or investors.
Berman, who worked at Bank of America, Salomon Brothers, Citigroup and Barclays, is not a disruptor. “We are building a software company, not a marketplace,” he says. “I know the banks’ and other market participants’ challenges very well.
“I also know not to get in a knife fight with them.”