8/14/2019 Greek Bond Sale Raises Wider Questions

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Greek bond sale raises wider questionsBy Anousha Sakoui and David Oakley

Published: February 4 2010 19:06 | Last updated: February 4 2010 19:06

In recent days, there has been a great deal of debate about last week‟s €8bn Greek bond sale.

Behind the scenes, some investors have also been asking questions about the banks that sold

the bonds.

It is a saga that has raised questions about the way bonds are sold and extends well beyond

Greece.

These questions come at a time when policymakers are trying to increase companies‟ accessto non-bank funding as a growing number of European companies, which have historically

relied on bank lending, lean on bond investors for refinancing.

There has even been a backlash from an investor body in the multibillion-euro market for 

covered bonds, one of the safest forms of corporate debt.

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Peter Montagnon, director of investment affairs at the Association of British Insurers, says:

“There are concerns among investors about how bond deals are done, particularly with regardto pre-sounding of deals in a way that is inappropriate and would not be seen in equity

markets.”

Pre-sounding is when bankers gauge investor demand for a potential deal. He says this is because it is harder to establish pricing in credit markets.

When raising new debt or equity in capital markets, a banker known as a syndicate manager 

sits between the issuers and the investment community. These bankers compete for new issue

 business with other banks and try to secure a low cost of funding for their borrower clients.

They also have to consider the interests of investors and ensure the bonds do not fall in price.

In the case of Greece‟s bond issue on Monday last week , bankers said the deal drew €25bn($34bn) in orders, five times the initial €5bn target. The deal was increased 60 per cent, to

 €8bn, and pricing increased as a result of the demand. 

The day after  –  when the €8bn issue was being priced – Greek officials said they intended to

sell another bond in the coming weeks. This news weighed heavily on the price of the latest

five-year bond, leaving investors with big paper losses. The Greek markets also weakened on

other reports about the country‟s financing plans. 

Some investors rounded on syndicate bankers, believing that the real demand for the deal was

exaggerated and that orders were inflated. Some investors, such as hedge funds, sometimes

 place orders for more bonds than they want if they believe a deal is likely to be

oversubscribed and hence their allocation of bonds cut back.

But there are also suggestions that bankers sometimes pressurise investors. Theodora Zemek,

global head of fixed income at Axa Investment Managers, says: “The practice of insistinginvestors put in much higher orders than they want to boost order books has been going on for 

years. It is very frustrating for us as a real-money investor because we are not allowed to put

 bids in for more bonds than we want. It often means we end up with a smaller allocation.” 

Ross Pamphilon, head of portfolio management at European Credit Management, says

investors often feel “herded” into deals. “Those same investors also share a responsibility notto inflate their order sizes or else the market runs the risk that syndicate desks can

unintentionally mislead the market on genuine book size because there is no certain way to

know which are the „real‟ orders,” he says.

Bankers on the Greece bond issue deny any misrepresentation of the volume of demand for 

the deal. Some bankers say that, on the contrary, they do not encourage inflation of orders

 because it can make managing a bond sale more difficult.

“Because syndicate officials sit between investors and issuers and try to achieve a positiveresult for everyone, it is inevitably difficult to keep all parties happy all of the time,” saidFrazer Ross, managing director at Deutsche Bank, who declined to comment on the Greek 

 bond, which the bank was a lead manager on.

“It is in the banks‟ interest to maintain an orderly syndicate pr ocess which is as smooth andtransparent as possible. Deals are executed quickly in order to reduce market risk for everyone

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and investors are never forced into deals – they can and do reduce or cancel their order during

the process.” 

The Covered Bond Investor Council last month questioned another market practice  –  the

 process of “shadow bookbuilding”. 

This is when banks solicit demand from investors for a potential issue before any deal is

officially announced.

CBIC says the process is limiting the time investors have to evaluate information provided on

issues because, when the order books are officially opened, it is only for a few hours, as

opposed to a whole day in a traditional bookbuilding process.

They add that this increases the risk of “inside information” concerns.

In equity markets, when banks sound out investors to gauge demand for a share issue, these

investors are “wall-crossed” –  restricting them from trading related securities. In debtmarkets, however, bankers and investors say such wall-crossing is not always used when

investors are sounded out for demand in potential issues.

Banks and investment houses do follow strict compliance rules. For example, the bank 

syndicate teams do not tell their traders they have opened a shadow book to sell bonds to a

company to avoid a conflict of interest.

Some bankers say a greater consensus about the correct process has built in recent months,

since the Financial Services Authority censured two Dresdner Kleinwort bond traders for 

market abuse in relation to a new issue of Barclays bonds.