That the Republic of Serbia’s bond is not performing well is an understatement — by Monday it had fallen 8 points from where it was priced at 98.263 last Wednesday, one of the worst first week’s trading performance of a new CEEMEA deal in memory, even with a one point rebound on Tuesday.
But it is not a failure for Serbia. Investors aren’t happy, but Serbia must be delighted, having pulled off what every emerging market syndicate official has been advising since 2007 — seeing a window and jumping through it before it shuts.
Rival syndicate and origination officials have pounced on the deal as a disaster, as it has not followed the standard playbook. Serbia priced at the wide end of its price talk range, seemed to be pushing its $2bn order book to achieve a $1bn trade and priced just before a Federal Reserve meeting. That added a degree of uncertainty, although no one expected the severe repricing of EM bonds seen over the last few days.
The deal certainly did not trade up the hoped-for one point after pricing that typically indicates that some — but not too much — juice has been left on the table for investors. The result has been a debut deal that has left unhappy investors with a 10% loss in less than a week.
But before the market turned many analysts thought the pricing on Serbia was fair. Lead managers say that Serbia was concerned about the market worsening, so it wanted to go for the bigger size. And crucially, the country has no plans to return to the Eurobond market in the near future, and neither do its corporates and banks.
With that in mind, why should it wait for a window where the deal will perform, especially when market volatility has hit bonds across the board, not just Serbia? True, investors may remember and punish Serbia the next time it tries to tap the capital markets, but the rational among them will probably simply look at the next deal on its own merit and ask for a few basis points more, a price which will certainly not equate to as much money as Serbia would have lost over the next 10 years had it waited for an extra day to price last week.
Serbia has done well out of this trade. Its lead managers, Deutsche Bank and JP Morgan, have done well for Serbia. Whether the banks have done well for themselves is less certain.
Arrangers walk a fine line with every deal they price. They are paid by the issuer, but in order to preserve their reputation with investors for future deals, they must price at a level that benefits them as well.
In pricing the Serbia note, the leads clearly picked sides. Other issuers are unlikely to see anything special in this deal to cause favour towards those banks in the future. And investor trust has been shattered as they watched the leads try — and fail — to support the deal.
Other banks may not have been able to do better, but it is the sales teams of Deutsche Bank and JP Morgan that have almost certainly lost friends as the bond plummeted. Yes, investors knew the risks, but they will want someone to blame.
The rumoured 4bp fee that the banks signed up to in order to lead the deal was perhaps a calculation of the possible benefits in terms of credentials when pitching to other issuers. But emerging markets deals carry plenty of risks for arranging banks as well as investors. And for the leads on this deal, it is unclear whether the gamble has backfired.