The increase in the number of funds investing in loans has exacerbated an age-old complaint in the market: buysiders being pressured not to trade away from agent banks and feeling penalized with smaller primary allocations if they do. Investors said the practice has become more of a problem as firms try to distinguish themselves from the number of new entrants in the market by hitting trading volume targets and trading a higher and broader number of products.
"Clearly there is pressure not to trade away from the agent," said Mark Abrahm, a trader at Gulf Stream Asset Management. "It is difficult to trade away because the agents see all the trades. I think it is the biggest impediment to liquidity." If they do trade away, buysiders said they get smaller allocations the next time around. "You get better allocations if you don't trade away," said one investor who asked not to be identified. A third investor said getting smaller allocations is the most direct way of getting penalized, but agents also try more subtle methods. "You may not get the first call when a bid is out," that buyside trader said.
Buysiders said all dealers put pressure on investors and none would single out any particular bank. Investors are particularly irked by the pressure because competition is so fierce in the buyside community. "What makes the problem more stark is that there are so many new entrants to the loan market that there is a lot of pressure to distinguish yourself from the next investor by trading volumes and by trading a higher number and broader depth of product," said the buyside trader.
One head of loan sales and trading at a large dealer said he is aware agents put pressure on accounts to trade with them in names on which they are the lead. He added that because agent banks often commit capital to their deals, they deserve loyalty from investors. "Agent banks feel most responsible to maintain good liquidity in a market; they commit capital to maintain that market," he said. "They deserve to be rewarded for the capital. We feel this about our deals; it would make us mad if we commit capital in a name and then have accounts trade away from us."
He added that investors should not expect top quality service if they trade away. "There is not a God-given right to get the first call on a deal or the best allocations. The service is part of the overall relationship between the dealer and the investor. Trying to come up with ways to change the rules won't make any difference," he said. He agreed that increased competition on the buyside has made the pressure from agent banks more of an issue for buysiders. "Maybe there are too many investors. The number of investors has tripled in the last couple of years."
One suggested solution is to separate banks' syndicate services and trading desks so that agents do not see investors' trades. "It is my wish that there is a wall between the agent bank services and the trading desk," said Abrahm. "I'd love to see that happen," said another buysider.
Eric Green, senior partner at FriedbergMilstein, said the pressure agents put on investors not to trade away creates more of a liquidity problem for middle-market deals rather than large deals. "If it is a big account you can do what you want, but for smaller accounts it is more of an issue," he said. He added that the creation of a wall between the agent services and trading desks is unlikely to happen for mid-market deals because it would make it difficult for issuers to seek amendments to credit agreements. "It won't happen for mid-market deals because everyone wants to know who the investors are. I would argue it would create less efficient trading," said Green.
An investor at a small firm said the pressure not to trade away does hurt liquidity to a certain extent, but he added that although most of the time agents do not offer the best price, they do often create the best liquidity. He explained that non-agent banks may be less willing to commit capital to deals they are not involved in because they know less about the borrower. "I have found that the agent is maybe an eighth off [on price] but they provide good liquidity," he said. "The admin agent is more likely to commit capital to keep an orderly market in that name. In mid-sized names it is nice to have people commit capital on the loan."
Spokespeople at JPMorgan, Goldman Sachs, Bank of America, Lehman Brothers, Morgan Stanley,Credit Suisse andCitigroup declined comment. Spokespeople at Merrill Lynch, Wachovia Securities and Deutsche Bank did not respond by press time.
