Starting wide is starting right
The tussle between bond syndicate desks and investors about whether opening books well wide of the final target spread is a worthwhile endeavour or a red flag for unprofessionalism has raged for years. This time, syndicate desks have called it right to start deals so cheap.
American Honda and La Poste sold multiple tranches of bonds in euros this week, marketing the deals 40bp to 55bp wide of where they eventually wound up. Switzerland’s Givaudan issued a dual tranche trade that was priced a whopping 70bp-75bp inside initial price thoughts.
In less mercurial markets, a syndicate team starting so wide would reek of poor judgement and a lack of conviction. Investors would fall over themselves to complain about how it deceptively inflates order books to lure buyers in with the prospect of a cheap asset, only to turn the screw at the last minute.
But let us be honest, even in good times this complaint doesn’t really stand up. On most deals professional investors will not disagree too much over fair value. If they do not think a deal pays a fair premium, investors always have the option to walk away and pull their order.
In whipsawing markets such as these, where a corporate issuer's bond yields face as much uncertainty as its underlying business, starting wide makes even more sense.
We are living through some of the most volatile markets in history, with records being broken in all directions week on week. Before the Easter break, Europe’s corporate bond primary market recorded its busiest ever week. This came just a few weeks after equity markets plunged the most in a single day since the global financial crisis.
And for all the moaning, there is only one thing that matters. These deals work. Givaudan and Telstra paid negative premiums this week for combined debt totalling €1.5bn.
Until the world gets a grip on the pandemic, we should expect, even welcome, plenty more hefty spread moves during bond execution. It will build strong momentum in deals until investors finally pluck up the courage to walk away.