Bad mouthing price talk
When does guidance stop being guidance? That's the question on some bankers' minds in the wake of this week's deal for Gazprom Neft.
Gazprom Neft’s $1.5bn 10 year note this week bore all the hallmarks of a stellar deal — decent size, huge book, pricing at the tight end guidance, trading up well in the secondary.
But the note has still irked some syndicate officials in the market. They argue that the tactic of using eye-wateringly wide initial price talk to get to that result was wrong.
And guidance was certainly some distance away from pricing. Initial yield talk of 4.75% for Gazprom Neft was too wide to be a meaningful reflection of where the deal would price, argue those away from the deal. After all, arrangers Credit Agricole, JP Morgan and Gazprombank ended up tightening guidance to 4.5% before pricing at 4.375%.
Those working on the deal say that the guidance was deliberately wide, but that it was designed in order to net the interest of the largest possible pool of investors — and then to use that interest to drive the deal tighter.
Such debates have been raised in pretty much all asset classes over the years — setting a super-attractive bottom of the price range for an equity accelerated bookbuild has been a common tactic. And, as usual, such techniques raise the question of exactly what guidance is for.
On one hand, if it is simply part of the enticement involved in marketing any deal, then it might be seen to have a place alongside the typical roadshow spin and deliciously persuasive caviar blinis.
But there's a cost to this, even if it does help give momentum to a book (as it did with Gazprom Neft's $1.5bn deal, whose book hit a peak of $15.5bn).
Wide price talk may waste some investors’ time if they end up having to withdraw their orders as guidance tightens (some $2bn dropped out of Gazprom Neft). But even that is just a matter of a call to sales — hardly the sort of thing to jeopardise long held relationships.
But those that slammed the Gazprom Neft method said that putting out deliberately wide guidance was especially poor form for debut names given that investors would have spent precious time on credit work, and probably on the assumption of a certain allocation.
A gigantic book, while sometimes helping secondary market performance, annoys investors because of their inability to get the exposure they want. Some bankers counter that there is plenty of fluff in a book that size, with inflated orders commonplace. Reduced allocations are par for the course.
Maybe so, but the biggest problem of excessively wide guidance might be its potential effect on the curve of comparables or of the borrower itself.
Had the market been less supportive, for instance, it is possible that investors could have sold out of the existing deals of majority owner — or Gazprom Neft’s own curve had it had one — in order to put in orders for the new paper. As it happened, market conditions are so strong that hardly anyone is selling anything.
Gazprom Neft is not the first issuer to have used the wide guidance approach — Gazprom came under fire for the same reasons in July after achieving a similar result for one of its own deals.
But such a technique is not essential for securing a good deal, and herd behaviour should be resisted. If a trend starts, the biggest risk is that investors will stop taking the first number released seriously at all, removing a stage of dialogue that is essential for finding a fair price for a note.
After all, no one — not issuers, investors or bankers — wants a number for pricing plucked from thin air, and especially not in the emerging markets.