The market on Wednesday morning, the day of the deal, had a weak tone but so had every other day of the previous fortnight. No one, including leads Commerzbank, JP Morgan, Société Générale, Standard Chartered Bank and UniCredit, could have predicted that traders were heading into one of the most volatile days of the year. Yapi Kredi had already put initial price thoughts out at 375bp over swaps when the sell-off in US Treasuries began.
At the IPTs stage, bankers away from the deal said the new issue premium on Yapi Kredi's new note looked high at around 30bp. They expected tightening of perhaps 15bp-20bp or more before pricing. But leads only sliced off another 5bp before printing. Bankers away from the deal were unimpressed with the move, and, despite begrudgingly praising the leads for getting the note over the line, called the final result a 25bp new issue premium.
The new issue premium for a deal is usually taken using trading levels for an outstanding curve before price guidance is released. But that convention is in place so that any effect on the curve from the action of releasing guidance is ignored. The movement of Yapi Kredi’s curve on Wednesday had nothing to do with the release of guidance, and everything to do with the wild volatility of US Treasuries throughout the day.
By the time of pricing at 5pm in London, fair value for a Yapi Kredi five year was very different to what it was at the time of IPTs at 11am. If the moved curve was used as a representation of fair value, the print was close to flat, though the curve carried on moving. It is probably fairest to estimate new issue premium somewhere between 0bp and 25bp. There is no right answer.
But leaving that debate aside, Yapi Kredi deserves recognition from investors for having gone through with the deal on such a torrid day. Wide price talk is too often used as marketing tool for drawing in investors with leads pulling a little bait-and-switch on buyers once they have been hooked, and using inflated orderbooks to pull pricing tighter for the borrower. IPTs are supposed to be an indication of what an issuer is actually willing to pay and a true reflection of a level where there may be demand.
Yapi Kredi had enough appetite for the note at the level of the IPTs it released. It tightened a little and then priced. It was right to do so.
The bank could have waited and perhaps shaved a few more basis points in a few weeks' time, but could not guarantee an improvement. What is certain is that pulling the deal because it couldn’t go even tighter would have been an insult to those investors who had taken the time to put in orders at original level offered.
The alternatives to printing a deal were two bad options — either pretending to the market that Yapi couldn’t get away a deal offering a 30bp new issue premium to that morning’s levels, or admitting to investors that IPTs are utterly meaningless.
Yapi Kredi took an unconventional approach last week in the face of volatility, but it was the right one.