Issuers have argued that although the pandemic has forced them to raise more cash from the bond market than ever, central bank policy — lowering volatility and buying up huge amounts of supply — has made underwriting easier and the fees they pay their lead managers should reflect this.
The SSA market today, they have argued, is not the same as the market the last time the standard fees on benchmark transactions were negotiated (upwards) around a decade ago, when first the financial crisis and then the sovereign debt crisis made the SSA primary bond market a far tougher place to raise capital.
Banks disagree. They have not denied the EU has a right to pay whatever fees it thinks are fit. but they have been eager to point out that while primary market underwriting part may well carry less risk than years ago, the fees pay for the entire ecosystem — secondary trading, auction participation, advice, and so on — that keeps the SSA bond market functioning. A cut in fees would mean banks would move resources to other, more profitable parts of the capital markets, they threaten, leading to a weaker SSA market.
But what is the size of the fee pool that they are fighting over? Accurate fee data is not publicly available but as a proxy GlobalCapital took every syndicated SSA deal, according to Dealogic, done in euros and dollars of $1bn-equivalent or more sold between 2018 and April this year, including smaller tranches on multi-tranche syndications.
We then applied the standard fee grid, according to each deal’s maturity — making an assumption of what the fees might be for intermediate maturities and applying a fee of 0.25% for every deal longer than 30 years.
There is no doubt that the extra issuance driven by borrowers’ responses to the pandemic has swollen the fee pool. In 2018 there was €434bn-equivalent of SSA benchmark syndicated issuance, earning banks — according to GlobalCapital assumptions — €657m-equivalent in fees, or 0.15% of total volume issued. That figure didn’t change much in 2019: €437bn of supply yielded €676m in fees — 0.15% again.
Last year was a different story. There was €833bn-equivalent of syndicated supply, paying €1.3bn in fees. Each deal became more lucrative too, suggesting longer average duration, with fees worth 0.16% of supply.
And this year has followed suit. After just four months of the year, supply had all but matched 2018 and 2019’s levels at €421bn-equivalent. But the value of the fees has increased again, with issuers paying €739m of fees over the period, worth 0.18% of volume.
The average tenor of a syndication in the SSA market has indeed grown — from 8.1 years in 2018, to 9.5 years in 2020, to 12.6 years between January and April this year. The number of syndicated deals has risen too, from just over 220 per year in 2018 and 2019 to 344 last year. In the first four months of 2021 there were 162 syndicated SSA benchmarks.
A simplistic analysis might suggest that if banks are successfully helping issuers to navigate the more distant reaches of the yield curve — traditionally much riskier business — in a more crowded market then nothing is awry. But in reality, the importance of central bank bond buying in the market cannot be overstated.
Central bank asset purchase programmes have meant that huge volumes of debt have been taken out of the market and locked away on their balance sheets, suppressing yields, damping volatility and driving investors out along the maturity curve in the hope of earning any sort of yield.
Data from the ECB over the same period shows that at the start of 2018, it held €1.5tr of paper under its Public Sector Purchase Programme. That has increased by around €43-€44bn a month to €3.2tr at the end of April. Additionally, the central bank initiated its Pandemic Emergency Purchase Programme (Pepp) in March 2020, which held cumulative net purchases of just over €1tr at the end of April. The Pepp’s holdings are overwhelmingly SSA bonds. Bankers have admitted that underwriting risk is lower as a result.
But which issuers are paying the most in fees? Of the 93 that issued the syndications covered in this enquiry, the top 10 account for over half of the volume and estimated fee pool, although the line-ups differ in each case.
Italy has been by far the biggest user of syndications from 2018 until the end of April, printing €224.8bn, or 11% of the total. It was also the biggest estimated fee payer, ponying up €421.7m, or 12% of the total.
Next is KfW, which has syndicated €206bn over the same period in euros and dollars, paying an estimated €279.3m in fees.
The top 10 issuers have brought banks €1.1tr of syndicated supply since 2018, 52% of the total, paying them €1.9bn in estimated fees, or 55% of the estimated total.
By borrower type, it is clear that sovereign issuers have done much of the heavy lifting in capital markets to fund the coronavirus response. In 2018, supranational and agency syndications accounted for 65% of the estimated fee pool. That fell to 53% last year, with the sovereign portion rising from 31% to 41%.
Banks have complained for years about the costs of being a primary dealer for a sovereign. Yet there is evidence that sovereigns are now paying more for banks' services, which offers some clue as to why the dealers are so keen not to see fees cut.
But where from here? While banks have been uniformly against underwriting fee cuts, the response from issuers has been varied. Some have been all for slashing fees, while others have said that hacking away at them is too blunt a measure.
Recently, one prominent SSA funding official at one of the very biggest issuers by syndication suggested that redesigning the fee schedule might be a better option, arguing that fees rise too steeply for longer maturities. But paying less for longer dated bonds relative to shorter ones would amount to a cut in fees if the trend for longer maturities continues.