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Early mandates get the worm

Early bird gets the worm

Avoiding intraday execution could help smaller, MREL-hungry issuers

With markets volatile and uncertain, FIG borrowers have increasingly pursued intraday bond issuance to cut their exposure to risky markets. But this strategy is not suitable for everybody.

A raft of issuance is expected before the summer break, with plenty of it set to arrive from smaller, riskier issuers - those that would benefit most, in fact, from a longer bond execution process.

Many of these issuers will be looking at printing minimum requirement for own funds and eligible liabilities (MREL) compliant deals, most likely in the form of senior non-preferred debt — the riskiest non-subordinated asset class of bank debt.

These banks' need for regulatory funding is high. The EBA last month said that 74% of other systemically important institutions (O-SIIs) with under €50bn of assets faced an MREL shortfall. And with just over 18 months ago until the final deadline for raising such capital, the clock is ticking.

Those smaller firms looking for a piece of the pre-summer funding pie to top up these levels would be prudent to prepare the market for their arrival by mandating ahead of time, effectively reserving a slot in the market and preparing investors for the prospective print.

Last month, intraday efforts from smaller names struggled to build momentum in their order books, with SpareBank 1 Østlandet and De Volksbank only just 1.3 times covered, with the latter unable to move past its initial price thoughts.

Bankers said that both deals suffered from being for less well followed issuers from their respective jurisdictions, making it easier for investors to pass at short notice.

Less frequent issuers need to pick the best windows carefully and avoid having to pay up against an uncertain backdrop. And with many competing funders in line to print over the coming months they would want to signal their plans to do so as early as possible, fending off competing supply.

Of course, spreading out the process over several days is not without risk. Any European issuer that chooses to do so could leave themselves having to follow a weaker US close or Asia open, or dealing with conditions beyond their control, like the war in Ukraine. And for more liquid names, announcing a deal early could drag their curve wider as investors position themselves for the new note.

However, for smaller, less frequent names, there is value in the extra marketing time.

Announcing ahead of time would allow prospective investors to get their own credit work in order long before any book building exercise.

Instead of having only a few hours on a weekday morning in which to make sure lines are in place, undertake due diligence and get internal sign-off, investors would have the luxury of spending a little longer preparing before pledging their orders.

Perhaps unsecured funders could look towards the example of the covered bond market. Since just before the Easter break, for instance, a succession of second tier Austrian names have dipped into the market, including a handful of debut deals. All but one of them were mandated ahead of pricing, with none of the deals going head-to-head in the market.

Of course, pursuing a long execution process is not for everyone. And it does come down to what an issuer feels is worse: paying up for picking the wrong window, or delaying a not yet printed deal.

But with large shortfalls in MREL debt still not closed, many firms are set to dip their toes into the market over the coming months, and those that want the most attention might find it best to take their time.

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