Blame is being heaped on the jumbo private placements printed earlier this year for borrowers from the Gulf Cooperation Council (GCC). The accusation is that with the private bonds now being offered in size in the secondary market wide of where public debt is trading, the effect on pricing is making public bond issuance more expensive, just when issuers want to return to the market.
But the criticism misses the point that these deals were a solution for a specific point in time and moreover, some may well be overstating the effect they are now having on the market.
Several GCC issuers printed PPs after the outbreak of the Iran war at the end of February, when access to the public market was deemed unfavourable. They provided large amounts of funding, albeit at a generous price to the investor, at a time of public market uncertainty, derisking issuers' borrowing programmes and demonstrating their access to bond funding.
The counterfactual — what if issuers had been forced into the public market at the time? — is unknowable. But getting the PPs done did much to quell investor fears at a time when the markets and the region's future seemed very uncertain.
But now owners of those PPs are selling their positions, offering investors large chunks of paper at levels wide of public market benchmarks. Qatar’s privately placed 2033s were offered more than 20bp wide of its 2034s this week; Abu Dhabi’s privately placed notes were being sold around 15bp back of its public bonds.
It is easy to draw the conclusion that the curves of these issuers are being pulverised by the reappearance of these bonds into the market but the truth is far more nuanced.
Some in the market suggest that offers in the PPs are pushing out issuers' spreads compared to their public secondary curves — the usual benchmark from which to start pricing a new public deal. But, unlike in a typical market, it is the public bonds that are more tightly held. They trade less often, and will trade tight when they do, therefore giving a false impression of where a new public benchmark bond would clear.
The private paper looks wide by comparison but those levels are up to date pricing information about what it takes to move size for these issuers. It is wider because the war rages on, with all the detrimental effects it brings to the GCC economy.
Banks pitching for bond mandates may well be having a tough time getting PP issuers to accept the new clearing levels.
And for a PP issuer, it must be a shock to see this new pricing information. But it is only information they would have receieved sooner had they been forced into the public market at a more difficult moment. It is not the PPs that have dragged the market wider but, as always, the underlying conditions that determine investor calculations of credit risk.
Issuers may also feel aggrieved that the PP buyers are not holding on to their bonds but private placements are still tradeable securities and it is naive to assume they will be locked away for evermore.
And of course, it may be a matter of regret to borrowers that issued PPs that they now have an up todate pricing reference for their debt. An out of date secondary curve leaves more room for price discovery and negotiation, it could be argued.
In fitness circles online, it is often said that there is no failure, only feedback. GCC PP issuance has offered plenty of the latter and should not be considered an example of the former. Issuers must consider that had they not done those PPs, and also not dared access the volatile public market, then they would be facing an even bigger pricing shock upon their return to the primary market in circumstances when they would have even more funding to do there than now.