Club-style bonds: acceptable, but within reason
The best funding plan is one that suits an individual issuer, and if that means a club deal without a legitimate public bookbuilding process, so be it. But even so, there are some lines that shouldn’t be crossed.
Most DCM and syndicate bankers probably feel a combination of pride — and relief — when they close a successful bond for an issuer, especially when that deal is large, complex and groundbreaking. What is the opposite of that? Look no further than a roughly $100m club-style — and anchored — “drive-by” trade that banks away from the transaction either deride or completely ignore.
But it is these deals that have gained traction in recent months, encouraged by a volatile market and a sensitive investor base.
It’s easy to brush these transactions, largely from Chinese issuers, aside — they are small and mainly sold to Chinese investors with little international investor participation. But the reality is these fundraising activities are keeping Asia’s bond market humming at the moment.
For banks and securities houses, these deals bring in revenue just like any other transaction. Perhaps more importantly, for borrowers, they allow access to offshore capital during difficult times — something that certain companies would never have dreamed of otherwise.
It might send a message of desperation for an established, repeat issuer to opt for a club deal, but for many first-time borrowers looking for just an opportunistic trade, what matters is to secure the funds. The most appropriate funding plan is one that suits the issuer. And for some borrowers, whose target audience is inevitably small, the only way to raise money from the international debt market is to do it club-style with plenty of anchor orders ahead of time.
The approach does not, in truth, matter much. But what should matter is transparency, consistency and fairness when it comes to the execution of these deals. Market standards need to be applied and rules played by — be it with public, club or private placement trades. And that’s where the problems lie.
This means that when an issuer, which is anchoring its issuance, announces public bookbuilding for a bond, the issuer and the leads should be honest about their willingness to accept market orders — and perhaps be influenced by market pricing.
Chinese property developer and returning issuer Gemdale Corp’s move last Friday, telling investors not to put in orders after officially opening bookbuilding for a dollar bond, only caused confusion and speculation among DCM bankers, with the execution style raising plenty of eyebrows.
Market standards also dictate that all investors need to get the same fair price when participating in a deal. Bankers have pointed out that, on some Chinese club deals, there is a good chance that bonds might be sold at a much cheaper price to the bookrunners than they are to real investors. Some investors are also offered a rebate to participate, making their real return rather murky.
The Asian bonds market, unlike its European and US counterparts, has increasingly suffered from shoddy market practices, some of which were seen even in high-profile deals from the likes of China Huarong Asset Management Co and Industrial and Commercial Bank of China (Asia).
This is a fact of life for bankers on the ground at the moment. But as the region becomes increasingly important in the global capital markets, now more than ever issuers and their banks need to play by the rulebook.