This is the end for new issue premiums
How can capital markets professionals talk about new issue premiums when it is becoming normal for issuers to price bonds at negative yields?
Bond bankers have long gotten used to using the terms “new issue premium” and “new issue concession” interchangeably.
Both of them describe the extra spread that issuers offer to incentivise investors to get involved in new bond sales, rather than just scouring the secondary market for things to buy.
But language is important in this new world of negative yields.
It is difficult to see how anyone could talk about borrowers paying their investors a premium in new issues, when increasingly those investors are themselves being asked to pay to participate in the primary market.
Take Berlin Hyp’s €1bn three year covered bond this week as an example. Bankers said that the German issuer had rewarded participating investors with 3bp of new issue premium, but that is hardly compelling considering that the deal was priced to yield minus 58.8bp at reoffer.
Surely it is more accurate to start talking about new issue concessions.
The main worry for well rated borrowers in Europe at the moment is whether they can convince investors to buy their bonds at some of the lowest yields ever seen in the new issue market.
If they end up having to pay a few basis points over the fair value implied by the secondary markets then surely this is a concession on their behalf, rather than any premium demanded by investors.
New issue premiums and new issue concessions are no longer two sides of the same coin.