What will it take for SSAs to see sense?
The decision by UBS to pull out of the SSA business is a warning signal to issuers that they must change their ways. There are short term benefits to resisting such change, but a failure to adapt to the new reality will be disastrous in the long term.
SSA bankers have warned of this moment for years, but on Tuesday morning, the deleterious costs of running an SSA franchise finally claimed their first victim. And not just any victim: UBS is a top five firm in the underwriting league tables.
If this doesn’t make SSA issuers finally sit up and work with their dealers then the whole market — and, by extension, international public finances — could suffer.
Basel III and the various financial crises of recent years have put the cost of raising funds in the public sector markets up. Dealers have warned for some time that with various new banks looking to snatch a slice of this already competitive market, they were having to swallow charges that issuers should be paying for transacting business.
They warned this was unsustainable and that issuers must start to accommodate some of these charges.
But those issuers have been slow to react. Some have, admittedly, made attempts to work with banks. Some have gone as far as to sign two-way Credit Support Annexes (CSAs) rather than one-way contracts, which has allowed banks at least the possibility of receiving collateral when necessary. In turn, that has meant they have been able to do away with punitive collateral and credit charges.
The costs of underwriting and of participating in primary dealerships remain points of complaint for dealers, as does the fact that the more intransigent borrowers still demand that banks use the fees they have earned on deals — and sometimes even more besides — for the privilege of doing business with them.
UBS has for some time held a desire to return to core banking and wealth management. But these weighty costs — and the CSA issue in particular — have given the firm the perfect justification to call time on what one banker has described as the “crown jewels” in a firm’s bond business.
If other banks look to follow suit — and why wouldn’t they, given the meagre returns on offer for the amount of capital invested? — then all of a sudden investors will be left high and dry without sufficient liquidity. Issuers, for their part, will suffer a dearth of choice when it comes to picking dealers to mandate.
Leanness and meanness will be things of the past, which will allow for sloppy distribution, lazy pricing and over-worked yet complacent syndicate desks.
In the secondary market, meanwhile, there will be a complete lack of appetite to support deals as firms look to reserve capital for more profitable business lines. Expertise and experience will drift out of the market and into more prestigious means of employment.
The net result of all of that will be a weaker SSA market for everyone. It is too soon to assume that UBS marks the beginning of the end for the SSA market as we know it. But it must surely mark the absolute end of issuer complacency.