Investors are criticizing what they call sloppy underwriting by Lehman Brothers and J.P. Morgan of Telecom Italia's dollar-denominated high-grade sale last week. They said the deal came late in the day, thwarting flippers, and overseas investors learned at the last minute the deal did not comply with regulations and were forced to drop out of the book. That, in turn, reduced demand and led to poor aftermarket performance.
Jim Merli, head of debt syndicate at Lehman Brothers in New York, did not return calls. Calls to J.P. Morgan's high-grade syndicate desk were referred to Michael Dorfsman, spokesman, who declined comment. Enrico Parrazzini, head of finance at Telecom Italia, could not be reached by press time.
Telecom Italia's new issue is comprised of three tranches, totaling $3.5 billion. Its 4.95% of '14s came at 100bps over Treasuries and its 6% of '34s came at 128bps over. They were trading in the aftermarket at the same price. "It's still wrapped around the new issue price and hasn't done well," said one investor who traded in and out of the deal, complaining the deal was aggressively priced.
Several market participants familiar with the deal remarked at least one important overseas investor was forced to drop out of the book at the last minute due to compliance problems. "There were some offshore accounts that found out late in the day the new issue didn't comply with foreign regulations and couldn't buy the deal," noted one participant. It could not be determined which specific investors dropped out.
"The book looked bigger than it actually was and underwriters grew the deal too much," said one portfolio manager who participated in the deal. He highlighted investors also dropped out because they didn't get their allocations until late in the day, were looking to flip the deal and didn't want to hold the issue overnight.
Of course, from an issuer's perspective, the timing of the deal to block investors from flipping the bonds was anything but sloppy.
