Last week bond bankers in Asia began revealing exactly how much they are contributing in orders to new issues. They previously acknowledged that order books “included joint lead manager interest”, but are now explicitly laying out the portion of the books made up by lead banks. The move should be lauded as a big step forward for transparency in the region and its potential to keep banks in check, but it remains to be seen how far banks will let the practice go.
The change came after the International Capital Market Association’s Asia Pacific Bond Syndicate Forum earlier this month pushed for more transparency during book building. While lead managers have indicated in the past when their own orders make up part of a book, they have never disclosed the amount of the orders. That led outside investors to speculate about how much of a deal the leads took.
The move to lay out explicitly the amount of bookrunner orders is, of course, a strong step forward for the Asian market and an excellent “best practice” to encourage. Transparency has long been bandied about as both a demand by market participants and an initiative by the Chinese regulators to make its market more appealing to outsiders.
But while the Chinese market has become more transparent in some ways, parts are still fairly opaque — particularly for outsiders. The result has often been a Chinese market for Chinese borrowers and banks, with little leeway for being truly international.
The sign that such disclosures are necessary for Asian bond sales shows how much Asian borrowers rely on bookrunner orders, and how common these orders have become as a tool for getting banks a mandate. Investors would not be clamouring for such transparency if they didn’t fear how much issuers are relying on banks to boost their books. That in itself isn’t a good sign for the stability or maturity of the market.
But having banks reveal their orders may cut back on this. The transparency will not only help investors gauge the real make-up of an order book, it will also keep the lead managers in check, discouraging them from putting too much into a new issue. After all, bookrunners don’t want to have to explain to investors why half the order book or more has come from the leads themselves.
Don’t get too excited, however. Being just a “best practice” for Asian banks, and not something formal from a regulator, limits the scope of the new efforts. Banks will need to encourage each other to disclose orders accurately, as it will prove easy for leads either to fudge the numbers or not to reveal their interest. It seems at this point the large international houses, which tend to follow ICMA guidelines the most closely, are the most concerned about the disclosures. Some banks may refrain from accurate disclosures when it suits them.
On May 15, for instance, two local government financing vehicles priced dollar bonds. One deal, from a debut name, was led entirely by Chinese banks. It did not disclose the lead bank interest in the transaction nor did it unveil the final deal statistics. The other LGFV trade, which was led by global co-ordinators CEB International, Industrial Bank Hong Kong branch and Standard Chartered, as well as four Chinese bookrunners and lead managers, did disclose the lead manager orders — $530m on a $1.6bn book at reoffer.
The potential for this new move is significant, and could greatly change the way transactions are run in Asia. But it’s still early days and the market is yet to see the longevity of the initiative during a more difficult market, or the consistent participation of banks. If lead managers embrace this practice as they should, Asia’s capital markets will only be better for it.