The limits of being 'origination-led'
Barclays wants to be a bank that puts origination first. But can it justify shutting dedicated secondary businesses?
Last week, Barclays closed its European ABS trading business. It wasn’t a UBS-style brutal mass cull, but its dedicated (and highly regarded) sales, trading and research functions were shut down entirely, and most of the staff working in those teams were asked to find employment elsewhere in the very immediate future. Generalist credit trading and sales will absorb what’s left of the client flow.
Unlike when UBS shuttered parts of its fixed income business however, Barclays appears to have hung on to origination. Senior staff members were cut in previous rounds of redundancy, and the head of the team jumped ship to Lloyds last year, but the bank shows every sign of wanting to stay in the primary European structured finance business, and still has mandates to execute later this year, GlobalCapital understands.
This throws the relationship between primary markets and sales and trading into sharp relief.
In the era before “modern” investment banking, the functions were often separate. Blue-blooded merchant banking firms advised companies on floating, but in the sclerotic pre-Big Bang stock market, sales was handled by the broking firms, and trading by the “jobbing” firms.
This institution separation fell apart quickly — SG Warburg, for example, bought a broker (Rowe & Pitman), and a “jobber”, or trading firm, Ackroyd Smithers, as soon as it could.
But the point is that primary markets haven’t always needed secondary market intelligence to function.
There’s no denying, however, that it helps.
The argument is that intelligence about secondary market flows ought to help a bank price primary issues holds less water these days, with syndicate walled off in glass boxes and information flow constrained. But it makes sense that salespeople who cover accounts for secondary trading will have a good idea who wants primary paper and at what price.
Furthermore, issuers handing out mandates want to know that their banks are out there making markets. Few of them are sitting there chin-stroking about who has the tightest bid-offer, but if investors start complaining to treasurers about banks failing to support their issues at all, it won’t take them long to find someone who can.
Some would argue all this is moot; nobody can run inventory these days, all trading has become agency broking, and investors better get used to it.
And in the European ABS market, the primary-secondary divergence is sharpest of all, with secondary markets still featuring pre-crisis paper, bad banks and bargain-hunting hedge funds, while primary markets still mostly sell pristine paper to the same 30 accounts.
But it’s not like the competition to win primary mandates has got any less fierce.
Liquidity might have got a lot worse in the secondary market, but there is still a clear tiering between what banks offer to investors, and this still matters to winning new business. Other things — lending, relationships — matter as well, but those don’t come for free either.
In other words, why would you give primary mandates to a bank without a secondary business, when there is a queue of five banks outside that have both?
Capital constraints rebalance the power dynamic between secondary trading and primary underwriting in the bond market — the fee stream from capital-light underwriting looks relatively more attractive compared to the spread earned from intermediating secondary markets.
But it doesn’t mean it’s a good idea to separate the two. When “origination-led” starts to mean “origination only”, the writing is on the wall for primary markets as well.