The debt world has been hitting all kinds of records of late, with unprecedented new issue volumes. But not all of these records are the stuff to boast about.
According to Dealogic, the average number of bookrunners for Asia ex-Japan international G3 debt deals has hit a record high of 4.3 in 2013 year-to-date, up from 2.8 during the same period last year. The average syndicate size was pushed up by the 12 bookrunners on Sinopec’s $3.5 billion bond that priced earlier this month. The deal was the biggest dollar bond in nearly a decade but also the largest syndicate for an Asia (ex-Japan) G3 deal.
It is hard to see the merits of having such an unwieldy syndicate. Three or four banks is fine, but 12? Ballooning syndicate groups are partly a reflection of the growing clout that lending banks have, as many borrowers seek to repay relationships of all sorts, including lending relationships, by awarding mandates. A company such as Sinopec, which has large funding needs, has plenty of lenders to keep happy.
But having such a large syndicate makes it inefficient on the logistics side — to run a pricing call and reach a consensus on pricing. In Sinopec’s case, the four global coordinators — Citi, Bank of America Merrill Lynch, UBS and J.P. Morgan — were said to have largely ran the show, with relatively little input from the remaining eight bookrunners on pricing.
Sinopec paid $15 million in fees and expenses but this amount includes lawyers’ fees, printing fees and so on. One source suggested that the fee for the deal was close to 30bp, which works out to be roughly $10.5 million. However, the four global coordinators were said to have taken the vast majority, or about 80% of the fees. Which meant that the rest of the banks weren’t making a lot of money on the trade.
Sinopec is a high-grade borrower, but having a name on any prospectus bears reputational risks — and banks have to balance this with the money they make.
Meanwhile, the number of sole bookrunner deals has also fallen. Only 18 sole-led G3 debt capital markets deals have been sold in 2013 year-to-date, down from the record 33 seen during the same period last year, according to Dealogic. This is the lowest number since 2009, when seven such deals were sold. Sole bookrunner deals currently account for 15% of total international G3 activity in Asia, down from 31% in 2012 year-to-date and the lowest proportion on record.
This is probably good news for borrowers and investors. For investors, taking part in a sole-led deal raises questions about how liquid the bonds will be in secondary markets. With investment banks cutting their bond inventories and laying off bond traders, there is little assurance that there will be a decent bid when investors want to sell their bonds or if there will be a market maker. This is especially true for small-sized high-yield bonds, which tend to be illiquid anyway.
Investors are more likely to demand a premium when they buy bonds that they perceive will be illiquid in secondary markets. Having at least two banks on the deal helps to introduce healthy competition among syndicate banks and to deliver the best pricing to clients — and reduces the risk of a grossly mis-priced deal.
In any case, the rising number of bookrunners highlights the difficulty investment banks face in making money despite record volumes. More banks are ramping up their debt presence in Asia, but, with the cost of capital rising, banks are increasingly expected to do more with less. Inevitably, this will mean a higher focus on returns, which will make it harder for banks to stay in a business as a hobby.
As it stands, half of the G3 bond market share is held in the hands of the top five banks — HSBC, Standard Chartered, J.P. Morgan, Deutsche Bank and UBS — and there is a long tail of banks trailing behind. This suggests that debt is a bit of a pastime at some of the outlying banks.
To be sure, banks make money in other areas that are not visible to the public eye, such as through private placements, or selling debt-related products such as swaps. Few doubt that the $3 billion private placement that Goldman Sachs arranged for Malaysian strategic holding company 1MDB on a sole basis last month was a lucrative trade for the bank. It was a controversial deal, and one that has come under criticism for the lack of transparency, but it sure paid more than Sinopec.
