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Too many banks? The Covered Bond Blog

02 February 2015
Richard Kemmish

Selling covered bonds isn’t exactly difficult at the moment. There are not enough bonds and too many buyers, the main job of the syndicate desks nowadays seems to be fighting the investors off.
So why do we need so many lead managers on each bond? The traditional answers just don’t stack up any more. More lead managers does not mean more secondary market makers – I’m not sure that it ever did but DCM officers always liked to pretend. The idea that there was a contractual obligation to make a market in a bond that you were lead manager of was never enforceable, it just happened to coincide with what secondary desks wanted before the crisis, and occasionally since.

And it isn’t as if you need the incremental distribution that a new lead manager could bring. The universe of potential buyers of a bond is increasing in step with the regulatory incentives to hold it. But we just don’t need them to get the deal done.

Don’t get me wrong. I’m not saying the job of the lead managers is easy. Judging price levels in the face of illiquidity and highly technical markets is still very, very difficult. Its just adding one more investment bank, one more opinion on those pre-launch calls isn’t very helpful.

So why so many lead managers? There are good and bad answers to that question.
The good, or at least acceptable, answer is that different banks can fulfil different roles, not just selling the bonds. Slots can be awarded for banks doing the swap, negotiating with the ECB or helping the issuer understand new regulations. Many of these don’t help the bond or investors particularly but it is at least understandable that the issuer will want to reward the banks providing those services.   
The bad answers are reciprocity and fee cutting.

It seems to me that the face of reciprocity is changing. Increasingly reciprocity is cross product – I’ll give you a role on my covered bond if you give me a role on your next contingent capital bond. At least when reciprocity was within a product (covered bond for covered bond) it was easier to argue that it was all about being a good covered bond house. But with little correlation between being good at covered bonds and being good at capital trades the idea of putting a strong capital house on a covered bond trade is at best, useless for investors.

Then there is the back-door fee cutting. Obviously you can put your own ‘investment bank’ (even if you don’t have one) on the top line of any deal to cut the fees. This doesn’t, strictly speaking, break the fee structure and make you a social pariah.

There is also the habit of putting another issuers ‘investment bank’ on the top line on the understanding that they will reciprocate. A combination of the traditional reciprocity between ‘proper’ investment bank issuers and backdoor fee cutting.
But none of this has anything to do with investor needs.

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