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Covered Bond Blog: It isn’t about you any more

14 August 2015
Richard Kemmish




The tendency of covered bond investors to complain does seem to be rather at odds with their utter lack of power in the covered bond market currently.

Investors don’t often like to go on record – they are far more nervous of the press than issuers and (of course) investment bankers. But I have been making a note of the things that they have said publicly recently. In the last couple of months I have read investor complaints about the choice of currency and of maturity for new issues, about the timing of a new issue, about the price talk process being disconnected from the final pricing and about allocations.

What is most interesting though is that all of these complaints were in the context of deals that went extremely well. Imagine the furore if they’d bought a bond that traded wide in secondary!

To be fair, some of the complaints are valid.

No matter that market power resides with issuers nowadays, investment banks ought to be able to come up with initial price talk that is at least in the same zip code (as our American syndicate friends would say) as the final pricing. It isn’t good enough when syndicate desks hide behind secondary market opacity as an excuse for IPT that is so hopelessly wrong. Its what you are there for guys.

Allocations are a bit more difficult. How much do you give the biggest player in the market? Tradition allocates that central banks get the allocation that they ask for. But no central banker wants to be a price maker so maybe they need to either limit their order size of accept that they shouldn’t be getting preferential treatment in allocations.

Is it me or are the largest complaints about allocations from the larger investors? Syndicate practice is biased in favour of both small investors and investor diversification (because DCM tell them that issuers absolutely demand a high number of investors and a broad geographical distribution. This is usually a lie). 

But it is far more difficult to have sympathy for investors on matters of maturity and currency considerations. Investors are masters at conflating ‘what is the right decision for the issuer?’ with ‘what I want to buy?  ‘Of course it is in their interest to issue a five year euro deal, what were they thinking?’

I think many investors fail to understand two key points. The theoretical cost of a swap (from numbers on the screens) is often very different from the actual cost of a swap for an issuer – which is why issuers often price at a level in one currency that looks wide of what they could achieve in another.

Then there is the maturity choice. Funnily enough internal considerations of matching liabilities to asset profiles (within the covered bond programme) and optimising liability profiles across the totality of the issuer’s debt are way more important than some investor’s perception of the appropriate spread between a five year and a ten year.

Particularly when the investors don’t have any power.  

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