Tensions Build Over Bond Allocations and Pricing Feedback

logo-cropped-11Investors’ reluctance to share bond pricing feedback with syndicate bankers intensified by new regulations

Source: Thomson Reuters

LONDON, Dec 2 (IFR) – Bond investors and syndicate bankers are growing increasingly frustrated with each other as the already thorny topic of allocations and how to reward investors for their feedback is being further poisoned by new regulations.

Investor feedback plays an integral part in the new issue process, helping syndicate banks gauge how much interest a bond will get and what price investors are willing to pay.

However, some buyers are becoming increasingly reluctant to provide feedback as they argue that banks often ignore it and tighten pricing anyway, sometimes by more than 25%, from so-called initial price thoughts.

“The aggressive tightening of IPTs does diminish the value of the investor feedback and in these instances we tend to vote with our feet and withdraw from the books,” said Alex Temple, a portfolio manager at ECM, part of Wells Fargo Asset Management, which manages US$480bn of assets.

Another portfolio manager said he made less effort to provide feedback – via “indications of interest” – than he used to.

“Issuance volumes are quite high so we have less time to do the work on each new issue, and you need time to do your work if you’re going to give the banks an IoI,” he said.

“I feel that sometimes syndicates don’t listen anyway. They’ll call up, announce a deal, do the roadshow and try and drum up interest. To do that, they’ll start talk at a ridiculous level. It’s just not worthwhile sometimes to give feedback.”

But syndicate bankers are fiercely pushing back against such arguments. They claim that, apart from in cases of more bespoke transactions where investor input should be rewarded, banks cannot be expected to do so on run of the mill trades.

“We work for the issuer and, if when we move the pricing level and still have an oversubscribed book, then we will price the trade there,” said one head of syndicate. “Investors can’t have their cake and eat it. You can’t expect to be a back-marker on price and be rewarded for that.”


Tensions may have been exacerbated by signs of creeping “equalisation of allocations”, whereby the same class of investor gets the same percentage of a deal, regardless of whether a particular investor has given pricing feedback.

Equalisation of allocations allows banks to allocate bonds quickly and cuts down time on allocation calls that can sometimes take hours, especially if a transaction is heavily oversubscribed.

“There’s a trend towards equalisation and investors don’t always get allocated more bonds because they’re being more upfront on giving colour to the banks,” said another syndicate banker.

“There’s not enough discrimination towards those who are communicating to issuers/banks where they are willing to invest in a transaction. To me, that has enormous value and it’s very important. I would argue that these guys deserve to be treated better.”

While equalisation of allocation is not yet widespread and has only been adopted by a handful of banks, some fear it could spread.

“I think some banks are pushing this for the wrong reasons, and some think that by adopting a more standardised approach to allocations, they’ll be saving money,” said a third syndicate official.

“Automation is to the detriment of the market and takes away accountability from the banks. Issuers are paying us for our distribution capabilities and certainty of execution.”


Saving time and money is not the only issue, however, and some bankers argue that difficulties in the feedback and allocation process have been aggravated by confusion about new rules such as the Market Abuse Regulation – with some investors interpreting the rules as barring them from providing pricing feedback.

“I think there are accounts out there who are misinterpreting MAR and don’t want to give feedback, even on a live deal,” said the first syndicate head.

“Some investors like to hide behind MAR.”

MAR, which replaced the Market Abuse Directive in the summer, brings more financial instruments under its remit and has implications for practices ubiquitous in bond syndication such as “soft-sounding”.

“Under the new market abuse regime issuers too have to be careful with what they’re saying and make sure they are conveying the same message to everyone – it can be a bit of a minefield,” said Brendon Moran, global co-head of corporate DCM origination at Societe Generale.

Furthermore, in mid-November, the Fixed Income, Currency and Commodities Markets Standards Board released a set of proposals aimed at improving the way bonds are divvied up between investors.

“Borrowers are increasingly worried about allocation processes and are demanding to see banks’ policies,” said the third syndicate official.

“They are increasingly thinking there is some potential legal risk.” (Reporting by Helene Durand, Laura Benitez, Additional reporting by Alex Chambers, Editing by Matthew Davies)