Syndicate bankers are awaiting the details of prospective ICMA best practice guidelines to see if primary market practices will have to change in ways that could increase execution risk for covered bonds, resulting in issuers having to pay higher new issue premiums.

As previously reported, the International Capital Market Association (ICMA) is working toward a set of best practice guidelines aimed at increasing transparency in new issues, through changes to the way in which information is communicated at various stages of the new issue process. Any such guidelines could affect the practice of price whispering, with the release of updates on order book sizes also under scrutiny (see original story for more).

The Covered Bond Report understands that the association aims to release a formal publication sometime in the next few weeks, which would most likely be in the form of an addition to the association’s primary market handbook. However, it is not clear how detailed or prescriptive this might be.

A meeting on the subject was held earlier this month and a syndicate banker referred to another “conversation” about ICMA guidelines taking place this week, but a spokesperson for the association said that there were no formal meetings, “just ongoing discussions as previously”.

Although final guidelines have not been drawn up, syndicate officials said that market participants have already been implementing what one banker described as “broadbrush” changes to new issue practices in line with where discussions have been heading.

Another said that he first noticed the guidelines being put into practice in the context of a recent corporate bond issue for Total. He said that initial pricing thoughts for the deal were communicated via a message in forwardable format – one of the practices that the ICMA guidelines are understood to be aiming to clamp down on is that of distributing information on a non-forwardable basis.

The syndicate official said that there have also been examples of the guidelines already having been put into practice in the covered bond market, where reference to a “price whisper” was replaced by something along the lines of “initial pricing thoughts”.

Jörg Huber, head of funding and investor relations, treasury, at Landesbank Baden-Württemberg, previously told The Covered Bond Report that the ICMA guidelines had made more complicated a Eu500m no-grow six year Pfandbrief the issuer sold on 4 July.

“These kinds of guidelines are harming the proper evaluation process, but we had to deal with that,” Huber said at the time (see aforementioned story).

An unlevel playing field

Syndicate bankers stressed that any impact new guidelines might have on new issues is difficult to gauge as long as their precise formulation and nature is not clear. But several said that they welcomed what they saw as a push for greater transparency.

“I view the whole thing quite positively,” said one.

Another said that he would like to see an end to “fibbing”, price whispering and shadow bookbuilding “today rather than tomorrow”.

He said that many market participants were resisting the changes, but that potential buyers had a right to receive information about the size of order books, for example. He contrasted large investors’ ability to request and receive such information on a one-to-one basis with the relative lack of leverage that the “faceless crowd” has at its disposition.

Another syndicate official said it was it was right to seek to increase transparency and fairness.

He also called on ICMA to look into what he considered to be unfair competition created by differences between compliance regimes in different countries. He noted that before beginning to soft sound a new issue an FSA-registered bank has to go through compliance procedures that could take a few hours, while a fellow lead manager operating in Germany can start soft sounding at any time.

“I hope ICMA will make sure that there is no unfair competition in terms of soft sounding,” he said.

Less stigma could ease any consequences

He said it is clear that the new issue process would become more complicated as a result of any new guidelines that reined in price whispering – unless this was a mere “semantic” change, with the term being outlawed but the practice continuing.

Making it more difficult to arrive at the appropriate initial guidance for a transaction by prohibiting discreet discussions with a small number of key investors would increase execution risk or the risk of an issuer finding itself in a position where it has to pull a deal. This could result in issuers having to pay higher new issue premiums to reduce such risks.

But some bankers questioned whether, or the degree to which, any new measures would affect new issues, saying that price whispers already spread quickly and widely, perhaps reaching more market participants and journalists than was intended.

“To all intents and purposes, how many deals have been out where you haven’t heard a price whisper?” asked one syndicate official. “A cynic would argue that if it is not in writing then it is easier to more elegantly step back or adjust levels, but I’m not 100% convinced by that.

“When it’s announced, it’s announced.”

Others said that those pulling deals could in future be less stigmatised for doing so. One syndicate banker said that market participants’ judgements of pulled deals had already eased over the past three years, and that such occurrences were less conversational.

He identified the return of retention deals as a possible outcome of any new guidelines on the communication of updates on order book sizes – something that bankers said is also being debated. The Covered Bond Report understands that lead manager and trading orders being included in order books that may otherwise not be fully covered is a focus of scrutiny.

The syndicate official said that a potential clampdown on including lead manager orders in order book sizes and/or potentially requiring such orders to be identified separately could lead to the return of retention deals because such rules would make it more difficult for banks to give the impressions that deals are being successfully handled in pot format.

Another syndicate banker said that “for the vast majority” of covered bond transactions the implications of ICMA’s guidelines would be “few and far between” and minimal compared with those for the corporate bond and sovereign/supra/agency market, where he said there is greater sensitivity to order book sizes.