LBBW fine despite ‘harmful’ price whispering campaign
Guidance for a debut benchmark Landesbank Baden-Württemberg mortgage Pfandbrief yesterday (Monday) was “spot-on” despite the bank foregoing a price whisper in a bid to heed ICMA guidelines on new issue procedures, an official at the issuer told The Covered Bond Report.
Leads Natixis, Landesbank Baden-Württemberg, Royal Bank of Scotland and UniCredit priced a Eu500m no-grow six year deal at 18bp over mid-swaps, the tight end of guidance of 18bp-19bp over, on the back of an order book of around Eu750m.
Jörg Huber, head of funding and investor relations, treasury at LBBW, said that a mortgage backed benchmark Pfandbrief had been planned for some time, with the issuer having obtained a triple-A rating from Moody’s around three years ago, but that the composition of the cover pool only recently became such that the issuer could launch a larger transaction while sticking to its conservative asset-liability management policy.
“We felt that the time was right to start issuing a benchmark sized transaction,” he said. “We were monitoring the market for quite some time and while we don’t have an urgent funding need we also thought the markets are not going to get any better in the next few weeks.”
With the uncertainty of recent weeks beginning to ebb, in particular following the Greek parliament’s approval of a new austerity package last week, the issuer decided that it would announce a transaction yesterday morning if conditions had not deteriorated, said Huber. Conditions were then stable so LBBW’s leads proceeded to talk to investors following a mandate announcement early in the morning. Initial feedback was positive, but non-committal in the absence of a pricing indication, according to Huber.
“Unfortunately there was recently an ICMA announcement recommending not to use price whispers,” he said, “which makes it quite difficult to find the right clearing level.
“This meant that we couldn’t inform the sales teams what our initial pricing ideas were to get relevant feedback, so it took a bit longer to establish what the right level was.”
This was deemed to be represented by the 18bp-19bp over mid-swaps range, with the leads taking indications of interest at that level and order books growing quickly once they were officially opened, according to Huber.
“We hit it spot-on, but the procedure could have been smoother,” he said. “These kinds of guidelines are harming the proper evaluation process, but we had to deal with that.”
Buy-side push could make whispers more widely heard
Ruari Ewing, director, primary markets, market practice and regulatory policy at the International Capital Market Association (ICMA), told The Covered Bond Report that the association had in October 2010 added an explanatory memorandum on pre-sounding, bookbuilding and allocations to its handbook, and that several roundtables with investors had been conducted over the past couple of years, most recently in May.
“Banks are now continuing their discussions internally, with some already starting to draw conclusions and move ahead with new practices,” he said.
One practice being scrutinised is that of price whispers, which Ewing described as an interim step after pre-sounding but before bookbuilding has begun on the basis of official guidance. He said that the practice of price whispers had emerged in response to the financial and sovereign debt crises.
“In an easy market you can go straight to guidance, but in volatile markets you’re dealing with a completely different kettle of fish,” he said.
Although price whispers can be shared with many market participants, some are arguing that the information needs to be communicated to a larger audience, according to Ewing.
“The aim is to go out much wider with a whisper than before,” he said. “With increasing volatility there is a feeling that it is important to go the extra mile. Under the old system you could always miss a handful of accounts, and this new approach is trying to wrap up that residual end.”
In practice this means that banks are looking at ways to modify their communication to better reach transactions’ target audiences, said Ewing, which could involve sending information as they have been doing but also potentially disseminating it by way of news-feeds, among other options.
Syndicate bankers described ICMA’s position as aiming to ensure that everyone who could be involved in a transaction has access to public information, with investors pushing to do away with whispers and other practices that could involve them being made privy to inside information and/or wall-crossed. ICMA explains wall-crossing as being sounded for a potential transaction on the basis of information that may amount to inside information and that could make investors subject to legal restrictions, such as restrictions on trading in related securities.
A syndicate official said that one outcome of discussions taking place could be that the term “whisper” is no longer used, partly on account of its connotations of secrecy. The Covered Bond Report understands that some banks are contemplating using the term “price discovery”.
Terminology is not likely to be the only feature of primary market activity set to change, however, with a syndicate banker saying that the ideas under discussion will also change the dynamics of pre-sounding.
“Pre-sounding will be on a more public basis,” he said. “The process will be slightly different, designed to make it more transparent.”
Another syndicate official said that ICMA’s guidelines had left him unimpressed because of the increased execution risk they would involve for borrowers. Investors, on the other hand, deemed information such as price whispers and order book updates to be relevant.
The guidelines were “slightly confusing and counterproductive”, he said.
The discussions that have been triggered in response to ICMA’s work with investors and banks on new issuance practices in part echo those that took place in the covered bond market last year, when the Covered Bond Investor Council (CBIC) in January called for an end to the practice of building shadow order books based on price whispers.
A leading covered bond investor told The Covered Bond Report that his position remained unchanged today and that he is still dissatisfied with what he called pre-sounding. It was unfair for only a handful of investors to be given preliminary pricing thoughts, while others only belatedly received this information and had little time to place orders given short bookbuilding periods, he said.
While issuers are eager to avoid execution risk, the portfolio manager said that he did not consider there to be any stigma attached to not completing a deal or having to widen pricing, and that this could in any case also happen if a new issue project had been pre-sounded.
He urged a return to traditional deal execution methods, citing high issuance volumes this year and the lack of failed transactions
“The crisis mode for covered bonds doesn’t make sense,” he said.