Comments on: Opinion: It’s time for fixed spread-range guidance and limited orders https://news.coveredbondreport.com/2013/07/opinion-it%e2%80%99s-time-for-fixed-spread-range-guidance-and-limited-orders/ News, analysis, data Tue, 21 Jul 2015 13:50:27 +0000 hourly 1 http://wordpress.org/?v=3.0.1 By: A Frankfurt-based covered bond investor https://news.coveredbondreport.com/2013/07/opinion-it%e2%80%99s-time-for-fixed-spread-range-guidance-and-limited-orders/#comment-73 A Frankfurt-based covered bond investor Tue, 30 Jul 2013 10:03:44 +0000 https://news.coveredbondreport.com/?p=15291#comment-73 I subscribe to Mr. Denger's arguments. I am not calling for new regulation as I believe the industry should rather sort it out itself instead of causing the regulator to step in. I am just calling for more discipline. Pricing on the deals in question was not per se wrong but the way how we got there caused a lot of wasted time on the investor's side. There is a certain risk that current bookbuilding somehow slips into a dutch auction process with an artifically / unrealisticially starting point. Looking at academic literature on auction theory, I wonder where we are potentially heading if investors have to fully reveal their preferences while getting a new bond with hardly any new issue premium in return....that could turn into the Covered Bond version of the winner's curse I guess...In addition to the working time wasted. For people being curious: <a href="http://tinyurl.com/nxcpq" rel="nofollow">en.wikipedia.org/wiki/Winner's_curse</a> On the investor side, the use of limits must become far more widespread - otherwise it is an invitation for investment banks to continously lower spread guidance throughout bookbuilding. The formal proof that an order at reoffer does get a better final allocation is still missing so this is for the time being just cheap talk. Again, I am not necessarily a great fan of ever more regulation, but just discussing best practice of price guidance is one thing. The allocation process is in my humble opinion the blackbox which additionally needs to be tackled: Does it or shall it make a difference with regard to allocation if an order @+x bp is given right in the beginning of the process or 5 seconds before closing of books? I subscribe to Mr. Denger’s arguments. I am not calling for new regulation as I believe the industry should rather sort it out itself instead of causing the regulator to step in. I am just calling for more discipline. Pricing on the deals in question was not per se wrong but the way how we got there caused a lot of wasted time on the investor’s side. There is a certain risk that current bookbuilding somehow slips into a dutch auction process with an artifically / unrealisticially starting point. Looking at academic literature on auction theory, I wonder where we are potentially heading if investors have to fully reveal their preferences while getting a new bond with hardly any new issue premium in return….that could turn into the Covered Bond version of the winner’s curse I guess…In addition to the working time wasted.

For people being curious:
en.wikipedia.org/wiki/Winner’s_curse

On the investor side, the use of limits must become far more widespread – otherwise it is an invitation for investment banks to continously lower spread guidance throughout bookbuilding. The formal proof that an order at reoffer does get a better final allocation is still missing so this is for the time being just cheap talk. Again, I am not necessarily a great fan of ever more regulation, but just discussing best practice of price guidance is one thing. The allocation process is in my humble opinion the blackbox which additionally needs to be tackled: Does it or shall it make a difference with regard to allocation if an order @+x bp is given right in the beginning of the process or 5 seconds before closing of books?

]]> By: Dhiren Shah https://news.coveredbondreport.com/2013/07/opinion-it%e2%80%99s-time-for-fixed-spread-range-guidance-and-limited-orders/#comment-72 Dhiren Shah Mon, 29 Jul 2013 16:13:45 +0000 https://news.coveredbondreport.com/?p=15291#comment-72 It is great to see one of the key covered bond investors putting across such a balanced view on the new issue process. I cannot disagree with any of points made by Andreas, especially when looking at it from the point of view of percentage moves from IPTs to final pricing. The RBC transaction is a good example of this. However, RBC aside, we have to look at this from the point of the issuer and the syndicates involved. Dialogue and honest opinions and thoughts coming from the investor community are becoming increasingly important. Particularly in a marketplace where ICMA guidelines on softsounding, lack of liquidity in secondary and an increasingly volatile rates backdrop are persistent. This is bound to increase the swing factor between IPTs and final pricing as issuers and banks try and ensure that there is enough new issue premium to satisfy the broadest range of accounts, and to ensure a transaction is deemed successful in the eyes of as many parties involved. We do not see the same swings in the US covered bond market, but this is partly a function of the significantly lower number of investors, where one can argue that a handful of investors dictate the price at which the issue prices. It is also a function of where given the fewer lead investors and less deal flow, there is the potential to get signficantly better feedback. This definitely helps alleviate any wild swings during bookbuilding. Which market is healthier? The USD with fewer investors, or the Euro market which has a broad range of investors with differing opinions on relative and fair value. It is great to see one of the key covered bond investors putting across such a balanced view on the new issue process. I cannot disagree with any of points made by Andreas, especially when looking at it from the point of view of percentage moves from IPTs to final pricing. The RBC transaction is a good example of this.

However, RBC aside, we have to look at this from the point of the issuer and the syndicates involved. Dialogue and honest opinions and thoughts coming from the investor community are becoming increasingly important. Particularly in a marketplace where ICMA guidelines on softsounding, lack of liquidity in secondary and an increasingly volatile rates backdrop are persistent. This is bound to increase the swing factor between IPTs and final pricing as issuers and banks try and ensure that there is enough new issue premium to satisfy the broadest range of accounts, and to ensure a transaction is deemed successful in the eyes of as many parties involved.

We do not see the same swings in the US covered bond market, but this is partly a function of the significantly lower number of investors, where one can argue that a handful of investors dictate the price at which the issue prices. It is also a function of where given the fewer lead investors and less deal flow, there is the potential to get signficantly better feedback. This definitely helps alleviate any wild swings during bookbuilding.

Which market is healthier? The USD with fewer investors, or the Euro market which has a broad range of investors with differing opinions on relative and fair value.

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