In the News: Recent Developments

February 14, 2005

Syndicate: Underwriters or undertakers?

PHOENIX — At least one panel had a healthy discussion at Information Management Network ABS West 2005 conference held here last week, as participants talked the fairness and efficiency of the allocation process for assetbacked securities. The panel consisted of a mix of sell-side syndicate heads — of which there were six — two issuer representatives and an issuer advisor representative. The question of who syndicate desks are really serving, issuers or investors, ran throughout the discussion.

The discussion centered around whether or not investment banking syndicate desks are doing the right thing for the industry by blowing deals out fast to favored investor clients, potentially leaving yield on the table in the primary market, which is often realized in the secondary. Joseph Fichera, CEO of advisor Saber Partners compared the process to the rapid post-IPO price appreciation seen in the 1990s equity markets.

“How can a billion dollar transaction go to 10 or 15 investors?” Fichera asked. “Don’t you think there is more value here and we can make the market more efficient?” he implored of the panel. Fichera asserted that the ABS market was beginning to resemble the equity IPO market in that syndicates are merely trying to push deals out the door quickly. “The debt market is not becoming the equity market,” countered Brian Wiele, syndicate head at Deutsche Bank Securities.

“Over subscription is not the best thing [for an issuer],” Fichera said. “It is more competition and greater liquidity that will tighten spreads,” he added. Fichera contended that underwriters need to be more proactive in building distribution networks, even outside of traditional ABS portfolios, so that more investors can get a piece of the action.

Fichera also pointed out that it has become rare for underwriters to actually underwrite and take down unsold bonds, as they would during his days as an investment banker, something he reported to be “recovering” from. “If underwriters are just becoming ordertakers, maybe we should just call them undertakers,” he quipped.

After an impromptu game of rock/paper/scissors with Banc of America Securities Principal Pat Beranek for the right to retort to Fichera’s comments, Deutsche Bank’s Wiele responded by noting that “the fee structure on asset-backed transactions has ground down, and [investment banks] are not really being paid to be underwriters and take down bonds.”

Fichera theorized that all-in costs to the issuer would be reduced with a broader distribution, even at the expense of increased underwriting fees charged to the issuer. While few on the panel flatly rejected the idea of boosting underwriting fees, the sellsiders contended that the preferences of programmatic issuers and the rapid clip with which offerings enter and exit the primary market favored the execution-based approach.

Bunty Bohra, head of structured product syndicate for Goldman Sachs, contended that competition among underwriters is sufficient that if issuers are unhappy with the syndicate process and the all-in yields they are paying, then they will move elsewhere. “The issuers are all adults,” he said. “[They] are not forced to do something they don’t want to do.”

Fichera also harped on the quality of the services underwriters provided, calling the underwriters collectively, “an oligopoly.” Caroline Morrill, head of the ABS syndicate for HSBC Securities, defended ever-shortening length of time that syndicate desks market deals, saying syndicates are trying to strike a balance between what the issuers want and what the investors want. She noted that often it is the investors who ask the syndicate to close the deal quickly. “We want the period that allows us enough diversity [among investors], and not one that puts us in a situation where investors are hurt.” — GC/KD

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