“You can’t win on all of them”. That was the rather lackadaisical response from one of the salespeople when I queried what the devil had gone wrong with the pricing process of the two tranche seven-year and 12-year €1bn bond issue for Adidas. From the moment of allocation but long before final pricing, the bottom was dropping out of the bonds.
Within an hour of pricing, the sevens which had been priced at Bunds plus 98.8bp was trading at +120bp. The 12s did similarly poorly. There is little question that the unrated deal has been a complete and near-catastrophic failure. This is not a bond for some barely known emerging market credit, but for one of the best known retail brands in the world. It is a deal which comes not in the customary minimum increment of €100,000 or €200,000 but in pieces of €1,000. This is a bond clearly targeted at the private retail investor. A bond like this should demand higher levels of responsibility by the leads and should be subject to price stabilisation rules. In the event, as the prices crumbled, the leads led the way down.
Just a few days ago I commented that there is nothing greater to fear than a full allocation and as I asked around the private banking community, they were all perplexed by the high allocation they had received. To be treated to an 80% allocation, as one of my Swiss contacts was, on a bond issue which is, according to the lead group, twice oversubscribed has everybody scratching their heads. There is no question that something has gone very wrong and that, as at the time of writing, nobody seems particularly fussed about doing anything about it.
There is a reason that the US markets hang on to their 144a private placement rules. These were introduced in the aftermath of the Crash of 1929 to protect private investors against the sharp practices of boiler room sales tactics which had played such a huge role in sucking in the unwary and inexperienced. Anyone other than Qualified Institutional Buyers cannot invest in scheduled securities until 40 days after issue – it used to be until 40 days after the SEC had received an “all sold” notice – in order for the securities to find what could be regarded as an equilibrium price in the market. Likewise, the old 30-day primary payment period on Eurobonds had a similar effect. They offer investors a level of protection against the shenanigans of investment banks; they place the burden of mispricing on the lead managers and pros but not the end investors.
Adidas is an unrated issuer that has not been to market since 2009 and whose last outstanding straight bond matured in July (though there is a €500,000,000 convertible left which matures in 2019). Investors have no existing curve with which to compare the proposed pricing and thus they must rely on the lead management to get it right. To what extent the nonsensical regulatory framework which enforces a game of hide and seek between syndicate desks and the investor base is to blame for this fiasco is beyond me. I can’t imagine that the banks ran with a billion euros worth of bonds without some sort of clue what they should be worth and who was going to buy them. Maybe they did. Maybe they blithely assumed that petty retail would merrily hoover them up, whatever the price.
Hubris
Maybe the hubristic behaviour which I have often accused the syndicate community of displaying really did get the better of them and in doing so they have simply and with gay abandon blown away €15m–€20m of investors’ money. Is the treasury department of the issuer sipping champagne or is there an air of embarrassment over the way in which Hans SixPack has just been rolled? Maybe we’re back to “originate to distribute”.
I recall Dresdner Bank being caught with its pants down in the mid 1990s over an issue for Fokker, the Dutch aircraft builder. It was deeply in junk-land but the Frankfurt bank led a Eurodeutschmark issue for them with an investment-grade coupon. It was sold on the basis that DASA, the German aerospace group, held a shareholding and, as DASA was owned by Daimler Benz, Fokker had to be seen as being as good as Daimler. Within a matter of months DASA decided to pump no more money into the basket case which was Fokker. The maker of the famed World War I triplane and of the well regarded Fokker Friendship went into liquidation. Dresdner took a spanking and, unless my memory serves me incorrectly, the bank stood up and made its mainly German investors whole.
The bankers are being paid hundreds of thousands of pounds for their supposed skill and expertise. Five banks co-led the Adidas transaction. Did not one of them stand up and suggest that they might be shooting in the dark? Maybe it’s all the result of the culture of fear where nobody dares to rock the boat, and everyone just jumps up and screams “Ra, ra, ra!”. I will be interested to see if there is any after-effect or whether the machine just splutters once and rolls on.
I hope there is a steward’s enquiry going on somewhere but it would be nice for the leads to stand up and be counted. They clearly got it totally wrong and it is not right that trusting retail investors who already bought bonds should be expected to bear the cost.
Sinning
Meanwhile, we continue to wait for the ECB’s Mario Draghi to put some flesh on the ABS buying programme’s bones. The recent article by the IFO’s Hans Werner Sinn has had tongues wagging that the latest iteration is that the ECB is about to turn itself into a junk bond fund. That bankers stand accused of lending out umbrellas when the sun is shining only to ask for them back when it begins to rain is not new and there is no reason why central bankers should be any different. The ECB has no more right to lend money to borrowers who might not be able to repay than any other bank. On the contrary – shareholders voluntarily assume the risk; taxpayers don’t.
It is impossible for the ECB to please all but we must assume that it will attempt to compromise, and thus please nobody. The atmosphere of “risk off” which is pervading markets might in fact make it easier for it to look like a hero, irrespective of what it chooses to do.
The German people, however, are getting restive. Nevertheless, the weaker economic releases coming out of the engine room of the eurozone should embolden the ECB. I suspect the lesser credits have little or nothing to fear.
