I really didn’t think they’d do it again… or at least not quite so quickly. Wrong.
The fiasco – and that’s being nice – which was the two-tranche euro-denominated bond issue for Adidas came close to being repeated on Wednesday for Metro, the German retailer.
A €500 million seven-year deal was announced with a pricing guidance of mid-swaps plus 75-80bp. Nothing wrong there, other than that the deal looked rich for a low triple-B rated corporate but, hey, the minimum denomination is €1,000.00 so petty retail can mop it up. Then, as with the Adidas deal, there were what can only be described as disingenuous inferences being spouted with respect to the book size.
Around 20 minutes before books were closed, a message was sent out declaring them the be “~ € 1bn”. Now, I’m not the one to try to define how long a piece of string is, but when the transaction was finally priced, the book proved to be €850 million. To me, and I might be quite wrong, €850 million is not approximately €1 billion but if it is, I’d be happy to let the lead group have my bank details where they can deposit the rounding error.
There is no question at all that the syndicate collective of Unicredit, Commerzbank, Deutsche Bank and RBS knew that it had a weak subscription book, but yet again the powers that be could not resist pricing to tight end of guidance. By the close of business, the bond was trading 10bp wider than it had been priced.
This might not be a twin of the Adidas which blew out by 20bp in the grey market and which is still sitting in that area, but it is very much a first cousin. Repo demand, incidentally, has me believe that there are still some juicy Street shorts out there in the Adidas – and they are not ones which could not be covered if desired.
A German problem?
I had dinner last night with a friend who is a market professional of many years’ standing but not in bonds, and not in the main-stream either. He wondered whether this might somehow be a German problem. He might well have a point.
German retail has always loved the security of fixed income products and hence the €1,000 denominated bond is common in that country. The famed Belgian dentist was, for those in the know, in reality a German doctor. Tips on bonds used to get passed around over a beer at the “Stammtisch”, the weekly chaps’ get-together around a large table in the local. I can well remember how in the hey-day of German retail buying into any of the high-yielding currency markets such as were Can$, Aus$ and Kiwi$ certain issues would be snapped up in some regions but not in others. It was all word of mouth and the power of that retail demand was well appreciated by issuers and their banks. Syndicating bonds in Germany as a lore unto itself.
However, even retail names like Adidas and Metro are beginning to lose attractiveness which is not surprising with 1⅜% coupons at seven years. The blind retail bid is fading but the old and adventure holders in the banking system have not woken up to that yet. Again the argument will be proffered by the banks that the issuing process was transparent and that everybody knew what they were in for. Investment bankers have it tattooed on their conscience: deny everything and admit nothing. But as the famous German novelist and political activist Erich Kästner wrote in “The Flying Classroom” in 1933: “In the perpetration of a mischief, not only those are to blame who commit it but also those who fail to prevent it”.
Senior management has failed to control the folks at the coalface – they are no doubt doing what they believe to be right – and the buyers once again get to pay the price. In the 1990s the catch-phrase was that the English can’t build cars and the Germans can’t trade bonds. Since then both have learnt something of the other but, by far, not everything. Enough now.
ECB bond buying
Yesterday the street was rife with rumours about the ECB planning to discuss adding corporate bonds to its buy-programme at its December council meeting. Do me a favour! The agenda for the November meeting hasn’t even been drawn up yet and stocks and bonds – other than Adidas and Metro – are rallying out of sight. Planning to discuss, even if the no-smoke-without-fire analogy were to be applied, is a long way from actually doing something.
The fact remains that the ECB does not want to relieve member states of the need implement basic reforms to the investment environment, be that by way of more flexible labour laws or simple company formation. Pumping cheap money into ossified economies achieves nothing, other than to encourage banks to buy yet more sovereign debt. As long as the likes of Italian Prime Minister Matteo Renzi preach that the 3% deficit/GDP is outmoded, the ECB will dig in its heels.
More to the point, a deck of cards has four aces, six of which the ECB has already played. If it has another one or maybe two up its sleeve, it wants to hang on to them. Let’s watch the European Commission first review and reject France’s and Italy’s budget plans, and then we can think again.
