At first glance, Adidas’s €1bn two-tranche foray into the bond market appeared to be something of a disaster for all concerned. At second glance, it seemed little better; a third look did nothing more than confirm many people’s prejudices. No one, it would seem, emerged with much credit.
Any bond whose spread widens immediately after pricing is going to attract attention. The recriminations will be widespread and directed at various parts of the industry, depending on the position of whoever happens to be pontificating at the time.
From the company’s point of view, of course, the economics were simple. Adidas raised the cash it desired and did so through relatively long-term instruments, with the deal divided into seven-year and 12-year tranches.
But Adidas is a household name that visits the bond market only rarely. As such, every visit takes on added import, especially given that the popular brand holds appeal for retail investors – as demonstrated by the €1,000 denominations on offer.
The fact that the paper tumbled 1.5 to more than two points in early trading – depending on the tranche – will have done little to enhance its reputation among those who bought the paper.
But an issuer can only follow the advice of its bookrunners – why appoint them otherwise? – especially one with so little history in the sector.
Initially, there appeared to be nothing untoward at play, with spread guidance announced and then tightened 5bp–7bp, with the leads reporting an issue comfortably 1.75 times covered.
But the bald numbers of book sizes can indicate a number of realities. Investors accustomed to having their allocations slashed long ago concluded that inflating their orders is the only hope of getting a decent slug of paper that at least partly matches their true aspirations. A book size does not thus reflect the genuine amount of demand.
That might be a mitigating factor for the syndicate desks that are invariably first to bear the blame when things go wrong.
But syndicate bankers are supposed to enjoy close relationships with the buyside and consequently have a good idea of what the truth is when it comes to demand. They are also at the forefront of pricing discussions. They decided on the last-minute ratcheting in of the final price – a move set into relief when the bonds widened three times as much as the tightening – and presumably they signed off on the decision to sell relatively long-term bonds as well.
The pricing comparables were also questioned by investors – and with good reason.
Again, syndicate officials might suggest that investors should make their own minds up about the correct comps and could have simply walked away if they didn’t like the price, or the tenors, on offer.
That is obviously true. But the waters are muddied by the retail aspect of the deal and the speed of the process, with investors given no time to do the necessary work. For big investors that is less of an issue, but retail buyers – and the brokers who cater for them – simply don’t have the capacity.
And this is perhaps where lessons need to be learned. There is no sharp distinction between the market for retail and that for professional investors – and there doesn’t need to be. But underwriters must consider the needs – and the weaknesses – of retail if they are going to target them. And they have to resist the temptation (as it looks like they did here) to stuff smaller players if the big boys walk away.
Quite simply a €1bn seven and 12-year deal, rushed into the market with no proper warning, is not an appropriate instrument for many retail buyers. (And that’s leaving aside the debatable comps and the last minute tightening.)
It’s not as if there aren’t other deals that provide appropriate models. Look no further than a retail-friendly €500m five-year issued in 2009 after being flagged the week before to enable at least a modicum of credit work. The issuer? You guessed it – Adidas.
Single-finger salute
The most galling thing about Bank of America’s decision to rewind the corporate governance clock and hand chief executive Brian Moynihan chairmanship of the bank as well is that it didn’t really try at all to justify or explain the change.
If the bank is going to insist on flouting decent governance standards, the very least it should do is offer shareholders a full explanation of why that decision has been made.
To appease the critics, the bank added some oversight roles for its “lead independent director”, the inglorious title now assumed by former HCA chairman Jack Bovender.
But not having an independent chairman to set the tone and lead discussion in the boardroom rolls back best-practice governance instituted after the disastrous reign of Ken Lewis, and it represents a single-finger salute to the basic principle that boards should represent shareholders, not management.
Whether having an independent chairman will really avoid a repeat of the crisis-era mistakes that continue to haunt Bank of America is beside the point, as is whether Moynihan deserves the new title for doing a good job in restoring the bank’s fortunes (he has certainly made pretty decent progress).
And it is no defence that so many other US banks give what should be two jobs to one person.
Among the reasons cited for marrying the chairman and CEO roles at banks are that these institutions are too complex for an outsider to understand and that the person leading the board could be a disruptive influence. Yet these are trite arguments that could even be seen as a red flag in terms of management’s desire to avoid outside scrutiny.
One reason corporate governance is often sneered at in the US setting is the lingering mindset that if investors don’t like it, they can simply do the “Wall Street walk”. But American exceptionalism in this case amounts to an attempt to erase the financial crisis from collective memories.
Indeed, given the systemic importance of banks that was painfully exposed in 2008 – not to mention the need to win back market trust – banks should as a matter of course adopt the very highest standards of corporate governance. The likes of Bank of America are standard setters for the rest of Wall Street and indeed corporate America as a whole. On this issue, they are not meeting their responsibility.
Don’t panic
We have been here before. Currencies weaken, spreads widen, a series of negative headlines hit the screens and gloom descends over the emerging markets.
It was thus in late May 2013 and then earlier this year. So it is again now. A confluence of risks has engendered a sense of uncertainty in the market – so much so that one survey of EM investors last week revealed money managers are “virtually in panic mode”.
Some of these risks are potentially seismic, such as the Fed’s tightening of monetary policy and China’s economic slowdown (with the knock-on danger to commodity exporting countries). Others are more fleeting – Bill Gross’s departure from Pimco and Brazil’s presidential election.
Individually, these risks could probably be managed without causing too much unease. Combined, they have the potential to turn negative sentiment into something more drastic.
The biggest fear is that investors will all exit at once. Liquidity remains scant outside of the primary markets – Wall Street turns over about only 45% of EM fixed income in a year compared with more than 100% of the asset class a year in 2007, according to Ashmore. Investment banks’ retreat from market-making remains the most pressing structural challenge facing the bond industry.
But it’s important to keep things in perspective. Are the emerging markets likely to experience a simple repeat of last year’s so-called taper tantrum, when the market tumbled over fears about the Fed’s withdrawal from its QE programme? No, for the simple reason that the market has already experienced the taper tantrum.
Lessons were learnt from that episode, and many parts of EM have gone through the necessary monetary and fiscal policy adjustments. On the whole, current account deficits are more manageable, real exchange rates weaker and real interest rates higher.
Also, as Citigroup analysts point out, many countries have cut or stabilised their stock of short-term debts to banks (though the one and arguably most important exception is China). And while EM corporates have become much more active borrowers, the average maturity of their issuance in 2013 was just under 10 years.
Experienced EM investors understand that their markets go through periodic bouts of excessive volatility – that’s why they invest in them. Irrational panic, however, does no one any favours.
