The business of underwriting bonds is being turned on its head in the U.S.
Gone are the days when money managers would passively wait for Wall Street banks to pitch them deals. Now, they’re often the ones cooking up sale plans with corporate issuers, haggling over maturities and interest rates before taking them to the banks to finish off the transactions. The goal: Carve out and keep a chunk of the new debt -- a precious commodity in a market awash with cash after years of central banks’ easy-money policies -- before letting Wall Street distribute the rest.
It’s a transformation that’s been building since BlackRock Inc., the world’s biggest fund manager, brought in a former Bear Stearns Cos. banker to start a capital markets group five years ago, a hiring that helped mark investors’ intentions to drive more of the process. Babson Capital and AllianceBernstein Holding LP, among others, have since followed suit.
While the Wall Street banks still collect the fees on the bond sales, the shift underscores how they have ceded some of their influence in financial markets to the world’s top asset managers in the aftermath of the 2008 credit crisis.
‘Extremely Prevalent’
Precise -- and even imprecise -- estimates on how much of the nearly $1 trillion of U.S. corporate debt sales this year was initiated by fund managers are hard to come by, but traders, bankers and analysts all agree that these deals account for a growing share of the market. One recent example of a deal initiated by fund managers that produced quick returns: Fortescue Metals Group Ltd.’s $2.3 billion sale in April.
These transactions, known as reverse inquiries, “went from a weird, one-off type thing until now,” said Peter Tchir, head of macro credit strategy at Brean Capital LLC. “It’s become extremely prevalent and a tool that everyone is trying to use. It lets you have a little more control over what the issuance looks like.”
The initiative sprung up because the sales have become more critical than ever for fund managers. They provide access to bonds that can otherwise be hard to obtain; and can juice returns when prices on the debt rally right after the sale is completed -- a huge advantage in a market where a paltry 3 percent yield has become the norm.
Banks Retrench
A study carried out by Tchir, whose two-decade career in credit markets has included stints at UBS AG and Royal Bank of Scotland Group Plc, showed that a $168 billion pool of corporate debt sold in early 2014 added $1.5 billion of market value in the first 10 days after issuance.