Some of the biggest money managers in investment-grade credit want to revamp the way new bonds are marketed, priced and distributed, pushing Wall Street and regulators to adopt fresh industry standards they say are long overdue.
The Credit Roundtable, an industry group which counts Vanguard Group Inc. and T. Rowe Price Group Inc. among its members, penned an open letter to various market participants Monday suggesting dozens of changes, from providing prospectuses immediately when deals are announced to disclosing final order books when they’re priced.
The changes would greatly help asset managers’ investment and compliance processes, according to the letter. The push comes as U.S. high-grade bond sales are on pace for a record year, already surpassing $1.3 trillion, and as Wall Street’s biggest banks prepare to launch an electronic platform for new issuances that aims to overhaul how the transactions are executed.
“It’s an effort to bring the underwriting and distribution of corporate bonds into the 21st century,” said David Knutson, vice chair of the Credit Roundtable and head of credit research for the Americas at Schroder Investment Management.
The Credit Roundtable’s suggestions span the entirety of the new issue process, which in the investment-grade market typically takes about a day. Other recommendations include allowing a minimum of 30 minutes between the start of the allocation process and pricing of an offering, and setting a 4:30 p.m. New York time deadline for deals to get done before they become the next day’s business.
The recommendations come just months before DirectBooks LLC -- a platform run by a consortium of nine of the world’s biggest banks intended to make ordering bonds more efficient -- is set to launch. Bond buyers are hoping to take advantage of the momentum it’s generated to discuss other aspects of the new-issue process that technology alone can’t solve, according to the letter.
Many of the recommendations deal with what’s seen as a broader lack of transparency in the process of selling new bonds.
Investors want standards set governing the disclosure of roadshow details, initial price talk, maturity dates, size estimates, CUSIP codes and redemption terms when a deal is first announced. They also suggest regular book building and deal size updates as the offering progresses.
Companies typically know going into a deal how much money they’re looking to raise, yet that information isn’t always communicated to investors. Firms often boost offering sizes as orders come in, and investor interest can drop off as pricing tightens in the issuer’s favor.
Yields on investment-grade bonds have compressed more than 31 basis points on average between initial talk and final pricing for deals sold so far this year, compared to less than 19 basis points last year and 15 basis points in 2018, data compiled by Bloomberg show.
The Credit Roundtable is also asking that a borrower’s expected credit rating be confirmed before or immediately after a deal is announced, as many investors have limits on what kind of debt they can purchase. Several companies including Ralph Lauren Corp. and Macy’s Inc. were downgraded in the middle of recent bond sales.
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