September 30, 2016 / 3:52 PM / a year ago

REFILE-Corps next in crosshairs as ECB involvement hits bond fees

(Refiles to change date line, add codes, add editing and reporting credits)

* Pfandbriefe issuers pay less for ECB allocations

* Corporate bankers dismiss talk of discounts

* Bankers argue fees tied to long-term costs

By Tom Porter

LONDON, Sept 30 (IFR) - Investment banks are facing tougher fee negotiations from bond issuers in the era of central bank purchases, with covered bond bankers receiving zero fees on portions of some deals and corporate issuers also eyeing a bargain.

Analysts have long complained that the European Central Bank’s ultra-low interest rates have choked off bank profits.

But now they face another unintended consequence, with issuers no longer prepared to pay for having their bonds sold to the ECB, which has been buying assets as part of a 1trn monetary easing package.

One of the best known German Pfandbriefe issuers now pays lead managers half fees on the portion of its bonds that are allocated to the central bank, its treasurer told IFR.

“That is how we do it,” he said. “I can’t speak for anyone else, but we have little complaint from the banks so I assume it is no problem for other issuers.”

One Belgian covered bond issuer pays zero fees on ECB allocations, according to a FIG syndicate head, who added that the practice was still not widespread.

ECB allocations have been 15%-20% in recent covered bonds, down from as much as 50% in the early days of the purchase programme, said the banker.

The central bank has acquired just short of 195bn of covered bonds since October 2014 and with corporate bonds added to its shopping list in June, some corporate borrowers have also smelled an opportunity to make savings.

Senior DCM bankers this week told IFR some of their issuing clients had raised the issue of fee discounts for ECB allocations in the past few months.

However, the question has typically come from smaller companies that issue less frequently, and therefore have weaker relationships with the bigger banks, they said.

Brendon Moran, global co-head of corporate origination at Societe Generale, described discussions on the subject as “idle chatter”.

“It presents a lot of practical problems,” he said. “Not only in execution from a disclosure and allocations policy perspective, but it could also result in the deterioration of the relationship between clients and banks in the long-term.”


One head of debt syndicate at a European bank dismissed the issue as a “storm in a tea cup”, and said his institution would push back if companies asked for a discount.

Most corporate DCM bankers were equally dismissive of issuers’ chances of cutting fees, but some confessed they were still worried by the prospect.

“Though I haven’t seen it happen on any deals we have worked on, it has been talked about and I am concerned,” said one head of corporate DCM.

“Fees, of course, are completely negotiable, but it doesn’t make any sense to me. It’s a bit like saying, ‘We know Pimco and BlackRock are going to buy this deal, so we’re not paying you for that allocation’.”

Others were quick to point out that fees were related to long-term costs, which remain constant regardless of the size of the ECB’s allocation.

“DCM is an advisory-led business and requires significant investments in infrastructure and people to be able to effectively advise on and distribute new issues - fees are in place to cover these costs and seek returns for shareholders,” said Moran.

“If fee erosion results in these activities becoming uneconomic, issuers may soon see competition and choice in the market reduce as banks invest elsewhere. That is not a desirable outcome in the long-run for any issuer.” (Reporting by Tom Porter, Additional reporting by Laura Benitez, editing by Matthew Davies)

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