March 16, 2018 / 5:46 PM / 2 years ago

Second-tier banks seek transparency on high-yield

LONDON, March 16 (IFR) - Guidelines aimed at improving transparency for how high-yield bond deals are handled have been welcomed by the industry - but many remain sceptical they will open the door for more second-tier banks to handle trades.

The Association for Financial Markets in Europe last month issued high-yield offering guidelines, which sources said were the first of their kind in the industry.

High-yield bond deals are typically run by one bank, often labelled “lead-left” or “billing and delivery” (B&D).

Other banks underwriting the new issues typically receive little information about them and the recommendations called for offering processes to be more inclusive.

“The guidelines are very helpful because they’ve come out to try and sort out some of these problems,” one DCM head said. “The problem is, these are unfortunately guidelines and it’s not that anyone enforces them.”

Other factors play a part in how big a role non-lead-left banks play.

The information received and the extent of participation in deal execution can depend on whether the bank is passive or active. If active, the scale of differentiation from the lead-left firm can vary. The process is more inclusive of joint global coordinators, bankers said.

Second-tier banks said the information they receive can also depend on arbitrary factors, such as what bank is in charge and the personalities of its bankers, as well as the relationships between the banks.

“The guidelines don’t have to fundamentally change the way that parties execute transactions; but they can be seen as a good indication of what the industry sees as recommended practice,” AFME’s high-yield director Gary Simmons told IFR.


Different banks have different transparency demands. Some second-tier banks want to see the high-yield market adopt an execution style similar to those on investment-grade and emerging market corporate bonds, where a small group of banks lead a deal collaboratively.

“There is no fundamental reason to have the lead-left model in high-yield,” said another DCM head.

But the big banks that often act as lead-lefts argue that the higher credit risk carried by junk bonds justifies a more controlled execution process. Some bankers at smaller firms agree with that view too.

“I appreciate the difference; there is no credit content in investment-grade, but if you have to sell a story hard, particularly a Single B or Triple C credit, you want that message to be carefully crafted, so some form of control is important,” said the first DCM banker.

One syndicate head added that second-tier banks do not have the investor contacts necessary for successful execution. Investor preference for the lead-left system, which is seen as more efficient, is another obstacle in the way of change.


Given that AFME’s guidelines are not enforceable, any change is expected to come gradually, if at all. Several bankers said representatives from the larger banks took little interest in the discussions ahead of the guidelines.

“At the end of the day, the industry isn’t going to reform itself, unless the regulator comes in and says: we can’t see how lead-left can be consistent with what we’re establishing in terms of transparency,” said another syndicate head.

Issuers could be another source of change, bankers said. But that will need to overcome sponsor indifference and the legacy of league table positions.

New MiFID II European regulations, which call for a fairer and more transparent allocation system, could have an impact, while the European Commission also called for transparency in high-yield allocations in late 2017. But bankers said so far, neither have had much of an impact.

The current system shutting second tier banks out of decision-making comes at a cost.

“Control is important, but it still doesn’t excuse the fact that banks participating in the deal are still at risk, because they also underwrite the transaction but are constantly kept in the dark,” said the first DCM head.

That was particularly the case on British modular building company Algeco Scotsman’s recent deal, where non-lead banks carried the same underwriting risk as the leads, the second syndicate head said.

Other sources of concern for second-tier banks have been pricing levels they deem inappropriate and limited liquidity in secondary trading.

AFME’s Simmons said the trade body plans to review and update its guidelines regularly.

“In six months, we’re going to look again to see if there have been any regulatory or other changes or if there has been any significant market reaction, and will update the guidelines accordingly.” (Reporting by Yoruk Bahceli, editing by Steve Slater and Helene Durand)

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