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ICMA Wants to Take the Fun Out of Marketing Debt Offerings

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So you might think that buying a Banco Santander covered bond backed by debt of Spanish municipalities - presumably the ones that don't have any people - would be kind of unattractive to most investors. And you'd be right! Since no one bought it. But, of course, if I told you that everyone else was buying it, then that would be a totally different proposition. Except for it being the exact same bond.

But to avoid that confusion, the WSJ reports, the International Capital Market Association, a European pseudo-regulator, is considering issuing new guidelines limiting banks' abilities to blatantly lie about subscription levels in new debt offerings.

This, um, I guess sounds kind of reasonable, since (1) you probably don't want to own the issue if everyone else thinks it's dogshit and (2) if you think a deal is oversubscribed you're more likely to gross up your order to get the number of bonds you want and then be surprised when you're filled. The WSJ article notes:

In deals where investor demand exceeds the supply of bonds up for sale, the securities generally get doled out to investors in rough proportion to the size of their bids. ... If demand is exaggerated, investors can end up receiving more than they wanted.

On the other hand, securities underwriting have always struck us as a pretty well-balanced reputational ecosystem. If banks overrepresent the amount of demand in their books, then they can get investors to buy deals they'd otherwise avoid or put in bigger orders than they want. Once. But if you hose investors repeatedly they're going to stop showing up for your deals, and then your underwriting business goes away and next thing you know a Costco is taking over your building. And the reverse is also true: if a buy-side firm consistently puts in big orders and then dumps any bonds they get, they're quickly going to be cut off from future allocations and reduced to buying in the aftermarket like chumps.

The WSJ is pretty sympathetic to investors who "have complained to some major banks that they have been duped into overbidding on supposedly hot deals." We're not so sure we agree. Those investors are basically complaining that no bigger fool bailed them out after they didn't do their own credit analysis, misrepresented the size of their own demand, and relied on the banks assuring them there'd be other buyers to take bonds off their hands.

Debt-Sale Hype Under Fire in EU [WSJ]