BondAuction, a new platform to support bond issuance, is planning to have its system to support a new auction process operable by mid-2022 with regulatory sign off allowing operational auctions before year end.
Primary bond markets saw record levels of issuance in 2020 with a only slight drop off in 2021 and predictions for high levels being maintained in 2022. The primary issuance process remains largely manual, creating inefficient and potentially risky processing on both buy and sell side.
At present a new deal might open at 8.30am and not be priced until 2.30pm with considerable communication needed between the different investors and the many syndicate banks involved creating a weight of messages and telephone calls with details being manually noted, copied and pasted to exchange information. As a result, it is opaque and relatively slow.
Spencer Maclean, a co-founder of BondAuction alongside Peter Charles, a fellow syndicate desk veteran, says, “Currently the banks are slightly shooting in the dark, a syndicate desk and issuer believe they have it right when they lose 10% of their book, though the danger remain that the price still tightens in secondary. The issuer always asks what if they go another basis point or two. Peter, I and other syndicate desks spent a lot of time answering that question.”
The BondAuction platform uses an auction process with bonds allotted to all investors at the same based on a ‘clearing price’ for the issuer’s desired size based on BondAuction’s Scenario Calculator.
“While we don’t think people will use an auction process for every single one of the transactions, it will be applied more strategically here and there, so we still expect issuers to use regular book build transactions and private placements,” explains Maclean.
Where it is used, the firm expects the both sides of the deal to experience greater clarity around issue terms and ease of accessibility to documentation, with direct order input by bookrunner-approved investors, including the ability to input distinct sub-fund orders with different parameters. They will also provide the ability for allotted bids to be downloaded by sub-funds, potentially saving time and reducing errors for the underwriters.
By using confidential computing, the platform is also expected to ensure that only those parties that need to know specific orders do so, enhancing data security.
“Syndicate guys get to benefit because we are not disintermediating, we are a private platform, they get to advise their clients on the right auction range to put in and that will be wrapped around fair value we would suggest, rather than thirty back and take time to arrive at the landing price,” says Maclean. “Speed of execution will be faster, allotment will be logical so you don’t have to justify the allocations to regulators, you can set out your hedges, the billing and delivering is done and dusted. We would expect to see a regular intraday execution by a well-known issuer shave several hours of the execution time.”
©Markets Media Europe, 2022
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