BlackRock, the world’s biggest fund manager, is continuing to apply pressure on the world’s leading non-government bond issuers to change the way they fund in the primary debt markets.
BlackRock insists these borrowers’ issuance patterns have contributed to the illiquidity in global bond markets.
Richard Prager, BlackRock’s head of trading and liquidity strategies, told Euromoney as part of a special report into the liquidity crisis in global bond markets: “We would be prepared to give up alpha in the primary market, which has been a big source of returns, in exchange for greater standardization in issuance patterns which will increase secondary liquidity and reduce costs.”
Buy-side to buy-side crossing networks have faltered, and the OTC market-making system of dealers quoting at variable bid-offer spreads and in unreliable size developed, because of the multiplicity of bonds of different maturities and terms from the same issuers.
A borrower with one single equity trading in small lots between thousands of investors from retail to institutional might have hundreds or even thousands of bonds outstanding, many under $1 billion in size but distributed in institutional-size lumps of $10 million that, within days of being issued, might barely trade.
In May, BlackRock put out a call for some of the larger and more frequent issuers in the credit markets to consider more quasi-sovereign-style borrowing patterns, concentrating issuance into fewer, larger, more liquid deals of certain maturity dates.
It pointed to 10 issuers making up a substantial proportion of the Barclays US corporate index: GE with 1,014 separate bonds outstanding, JPMorgan (1,645), Goldman Sachs (1,242), Citi (1,965), Morgan Stanley (1,316), Bank of America (1,544), AT&T (74), Wal-Mart (50), Verizon (71) and Wells Fargo (274).
There are many reasons for this sheer diversity. Financial issuers are expert at spotting funding arbitrage opportunities and dipping into pockets of investor demand as they spring up sporadically, often with small, tailored deals that are more disguised loans than tradable securities.
Corporates do less of this, but they too like to spread refinancing risk and not have too high a proportion of their liabilities coming due in any one quarter.
BlackRock wants issuers to embrace greater standardization, arguing that over time regularly tapping and reopening bonds with maturities more aligned to cleared interest rate swaps and credit derivatives will benefit them. By playing their part in easing investors’ liquidity woes, borrowers might build up deeper and more dependable pools of capital to tap.
That has not been a problem for issuers in recent years, when demand to buy in the primary market has outstripped supply as central banks repress yields and investors chase earnings. The need to offer new-issue concessions has vanished.
However, when the markets turn – and they will – that could all change overnight. And remember that as banks have de-levered, issuers’ dependence on healthy capital markets has increased. If the secondary markets wither, that will threaten the primary markets.
Euromoney contacted each of the 10 issuers on BlackRock’s list to ask for a response. Several spoke about fears of concentrating rollover risk. None would comment on the record.
Prager insists these issuers are mistaken. “They’re talking about cliff risk and maturity walls – let’s not kid ourselves,” he tells Euromoney as part of a special report into the liquidity crisis in the global bond markets.
“If the capital markets closed tomorrow for six months, what volume of liabilities would fall due for these big issuers? A few billion dollars maybe, but just a fraction of their total liabilities. And remember that the bank issuers are all carrying big liquidity buffers.
“We’re not saying let’s move to just a handful of bonds. How many does it require to build a liquid yield curve? Say 15 node points for the dollar, euro and one other market: that’s 45 bonds. Of course, borrowers need to manage cliff risk. We’re just asking why can’t you move to having 120, instead of 1,200.”
Prager adds: “It is borrowers’ own issuance patterns that have led to this state of illiquidity. And what are they doing about it? Nothing. We need dealers and corporate treasurers to engage more constructively on this. None of us expects it to change overnight.
“We’re already seeing volumes of displayed interest and completed transactions in all-to-all trading rising. Necessity has been the mother of invention in the secondary markets and I’m very optimistic of progress there.
“But this change in issuer behaviour in the primary market will be a three- to five-year journey and might need a regulatory nudge.”
Prager is not an isolated voice. Stephen Grady, head of trading at Legal & General Investment Management, says: “Issuers are notably absent from the discussion [about bond market liquidity].
“But investors are changing their portfolios to hold more liquid instruments and there is much more liquidity screening now than ever before on the size of an issue, its tenor, whether or not it can be characterized as on the run.
“More regular issuance in set tenors would certainly help attract funding and you can clearly see price differences developing between on-the-run and off-the-run bonds.”
