Reuters: Financial Services and Real Estate: Private bank investor appetite ruffles bond market

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Private bank investor appetite ruffles bond market Mar 30th 2012, 08:17 By Umesh Desai Fri Mar 30, 2012 4:17am EDT HONG KONG, March 30 (IFR) - Private bank investors are snapping up the lion's share of many new bond issues - and that is causing grumbles about inflated order books and underperformance in the secondary market. Their emergence as major players is also cutting into the supply to institutional investors, leaving the traditional mainstays of the bond market increasingly empty-handed. "We are getting under-allocated because of higher private banking and banking participation," said Arthur Lau, Hong Kong-based fund manager at PineBridge Investments Asia Ltd. One factor driving the trend is the leverage that lending banks are extending to their private bank clients, which has provided them with more buying firepower than ever. That in turn is distorting the true demand for new issues, as seen in this week's bond offer from debutante Shangri-La Asia Ltd, a holding company for hotel and property assets. The $600 million deal drew more than $7 billion in orders. "Private banks have been given a lot of priority," a Dubai-based broker told IFR. "(Lenders) offer leverage to their clients which is making their order size chunky." The size of the demand for Shangri-La - which included $1.9 billion in orders from private banks - it price around 25 basis points (bps) inside preliminary guidance. "Some banks are placing inflated orders," said Lau. "You are sending a wrong signal to the issuer about how strong the demand for paper is, given the market situation." MORE AND MORE - AND FASTER TOO Working in tandem with robust demand is the fact that private bank accounts are more likely to pile into trades based on the name or the yield, without the level of due diligence or credit analysis that the large institutions would undertake. The result is that deals are being pushed through more quickly - which could have implications down the road. "The speed of pricing is faster because of these structural reasons," said Agnes Belaisch, London-based head of emerging market strategy fixed-income at Threadneedle. "The only risk is that there could be demand for bad credits as fundamental weaknesses could be blurred by the hunt for yield like in the 2007 subprime crisis," she said. "But it's too early for that." The change in the market, and especially the burgeoning demand in Asia, has not gone unnoticed by issuers from Europe and Latin America. In March alone, Germany-based integrated utility RWE AG and Brazilian mid-cap lender Banco BMG turned to Asia when issuing new bonds, driven in part by the appetite of private banks. But there are grumbles about volatility and underperformance in the secondary market once these deals get done. Private banks tend to hold whatever bonds they buy, making them less liquid and more prone to sharp price swings. "They look at the yield rather than the spread," said the broker in Dubai. "Once they lock into the yield, they don't worry where the price is moving. That is why volatility has been increasing." And some in the market are noting what they see as too big a gap between the size of the private bank-driven order books and how the issues are actually performing. Shangri-La's bonds tightened just a meagre 5 bps after pricing despite the enormous size of the nominal demand. "A $7 billion book should have tightened the bonds 25 bps at least," said a Singapore-based debt capital markets banker. "If it were real money or real demand with real liquidity, it probably would have." (Reporting by Umesh Desai; Editing by Christopher Langner, Marc Carnegie and John O'Callaghan) Link this Share this Digg this Email Reprints

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