Notes from the Buy Side
February 1, 2010
“Too many dollars chasing too few deals.”
If there was a recurring theme at the 2010 Private Placement Forum in Key Biscayne, Fla. last week that was it. It was said during the panel sessions and as private placement professionals talked shop while eyeing the beach.
“The issuers are in the driver’s seat,” one investor said. Insurance companies, many of whom were relegated to the sidelines last year, now have the cash and want to lend it. And issuance remains relatively thin. In this environment, the borrowers can afford to call the shots, some buy-side professionals say.
Issuance suffered at the beginning of 2009 and came back in the summer. In Q4, due to pent up demand, issuers flocked to the private placement market. But it is unlikely the market will be able to sustain this momentum, many buysiders agree.
The private bond market reached its highest volume level half a decade ago, when it clocked in at about $50 billion in issuance. Total volume in 2010 will be better than last year, which was $30 billion, but it's unlikely to reach the lofty levels of the peak, private placement professionals say. Another buy-side source predicted this year will probably see about $40 billion in issuance.
Some investors argue that issuance is not going to pick up until sentiment about the overall economy improves. Unemployment is still high, and companies are not going to want to borrow money when they are either still cutting work force or operating with a streamlined staff. A rise in M&A activity would also benefit the private placement market, as companies would turn to private bonds to finance their acquisitions.
The large buy-side shops are also frustrated by their diminishing bite sizes. Sources on the sell side said some of the larger insurance companies would ideally like to deploy $1 billion to $4 billion in 2010, but with only so many deals to go around oversubscription has become the order of the day, leaving many large buy-side shops with pockets full of surplus cash.
This is one of the reasons some large insurance companies choose to go directly to the issuer, the buy side argues. Going direct, often limits the number of investors and protects the allocation size. “That’s just how Prudential does business,” said one agent. More than 50% of Prudential’s private bond deals in 2008 were done directly. Metlife, NY Life and John Hancock are also getting more aggressive about direct deals.
Amendments also seem to be a thorn in the market's side. “Every year amendments and the restructuring process are discussed at the conference, but nothing ever changes,” a source from a large buy-side firm said. He went on to say that nothing is likely to change unless the industry fundamentally alters the way it does business, and that will not happen. When a deal reaches the amendment stage a lot of work is involved for all parties. What worries the private placement community is that issuers who have had a bad experience with amendments spread the word and this, at times, can curb issuance.
But the buy side doesn’t necessarily stand united on all point. Some larger shops would like a limit on allocation size. If this limit is set too high, it could exclude some of the smaller investors.
The smaller investor is aware of this, said one source from a boutique buy-side shop, but they also have to live with it. No one is going to go up against the large insurers, he said. Direct deals also worry the small players, he added. Smaller investors are reliant on agents to bring them deals, and direct deals are done without agent knowledge.
However, the buy side does stand united in its desire for greater issuance. Even if 2010 hits the $40 billion mark, as predicted by some sources, it is not enough, they say.
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