Investigation and Evaluation of the Primary Market Benchmark Syndication Process in Debt Capital Markets

Master's Thesis, 2017

130 Pages, Grade: 55


Table of Contents







1.1) Contextual Background Information
1.11) Research Scope and Objectives
1. Ill) Overview of Methodology and Data Analysis
1. IV) Research Questions and Expected Results
1. V) Importance of this Research
1. Vl) General Research Limitations

2. l) The syndication process
2. ll) Importance of Efficiency within the Syndication Process
2. Ill) Importance of Fairness within the Syndication Process
2. IV) Importance of Regulation within the Syndication Process

3. l) Methodological Approach for the Research
3. ll) Methods Design and Sample Sizes
3. Ill) Limitations ofand Justifications forthe Research Approach

4.1) Efficiency within the Syndication Process
4. Il) Fairness within the Syndication Process
4. Ill) Regulation within the Syndication Process
4. IV) Trends within the Syndication Process

5. I) Discussion on Efficiency in DCM Syndication
5. II) Discussion on Fairness in DCM Syndication
5. Ill) Discussion on Regulation in DCM Syndication

6. I) Results in Relation to the Research Questions
6. II) Future Research and Concluding Remarks

Appendix 1. Survey questions and results
Appendix 2. Interview summary questions and notes


Author’s background

Alexander Malitsky finished his Bachelor’s Degree in Business Administration with a focus on financial services at the Leibniz Fachhochschule Hanover in July 2014. He joined the Norddeutsche Landesbank Girozentrale at the beginning of his three-year-long Bachelor’s program and transferred into the FIG/SSA Syndicate department in August 2014.

Here he became acquainted with the debt capital markets, in particular, the execution of sub-benchmarks, benchmarks, and private placements. Currently, he is responsible for preparing and following up on new issue transactions (i.e. marketing to promote syndicate capability, both internally and externally) and delivering pricing updates for EUR transactions within the segments of financial institution groups, sovereigns, sub-sovereigns, and agencies. Additionally, he is responsible for consulting the issuer on the best execution strategies, as well as managing live transactions via book building or retention approaches.

In October 2014, the author began his Master in International Accounting and Finance with a specialization track in Strategic Finance Practice at the University of Liverpool. Within the scope of this course, this thesis was carried out with the intention of combining practical knowledge with the academic principles obtained from the study modules.


The dissertation aims to analyze the process of issuing new bonds in the EUR debt capital markets and, more specifically, the approach by which investment banks consort with each other (syndicates) to jointly execute a new issue. In this thesis, the aspects of fairness, efficiency, and regulatory implications were first analyzed from a theoretical perspective in the literature review, and the information gleaned was thereafter combined with a practical view based on a survey conducted with 54 active syndicate professionals. Additionally, experts with more than ten years of experience were interviewed in order to enhance the reliability of the findings. The outcomes, therefore, showcase an extensive comparison between theory and practice, while also outlining prospective trends within the business of primary markets.

In summary, this thesis reveals aspects of the syndication process, as it is executed on a daily practical basis, that appear contrary to a theoretical impression of efficiency and fairness. However, the input from current professionals highlights the immensely complex and varied applicable strategies, and that many aspects must be evaluated on a case-by-case basis.

-n the contrary, the newly implemented regulations that shape the syndication process were determined to be unable to comply with such sophisticated requirements. Thus the analysis concludes that the syndication business is self­regulating by nature and that it is harmed by a lack of equal application by the investment banks within the EUR area.

Moreover, the syndication professionals indicated a strong trend towards automation and digitalization of the process, even though a more detailed investigation of this aspect showed that full exclusion of investment banks is not desirable because of a number of operational and strategic reasons.


I would like to thank Nicos Balafas for his support during the preparation of the entire thesis and for not refraining from any request I had. Moreover, I want to thank Ruari Ewing and Chris O’Malley for providing me with initial ideas, documents, and sources, which all served as a great fundament for my entire research. I also thank my colleagues at NORD/LB for supporting me in finding answers to a variety of questions within the debt syndication business as well as all European syndicate professionals who supported me through participating in my survey. Last, but certainly not least, I thank my beloved family for encouraging me during the entire time of my thesis and my girlfriend for all of her support and patience throughout this arduous time.

“Syndication is an art not a science”

Ruari Ewing (cited in Myles, 2014).

Table of Figures

Figure 1: Partial Syndicate Process Step 1: Prior to transaction ANNOUNCEMENT

Figure 2: Partial Syndicate Process Step 2: Transaction Announcement

Figure 3: Practical example of a retention-based deal announcement

Figure 4: Practical example of an initial announcement of a pot transaction

Figure 5: Practical example of an ΙΟΙ/ IPT message

Figure 6: Practical example of a comparables message

Figure 7: Practical example of a book’s open message

Figure 8: Practical example of an update message (1)

Figure 9: Practical example of an update message (2)

Figure 10: Practical example of a launched message

Figure 11: Spread amendments during a new issue

Figure 12: Partial Syndicate Process Step 3: Bookbuilding and launch

Figure 13: Practical example of an allocation message

Figure 14: Partial Process Step 4: Allocation and allotment

Figure 15: Practical example of a pricing message

Figure 16: Long-term debt securities as percentage of total assets within banks

Figure 17: Overview of conflicts of interest: Issuer - Bank - Investor

Figure 18: Update message with detailed book information

Figure 19: Update message without detailed book information

Figure 20: Overview of regulations directly or indirectly influencing the syndication process

Figure 21: Overview of market sounding responsibilities under CSMAD/ MAR

Figure 22: Evaluation by syndicate professionals of an issuer’s general expertise during a new issue in DCM

Figure 23: Survey outcome: Conflicts of interest

Figure 24: Syndicates’ impressions on fairness within the syndication PROCESS

Figure 25: Overview of syndicate professionals’ views on fairness regarding order inflation, order protection, and wrong name-give ups

Figure 26: Syndicate professionals’ impressions on whether allocation is executed in a fair manner to all investors

Figure 27: Factors that influence the allocation decision

Figure 28: Summary of syndicate manager’s level of confidence within selective regulatory frameworks

Figure 29: Syndicates’ impressions of how regulatory aspects are implemented in practice

Figure 30: Syndicate professionals’ impressions on whether the syndication process can be replaced by electronic platforms

Table of Tables

Table 1: Sections of the DCM syndication process

Table 2: Comparison retention vs. book building

Table 3: Responsibilities of the disclosing market participant when conducting market soundings with or without inside information


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Chapter 1 Introduction

1. I) Contextual Background Information

The scope, developmental pace, and complexity of financial markets have always been tremendous, yet they are somehow detached from most ordinary people who do not work in finance. Several markets have evolved over time, such as the equity capital market (ECM), the market for derivatives, the money market (MM), and the debt capital market (DCM)—to name just a few. This thesis concentrates on the DCM and focuses on a very particular segment—the process of issuing new bonds into the DCM.

In accordance with the literature, the DCM can be defined as the market where debt securities (e.g. corporate debt, governmental debt, etc.) are traded. Underlining the significance of the DCM, the Bank for International Settlement (BIS) (2016) found that at the end of the second quarter of 2015, the outstanding amount of debt securities was more than eight trillion dollars ($8,000,000,000,000+) just within the euro area. In comparison to the MM, which deals with short-term debt, the DCM includes debt securities starting from two years in tenor: mid- to long-term debt. Additionally, the DCM can be divided into a primary market—where new bonds are firstly introduced (issued) into the DCM—and a secondary market—where outstanding bonds can be traded (Kohn, 2003).

In the following, the term DCM syndication is used when referring to primary market transactions. In detail, this implies the execution of a new bond issue, usually conducted by several investment banks incorporated in a so-called syndicate consortium (usually 3-6 banks). The major advantage of this structure lies in the risk diversification of the investment banks, meaning that the execution risk (of a bond that cannot fully be sold to investors remaining with the investment banks) is spread overthe participating banks (Webster, 2014).

This particular process is of significant importance for financial institutions, helping to determine their long-term financing portfolio, as well as capital structure. A large amount of literature deals with this aspect of corporate finance, which essentially comes down to the question of what is the cheapest, most diversified, and most suitable source of financing for a given company according to its unique strategies and special funding needs (Ross, Westerfield and Jaffe, 2010). Hence companies must evaluate multiple sources of funding, which—if focusing exclusively on debt—can vary from ordinary bank loans to borrowing money from investors through issuance of new bonds in the DCM (i.e. the DCM syndication process).

When it comes to a company’s choice of debt funding (bank loans vs. bond issuance), Hale (2001) found that pivotal factors included a functioning DCM, a company’s creditworthiness, a firm’s access to a(n) (inter)national DCM, the tenor of refinancing, and the sustainability of the banking sector. Therefore, it is of crucial interest for the three major participants in a new issue—the investor (creditor), the issuer (debtor), and the investment bank (financial intermediary)— that the DCM syndication process is designed and executed in a manner that generates an agreeable outcome. Without an effective and well-functioning process in place, issuers will not opt to refinance their debt funding using bond issuance.

Aside from issuers and investors, it is also in the interest of politicians and central banks that a sustainable and regulated process exists, in order to enhance capital flows. Especially in the case of the Euro area, the aspects of comparability and uniformity across countries play a significant role. Hence the entire segment of laws and rules is shaped by a variety of interdependent participants. While, on the one hand, the legal laws and regulations are set and defined by the European Commission and the resulting European Union (EU) Regulations, there are also EU Directives, which are derived from the EU

Regulations and propose a framework for each EU member country. Following these frameworks, each country has to ratify the directives into its national law (European Union, 2016).

In order to ensure objectivity and comparability between national applications, the International Capital Market Association (ICMA) consults with all major investment banks within the EU, resulting in a proposed guideline on how to ratify each directive. In the end, the ICMA publishes and updates the ICMA Primary Market Handbook, which contains all applicable recommendations on the benchmark syndication process. Given its high representative status and the fact that updates are generated through dialogue with the regulators and current market participants (syndicate professionals), this handbook majorly shapes the DCM syndication process.

This research focuses on the field of primary market syndication in the fixed income investment grade (IG) EUR market of financial institution groups and sovereign, sub-sovereign, and agency (FIG/SSA) issuers in Europe.

Given the high level of complexity and depth of expertise required to generate a detailed academic analysis of the DCM syndication process and its interdependencies, this research will concentrate on the three aspects of the process: efficiency, fairness, and compliance with laws and regulations.

For additional clarification, the above-mentioned terms are defined within the DCM syndication framework as follows:

- Process efficiency:
- Doing the task correctly: The degree up to which the syndicate procedures promote the best cost/benefit ratio for the issuer and the investors.
- Fairness:
- Market participants trust that they will be treated equally to any other market participant, such as an investor or issuer (Boatright, 2014). The issue of transparency is arguably crucial in this respect and will also be analyzed from a syndicate perspective.
- Compliance with the law:
- The adaption to and obedience with defined rules by all market participants in an equal manner.

In terms of the topics addressed, one objective is to clarify practical processes and detect potential improvements or even misconduct. This will be executed by gathering data from syndicate professionals and comparing this primary data with existing laws and regulations.

Hence a further aim is to gather representative hands-on information from a variety of syndicate professionals with different levels of expertise and experiences in an assortment of investment banks. This generates different perspectives on the proficiency; expands the scope of current issues, trends, technologies, and developments; and ensures crucial validity and reliability by including professional participants from the syndication field in this survey.

This pioneering study sheds light on a subject that has received very little detailed attention from academia. The research questions listed in chapter 1. IV) outline the core problems that will be addressed by this thesis and also link the contextual background to the importance ofthis research.

1. III) Overview of Methodology and Data Analysis

This thesis follows the approach of a case study within the interpretivism paradigm, with a major focus on a mixed approach using qualitative and quantitative data gathering. Considering that there is no one single way to conduct a case study, the thesis includes the following characteristics (Range, 2014):

- The object of the study has a relationship to people’s behavior and their contributions to the researched phenomena.
- The research is conducted in a practical and natural environment.
- The researcher tries to answer the research questions based on contemporary phenomenon, ratherthan on historical data analysis.

Moreover, the literature distinguishes between descriptive and explanatory case studies: the prior is limited to describing current real-life circumstances, while the latter aims to explain what exactly happens in practice. This thesis contains characteristics of both types of case study (Yin, 2013). The main reason for choosing the case study approach lies in the wide-ranging topic of the thesis, combined with its high level of complexity. Accordingly, a different approach would not satisfactorily display this topic in both a theoretical and real world context.

In terms of methods, the author follows a process of primary and secondary data collection. For this purpose, recent academic literature is taken into consideration, as well as the previously mentioned ICMA Primary Handbook, in combination with a profound analysis ofthe latest regulations.

The primary data-collection paints an in-depth, practical picture of the syndication process and how this phenomenon is executed in real life. Accordingly, the data is based on input from current professionals gathered through the following methods:

- Face-to-face interviews
- Focus group survey

Concerning the survey, a questionnaire was developed and distributed among European syndicate professionals with a minimum syndicate experience of two years. The participants for the survey, as well as for the face-to-face interviews, were chosen by the author personally (via judgment sample) in order to ensure high levels of expertise. Moreover, the survey questions were categorized in order to generate a broad basis of practical impressions from different banks:

- Current syndication practices
- Regulation & regulatory awareness
- Fairness
- Trends/technology

Live transactions have been used as practical examples for announcements and messages.

In accordance with the above-stated objectives, the study aims to answer the following research questions:

- Does the current DCM syndication process for IG benchmark new issues, as professionals in the EUR bond area execute it, imply an efficient and fair process forinvestors and issuers?
- Is the majority of the aspects of the DCM syndication process in line with the ICMA Primary Handbook recommendations as well as the current legal regulation? How well is the awareness of syndicate professionals regarding the regulatory environment and restrictions for the DCM primary syndication?
- Do the regulatory requirements enhance fair- and efficient execution of new issues forissuers and investors?
- Are there aspects/ trends discussed by syndicate professionals, which may enhance fairness and efficiency but are not- or not well enough implemented in practice?

The expected results should predominantly display overlaps between the theoretical framework set by both regulatory and ICMA recommendations and the practical observations gathered from the syndicate professionals. However, there may also be specific variations; when these are found, they will be explained and discussed, then used to evaluate prospective developments or potential improvements. These findings are expected to have a high level of inherent validity, given that this information will originate directly with professionals within the business.

This thesis will be beneficial to any individual interested in DCM and primary markets and will give these individuals the opportunity to understand the interdependencies within primary capital markets (i.e. issuers, investors, and investment banks as financial intermediaries).

In addition, this topic is of special interest to the author, given his current dual position as a professional syndicate manager and a student working on his master’s degree. This results in an unique chance to shed light on the publicly opaque practice of DCM syndication. Generally speaking, most syndicate professionals have finished their degrees long before starting this profession, and current academics do not have any opportunity to generate an in-depth view of real world practice. Up to this point, the topic of primary market syndication has received almost no academic attention. It is therefore in the interest of both academics and practical professionals to research this topic; analyze the practical and legal applications; and review potential trends, inefficiencies, and origins of improvements. All of this becomes even more key when given the fact that this particular field is almost exclusively evolving in a manner hidden from the public view.

Moreover, the analysis of the professionals’ perspective will result in benefits for current active regulators, frequent and infrequent issuers, commercial investors, and DCM departments within investment banks.

This paper will, therefore, contribute in several ways: primarily, by closing the academic gap regarding how the syndication process is executed in practice; secondly, by expanding on the (limited) available literature with a focus towards DCM benchmark syndication; and finally, by detecting and closing a potential gap between the theory of primary market DCM benchmark executions (i.e. defined by literature, regulation, and laws) and the actual practice.

First of all, the scope of this research lies within the EUR IG FIG/SSA sector and may, therefore, be distinct from syndication processes within different currencies or executed by another group of issuers (e.g. corporate issuers). Additionally, the combination of the sample size and the approach of conducting a judgment sample inherently imply that all possible opinions from syndicate experts will not be covered. Furthermore, a survivorship bias is present because of the fact that only currently active syndicate managers participated in the survey; every syndicate professional who has left this business (e.g. because of retirement) cannot be taken into consideration.

All of these limitations are inevitable, given the objective and scope of this thesis. The chosen sample size is considered to be sufficient in order to develop a representative opinion. Besides, the defined scope should be seen as an opportunity for further research, which could compare different currencies and issuer groups to the findings ofthis thesis.

Further limitations stem from the current position of the author as an active syndicate professional. This could potentially result in bias regarding the analysis ofthe survey outcomes. Aside from that, this might lead participants in the survey to respond in an untruthful way, given that no employer wants to give out inside information from its bank.

However, the author’s position can be stated to be a generally ambivalent issue in this research, given that an external academic researcher would find it difficult to access any information within this field. Moreover, an external researcher also would not be able to evaluate the quality of responses to the survey, nor would they know how to ask the right questions to develop a detailed and realistic analysis. In order to minimize the risk of receiving false answers on the survey, the approach of full anonymity was chosen. Despite the fact that the author was aware of the individuals who received the survey, those who participated were able to conduct the study without giving out any personal information. As a result of the high number of survey recipients, it is virtually impossible for the author to trace answers back to a particular respondent. These points were clearly explained to the participants before data collection commenced.

Given the complexity of the DCM syndication process, a clear limitation results from the restriction of this research to the aspects of process efficiency, fairness, and compliance with the law. There are various further perspectives that will not be analyzed because of the defined focus of this thesis. However, the lack of prior academic work on this topic means that it is actually highly beneficial to first generate a profound fundamental work, which can then be used as a starting point for future researchers.

Chapter 2 Literature Review

Following the previous arguments, there is no academic research that deals explicitly with the DCM syndication process. This requires a literature review structure that divides the process into its crucial aspects and investigates available literature within each field—otherwise, the literature review would not add much value for the reader. Recalling the focus on efficiency, fairness, and regulation, the literature review will be divided into these particular areas. Moreover, the limited research available on DCM primary markets makes it reasonable to also include perspectives from the ECM primary markets and adapt findings for the field of DCM syndication.

However, as it cannot be assumed that all readers of this research are familiar with the DCM syndication process, the first chapter of the literature review will provide a step-by-step description ofthe entire syndication process.

2. I) The syndication process

In accordance with the corporate finance literature, the broader process of a new issue begins with steps that include receiving the board’s approval or preparing regulatory aspects for public offerings (Ross, Westerfield, & Jaffe, 2010). Moreover, the legal documentation of a new issue plays an important role in practice. The common market practice, as presented by Woehe et al. (2013), is to establish a so-called Debt Issuance Program (DIP), which is a framework for a defined amount of potential bond issuances. The issuer then has the flexibility to issue bonds under the DIP at any moment, following a variety of pre-defined configurations in terms of maturity, currency, coupons (fixed rate note vs. floating rate note (FRN)), collaterals, call options, and so on. Another advantage is the cost savings, as compared to establishing so-called stand-alone documentation (the counterpart to a DIP) for every new bond transaction.

In spite of the undeniable importance of having every documentary prerequisite in place, this section of the primary syndication process will not play a distinct role in this research. This exclusion is necessary in order to focus on the technical process wherein the first interactions between the syndicate, the issuer, and the investors appear. Instead, DIP development is the responsibility of the issuer and their supporting legal advisors.

As a consequence, the scope of the DCM syndication process treated by this thesis is illustrated in Table 1 (ICMA Primary Handbook, 2016):

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Table 1: Sections of the DCM syndication process

I) Prior to transaction announcement

Firstly, the ICMA Primary Handbook (2016) proposes managing any outstanding legal issues. Accordingly, this means the separate formal invitation of the joint- lead managers (i.e. the banks that will execute the transaction), as well as their interest in conferring with legal advisers (either internal or external) regarding the individual necessity of each bank to conduct due diligence with the issuer. Moreover, at this stage, any mandated investment bank has to check with the issuer to verify whether any material changes to its DIP were undertaken.

In addition to the legal topics, this segment of the process includes two more sub-components: (non-deal related) investor meetings and the pre-sounding. The former aims to develop and maintain long-term relationships between the investor and the issuer. In this respect, several surveys have investigated the significance of face-to-face meetings and one-on-one interviews between the seller and an institutional investor and have concluded that this remains the most crucial origin of a long-term business relationship (Marston, 2008; Harvard Business Review, 2009; Storper & Venables, 2004).

The second aspect refers to the period of time before the public gets access to preliminary information about the new issue. Hence in times of high uncertainty regarding the size, duration, realizable price (i.e. spread over benchmark)[1], or receptiveness of the new issue, the approach executed by the syndicate banks is to seek feedback from a defined number of prospective investors, adding value to the banks. Following the argument of Ruari Ewing (cited in Euroweek, 2009, p.45), a member of the ICMA regulatory team, a coordinated approach of pre­sounding among the syndicate banks could even enhance the efficiency of the entire following process. Yet spreading non-public information to selective market participants after they have shown their willingness to receive that particular information (also known as wall-crossing) (Stocks and Hyde, 2012) is accompanied by a high regulatory and documentary burden, as will be further outlined in the following chapters of this thesis. Figure 1 summarizes the crucial points ofthe phase prior to the transaction announcement.

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Figure 1: Partial Syndicate Process Step 1: Prior to transaction announcement

II) Transaction announcement

Under the assumption that the issuer has decided to proceed with a new issue, this stage includes any deal-related tasks that need to be managed. In the first place, the issuer has to finally determine and communicate the initial transaction information to the potential syndicate banks, including each ofthe following bullet points, as stated in the ICMA Primary Handbook (2016):

1) Issuer name und name ofany guarantors
2) Any fungibility with outstanding bonds (i.e. for a tap)
3) Currency, maturity, interest basis, denominations, and ranking
4) Roles of each syndicate bank, fees, and underwriting commitment
5) Relevant selling restrictions
6) Retention or pot procedure
7) Whether bonds will include a withholding tax gross-up
8) Any disapplication of ICMA Primary Handbook recommendations
9) Any further essential information related to this transaction

All of these terms will play an important role in the next step, where the first
official information is given out to the market participants. For now, however, -nce these terms are defined, each of the invited syndicate banks has to confirm its participation to the issuer on a bilateral basis, before a syndicate consortium can be formed. Apart from this, the paying agent (not a member of the consortium)—as defined within the DIP—must be informed of the prospective transaction. According to Choudhry (2001), the paying agent is required for any DIP within the Euromarkets and provides administrative support to the issuer (i.e. issuing securities and transferring any funds between issuer and investors over the lifetime of the issue).

Furthermore, the aspect of underwriting fees has been discussed by Melnik and Nissim (2003). Their research investigated the major components that shape issue costs for the issuer (including the underwriting fees) of bond issues within the Eurobond market. Their findings show evidence that credit risk and maturity are the two main factors impacting the fee, which is demanded by the investment banks in order to execute a primary transaction. The issuer decides on the amount of fees that will be paid and requests consent from each prospective joint-lead manager.

Another crucial aspect is the type of deal execution. As explained by O’Malley (2015), in practice, either a retention process or a pot/book building/syndication process is chosen for a debt issuance. These two structures differ in regards to the awareness of market participants (i.e. from the perspective of a marketing tool), order and price transparency, execution effort, risk distribution, and flexibility for the issuer and the deal arrangers. Table 2 displays an overview of these two approaches.

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Table 2: Comparison retention vs. book building

On the whole, the deal arrangers (i.e. investment banks) retain a fixed amount of bonds at a price determined by the retention process; conversely, under the book building process, the entire order flow is collected within an electronic book, until the required volume of orders is given and the book is closed at an adjusted price, which reflects the total demand within a defined range (Organization for Economic Co-Operation and Development, 2002).

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Figure 2: Partial Syndicate Process Step 2: Transaction Announcement

Figure 2 outlines the most important key points during the transaction announcement.

III) Bookbuilding and launch

Once the syndicate banks and the issuer confirm the terms and conditions, the first step towards making the transaction public is referred to as the announcement. According to the ICMA Primary Handbook (2016), such an announcement ought to be based on public knowledge (i.e. available to all market participants at the same time), even if not required by governing law, and it should state all of the terms defined in the previous section (see II) Transaction Announcement). Furthermore, most of the syndicate banks provide the official announcements to trading and informational platforms, such as Bloomberg and Reuters (i.e. International Insider Screen (IIIA), an official overview of third-party new issues (Rees, 2004)).

A transaction based on a full-retention approach would result in a single announcement including the key terms (issue size, price [i.e. spread], maturity date, joint-lead managers) without any further public messages. Figure 3 shows a practical example ofa retention-based transaction (Bloomberg, 2016).

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Figure 3: Practical example ofa retention-based deal announcement

In contrast to this procedure, the book building approach follows a different chronology, under which the initial announcement has the objective of notifying market participants of the upcoming transaction. If, for instance, the first announcement is associated with tentative pricing information, it is proposed by the ICMA Primary Handbook (2016) and executed within practice. This price range is referred to as the Initial Price Talk (IPT). Consequently, the phase following the initial announcement and prior to the actual order book opening is known as the Indication of Interest (101) stage. Accordingly, the IPT is defined as a (wide) spread range above the benchmark and reveals flexibility in terms of price discovery.

Figure 4 and Figure 5, displayed below, show practical examples of an initial announcement, as well as the public message for the following I0I phase (Bloomberg, 2016).

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Figure 4: Practical example of an initial announcement of a pot transaction

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Figure 5: Practical example ofan I0I/ IPT message

Once a transaction has been made public through an announcement, the ICMA Primary Handbook (2016) proposes that any necessary documents to make an investment decision (e.g. offer documents, issuer information, program documents) should be distributed to the targeted investor group. In practice, an announcement can be distributed one day before the actual deal (two-day execution) or on the same day as the deal (one-day execution). Moreover, the syndicates can opt to send a relative value message, which is usually distributed simultaneously at the 101-stage. Figure 6 shows an example of such a message, which is expected to support the investor in his relative value analysis (Bloomberg, 2016).

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Figure 6: Practical example ofa comparables message

The next step of the book building process is called opening the book; this closes the Ι0Ι phase and changes the IPT to a spread guidance. Just like with the IPT, the spread guidance is based on a spread range above the benchmark, even though it has been adjusted by the syndicate banks, in accordance with the book development (i.e. demand and price sensitivity). As outlined by Gemloc (2013), the higher the demand (i.e. volume of orders in the electronic order book), the more aggressive the syndicate banks can be when tightening the spread from the IPT. This step is discussed and decided by the syndicates and the issuer and then is simultaneously communicated to the market via a message (see Figure 7) (Bloomberg, 2016).

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Figure 7: Practical example ofa book’s open message

Based on the further book development (i.e. order inflow and price sensitivity of investors), there will be one or more further updates (see Figure 8 and 9) that inform the investors about the order inflow, further spread adjustments, and final deal size if it has not already been defined (Bloomberg, 2016).

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Figure 8: Practical example ofan update message (1)

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Figure 9: Practical example ofan update message (2)

Finally, the syndicate banks set the final details and close the books at a previously communicated time. From now on, no further orders are accepted into the order book. This step can be accompanied by a simple book’s closing or a launch message: the latter is more sophisticated and reveals an overview of all transaction details (see Figure 10) (Bloomberg, 2016).

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Figure 10: Practical example ofa launched message

With regards to timing, the ICMA Primary Handbook (2016) suggests that a book ought to be open for at least 60 minutes and that the update including the closing time should be published at least 15 minutes before the actual book closing. Figure 11 shows the total spread tightening process over the different phases of a book building process:

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Figure 11: Spread amendments during a new issue

The ICMA Primary Handbook (2016) recommends that, before the allocation process begins, any individual allocation interests or issuers priorities are notified as early as possible (i.e. ideally during the book building process). More specifically, discussions should take place between the syndicates and the issuer regarding specific investors for the book and their demanded minimum allocation. All of these proposals should be drafted and sent to the issuer so that they can make a final decision.

Moreover, the electronic order book generates full transparency among the joint- lead managers in terms of orders. This is known within the ICMA Primary Handbook (2016) as a name give-up. Concerning transactions based on the retention approach, banks are not required to disclose the names of their investors unless there are any significant reasons to do so. In contrast, any disclosure of investor names in both the pot and retention approaches must be based on prior approval by the investor. In the case that the investor does not give their consent, the order will be stated as an X-Order, disclosing only the sector (e.g. fund manager, bank, etc.), the geography (e.g. Germany, UK, etc.), and the volume.

In the end, the more transparency an investor is proposing regarding the background of the order (i.e. real money, trading, etc.), the more efficient is the allocation executed by the syndicates. Figure 12 displays the most important points ofthe bookbuilding and launch phase.

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Figure 12: Partial Syndicate Process Step 3: Bookbuilding and launch

IV) Allocation and allotment

If once the books are closed it is discovered that they have been oversubscribed (i.e. amount of orders in the book > required funding/issue size of this transaction), the syndicates are responsible for allocating the final bond issue with an appropriate percentage given to each investor. Before this is executed through an allocation call among the syndicate banks, a reconciliation call usually takes place first, in which the correctness of all orders (i.e. volumes, dupes, limits, demanded swaps) is verified. According to a paper by Gemloc (2013), the actual allocation can be executed through the following three approaches:

I. Allocate each investor a standardized percentage basis

- Each investor receives 50% of the actual order

II. Allocate each investor an individual percentage based on their quality

- InvestorA (high quality) receives 80% while Investor В (low quality) receives 10%

III. A combination of both these approaches (i.e. individually designed by the syndicates)

In this respect, the ICMA Primary Handbook (2016) emphasizes that shaping the allocation should be the responsibility of each joint-lead manager. Once the syndicate banks have agreed to the allocation, a simultaneous message should be sent out to all investors confirming that their orders are officially allocated. In practice, this is fulfilled by another message, which is distributed by the joint-lead managers (see Figure 13) (Bloomberg, 2016).

illustration not visible in this excerpt

Figure 13: Practical example ofan allocation message

It is important to mention that the issuer has to give their final consent on the final allocations before they can be considered to be truly final. Accordingly, both the draft allocations and the draft allocations available message for the investors are first sent to the issuer. Figure 14 summarizes the most important points in this section ofthe process.

illustration not visible in this excerpt

Figure 14: Partial Process Step 4: Allocation and allotment

V) Pricing

The final stage of the syndication process includes the pricing of the new issue (i.e. if fixed rate) and an inherent pricing message, which the ICMA Primary Handbook (2016) proposes should be distributed simultaneously and as quickly as possible following the actual pricing (see Figure 15) (Bloomberg, 2016).

illustration not visible in this excerpt

Figure 15: Practical example ofa pricing message

VI) Other aspects of the syndication process

There are other factors that must also be taken into account in order to display a full picture of the syndication process. First of all, the banks within the consortium divide certain roles in order to allocate tasks as efficiently as possible. Accordingly, the following roles and duties are usually assigned to one syndicate bank at a time (although exceptions exist):

- Technical lead manager
- Responsible for organizing the documentation process and distributing documentation among the leads.
- The billing and delivering agent (B&D Agent)
- Responsible for technically running the electronic book (i.e. technical setup, clearing potential dupes, and false orders) and for the settlement ofthe allocated orders.
- The screen agent
- Responsible for generating, proposing, and sending deal messages and updates to the other syndicates, as well as to third parties (i.e. Reuters and Bloomberg).
- The duration manager
- Responsible for executing any demanded hedges or swaps from orders within the order book. If the duration manager offers the swap for the issuer, the syndicate manager usually opts to run the pricing call.
- The stabilization manager
- Responsible for conducting stabilization of a new issue. According to O’Malley (2015) and Gullifer and Payne (2015), stabilization is a process in which a previously selected joint-lead manager is chosen to buy bonds from a recent new issue in the secondary market in order to absorb short-term volatility.
- Given that stabilization involves direct market manipulation, it is subject to a number of regulatory aspects (i.e. defined time interval, disclosure, and documentation requirements).

All of these duties are interchangeable for different new issues, but once they are determined in the phase before an official announcement, the roles do not change.

It is also important to differentiate between the kinds of participation a bank may have in a new issue. While the process above focuses on all duties of a joint-lead manager position, banks can also participate in a new issue by being appointed as a co-lead manager (ICMA Primary Handbook, 2016). In this case, a co-lead would not have any responsibilities as far as supporting the technical execution of the deal, aside from delivering orders once the IOI or books open phase had begun. In short, this role can be considered to be a junior role, with a much lower underwriting commitment.


[1] Given that, in practice, bonds are priced based on a spread in basis points versus a benchmark, the terms of price and spread will be used interchangeably.

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Investigation and Evaluation of the Primary Market Benchmark Syndication Process in Debt Capital Markets
The University of Liverpool
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Primary Market, Syndication, Bonds, Anleihe, New issue, Neuemission, DCM, Debt Capital Markets
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Alexander Malitsky (Author), 2017, Investigation and Evaluation of the Primary Market Benchmark Syndication Process in Debt Capital Markets, Munich, GRIN Verlag,


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