Saudi Aramco’s debut international bond sale drew $100bn of investor orders for the initial $10bn available to buy, smashing records for an emerging-market bond sale. How does that imbalance between orders and allocations happen, and what does it mean?
How does a company issue a bond?
In this case, JPMorgan and Morgan Stanley are the global co-ordinators, meaning they are running the show. Citi, Goldman Sachs, HSBC and NCB Capital Company are helping out as “joint bookrunners”.
A so-called roadshow was held last week, where bankers and Saudi Aramco executives travelled around the globe to talk to investors, answer questions and drum up demand.
Bankers provide the first suggestions of how much the bond will yield and in turn, investors respond with early indications of interest — a sort of hypothetical order to buy the bond if the final price matches what the bankers had said. By the end of last week those indicative orders had reached about $30bn.
So, the banks’ work is done?
Not quite. The next step for the bankers is to firm up the price. They send out a summary to investors with details about each chunk of the bond, its maturity and its likely price. This is known as initial price talk.
Investors now submit fresh offers to buy the bond — and how much of it they want. But here is where it gets tricky, as Paul McNamara, investment director at GAM, a Swiss-based asset manager, points out.
Investors already know there are more investors wanting to buy the bond than the banks can sell to. As a result, investors routinely ask for more than they actually want, expecting the banks to sell them only a sliver of their order. “Once you get into a cycle where the order book is seen as reflective of demand, it creates demand in its own right,” says Mr McNamara.
Which investors get what?
It depends on who you are and what you are asking for. If you are a large and important client to the bank selling the bond, then you are more likely to get what you want. Similarly, if you are asking for just a small amount, it is easier to fulfil that order.
Investors say small and midsized fund managers who want to buy a decent amount are often stuck. “It’s like game theory in a way for us, as a medium-sized client,” says Mr McNamara of GAM, which had about $130bn of assets at the end of last year. “We have a final amount we’d like to get. But someone like Pimco or the big sovereign wealth funds will get a better allocation because of their size and the fact that they are regarded as strong hands that won’t try to flip the bond” if the price rises.