Origination
Exchange of information
Banks permanently provide indicative prices and market information to prospective issuers. This allows the potential borrower to remain up-to-date on the terms and conditions on which the he could obtain financing, and also on how well an issuance would be received by the market. The bank on the other side will stay informed about potential projects of its prospect.
Proposal
The proposal, which ideally will result in a mandate for managing a new bond issuance, can be delivered in two different ways.
Pitching
It can be done at the initiative of the syndication desk's origination team, when the client, the potential issuer, shows an interest in borrowing or because the bank detects an interest or finds the market conditions advantageous.
This approach is called pitching and it is frequently used when the bank has an existing working relationship with the potential issuer, either through deals of the past, or by extending an existing relationship with other services of the bank (sales, trading, mergers & acquisitions …).
Request for proposal (RFP)
The issuer may also, when the issuance project is already concrete, decide to put several potential arrangers into competition by making a request for proposal. This allows him to approach banks with which he had perhaps never worked before and by the same occasion to have competition work in his favor and thus obtain better conditions.
He will send the candidates a questionnaire, in which they will have to demonstrate their ability to carry out the proposed mission. The questions, of which the quantity and degree of detail varies from case to case, may relate, among other things, to the issuance modalities proposed (market timing strategy, pricing, rating and placement of securities), to the candidate's capacities (recent issuances) or to legal and financial aspects of the mandate (fee structure …).
The syndication process
Once the mandate has been obtained, the syndication period begins. It is divided into several phases:
Constitution of the syndicate
The bank which has been mandated to be the lead manager for the issue will reach out to other institutions, which often competed in the effort to obtain the mandate, to be part the syndicate of issue. The formation of a syndicate meets the need to reduce the financial risk incurred by the lead manager in the event that the issue ends up not being fully subscribed.
Presentation to the sales force
After the syndicate has been formed, the syndication desk will meet with the bank's institutional client sales team, who has close relationships with institutional investors, in order to exchange with them on the upcoming issue.
Presentation to investors (roadshow)
Organized jointly by the lead manager and the issuer, the presentation to investors is made by one or more teams composed of people from both companies, most frequently analysts.
Depending on the issuer, the issuing currency (or currencies) and investors that are targeted, the roadshow may take place in several countries or even on several continents. Its purpose is to present both the issuer and the proposed issuance to investors, in order to create interest and also to gather the feeling of the potential subscribers vis-à-vis the issue. These presentations are usually accompanied by a series of one-on-one interviews between financial analysts and key investors, which are an important source of information for both sides.
Price discovery (price talk)
The feedback from the investors gleaned during the roadshow allows the lead manager to get an idea of – and then communicate on - setting an initial price level – which will still be indicative - for the issue. Depending on the acceptance by investors, adjustments will be made until the announcement of the definitive issue price.
Building of the order book
Once the roadshow is underway and the first, indicative price level for the planned issue has been communicated, the lead manager and the other banks of the syndicate will start to collect subscription orders from the investors they have commercial relations with. Oftentimes, when a big institutional investor has relationships with more than one bank in the syndicate, he will split the order amongst all of the banks he works with.
Order book closing and final pricing
After the end of the roadshow and the closing of the order book, the subscription orders received from investors are confronted with the volume that the issuer wishes to borrow. If the issue is, as is often the case, oversubscribed, meaning that the volume of subscription orders exceeds the volume to be issued, adjustments may be made both at the level of the issue price and at the level of the volume to be issued, as the issuer may decide to borrow more than initially planned if the conditions are good.
Investors will then be communicated their allocations, which is the fraction of their initial subscription order they will effectively get to buy. The size of the allocation depends, of course, on the ratio between the overall volume of subscription orders and the volume to be issued.
Grey market
Once the allocations are known, and before the issue is actually issued on the market, buying and selling transactions are already taking place on these securities. These sales and purchases are called grey market transactions and they take place between the date the pricing and volume are officially known (the announcement date) and the issue date, which is the date on which the issued bonds are delivered to subscribers, and when they start to be negotiable on the secondary market.
Secondary market
Generally, it is part of the syndicate banks' contractual obligations to ensure the issued bonds' liquidity on the secondary market for a certain period of time to get the issue off to a smooth start. Once the issue has been successfully launched and is traded in the secondary market, the syndicate dissolves.
