Secondary market liquidity As liquidity drained from the market in June, it was the tried and tested liquidity providers that investors relied on, ensuring that Royal Bank of Scotland topped the sterling investment-grade bond survey once again.“By the end of June it was noticeable that investors wereturning to a core group of liquidity providers for execution, asincreased market volatility translated to poorer liquidity for all,”says Paul Hawkins, sterling trader at the bank in London.The volatility in June followed a patchy three months, he says.“Volumes in April were lower than average. May was busier, asthe hunt for yield began in earnest, driven partly by a lack ofprimary issuance and a retracement from the February weakness.Unsurprisingly, given the strength of the market, the triple-B sectoroutperformed: recent deals from issuers such as Hutchison,St Gobain and Glencore all rallied signifi cantly during May.”In the primary market, media was the busiest sector over thepast three months. BSkyB and Daily Mail both came to the market,pricing new issues at the tight end of guidance, thus limitingsecondary market performance when they broke.“This prompted a reappraisal of their existing shorter deals,”says Hawkins. “In both cases the lack of performance of thenew deals coincided with a strong rally in existing debt. Thetone of the market was such that investors took the view thatcredit curves were too fl at in these names upon pricing of thenew issues.”The May rally, heightened mergers and acquisitions speculationand the beginning of the sell-off in government bonds prompted strong demand for transactions featuring change-of-control covenants,even when there was only a remote prospect of a takeover.Issues from companies including Rentokil, ITV, WPP, Reed andNext saw cash prices trade well into the low 90s, guaranteeing significant upside in the event of a non-investment grade takeover.“The technical nature of the sterling market was again highlightedby equity market speculation regarding bids for Hammerson andSlough Estates,” says Hawkins. “As soon as there was speculation in the equity market, change-of-control bonds went very wellbid, while older, less covenanted deals widened.”Credit derivatives were responsible for added demand forsterling assets as the rally continued: basis buyers looked to buysterling bonds offering a negative basis against credit defaultswaps. This fuelled demand at the shorter end, but a lack ofdemand at the longer end meant traditional UK investorsremained the dominant force driving demand and supply.Over the quarter spreads are little moved, but the gains of Maywere being erased by the fi nal week of June. “My ratio of bids tooffers was almost reversed from May,” says Hawkins.METHODOLOGYIncisive Research polled 40 of the largest investors in sterling-denominated investment-gradecorporate bonds in June. Respondents were asked to nominate their top five banks making marketsin two categories: 1) for deals the nominated banks brought to market themselves and 2)for all bonds regardless of underwriter. Respondents were then asked to specify a top five withinboth categories a) specifically for all financial bonds (i.e. all banks and insurance companies) andb) for all other corporate bonds.The results were aggregated, with five points awarded for a first place, four points for a secondplace, down to one point for a fifth place vote. The results are printed alongside bookrunnerleague tables for purposes of comparison.The aim of the survey is to provide issuers with an idea of which banks are most willing tosupport deals in the secondary market – and, by implication, which are not.The next £ investment-grade survey will appear in Credit’s November issue.View the PDF Adobe Acrobat - PDF Files To read Adobe Acrobat files you will need to download the Acrobat reader software. This is available from the Adobe web site. Copyright statement As a subscriber/user of this website, the PDF you are about to view is made available for personal use only. Under the following terms you are granted permission to view online, print out, or store on your computer a single copy, provided this is intended for the benefit of the individual user. Should you wish to use multiple copies of this article, please contact Customer Services. © Incisive Media Ltd 2007. All rights reserved. No parts of this publication may be reproduced, stored in or introduced into any retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the copyright owners....
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