Thursday, April 14, 2016


As forecast, I was going to spend a good deal of time today talking about when an underwriting isn't an underwriting, but I think I might hold fire for a moment as there may have been a development or two that renders the entir discussion moot.  Rumors are spreading that this thing might actually get done.  In fact here are rumors that it might be over subscribed!

Now before we all get giddy, please understand that a bit of "salting the market" is a time-honoured tradition in this business,  If I remember correctly I might have done a bit of that myself a ways back but the ol' memory is not what it used to be.  Then again, any manager worth his/her salt always has a few friendly members of the press salted away just in case a favorable word is needed here or a dampening of negativity needed there.  I seem to remember one young lady from---well, that doesn't matter--that cost me a bottle of Bolly one night but in the end she got the story right, the deal got done and no harm, no foul.  Of course that doesn't go on any more I am sure....

So, good luck to them but in case things don't go quite as expected, here's something to keep in mind.

Remember, "underwriting" means that in exchange for being awarded the deal, the underwriters commit to supply all of the funds to the borrower irrespective as to whether the paper can be placed with end-investors or as we say in the trade, "firm hands."  OK, it is for that you get paid the Big Bucks, but with a credit risk like this there are added complications to which we have alluded.In these times, I would be quite surprised if the various central banks who are regulators to the underwriters aren't looking at this one very carefully.  Let's take an extreme scenario.  Suppose J.P. Morgan has an underwriting commitment of $1 billion but at the end of the day can only place $500 million in firm hands.  How happy would the Fed be.  It's not the end of the world but half a billion isn't chump change either.  The answer.  Not very, especially since the quality of bank exposure has been topic 1 or 1a for the past 9 years.  This makes the Fed appear to be not very successful in its oversight and the Fed doesn't like that.  Now Morgan can hold on to the bonds or sell them at whatever price is out there taking the loss but more importantly, wrecking the secondary market and giving the Argies one hell of a black eye and probably prejudicing any further issue(s) that might be contemplated...which by the by will almost certainly not include Morgan.  It is a situation to be avoided if at all possible.

Now under normal circumstances with the every day kind of issuer and underwriter can do one of two (or both) things.  Either the issue can be reduced in size or the anticipated terms sweetened to attract more interest.  But not here.  The size is THE size and the coupon is THE coupon.  Oh yeah, the terms can be sweetened by providing more fees (you can bet the standard fee schedule does not apply here)  which comes out of the underwriters' pockets or you can try to anticipate that there might be problems and form a contingency plan.

It is not unknown in this business for underwriters and a "difficult" client to negotiate, outside of the normal documentation, a "hold harmless" agreement whereby in the event that the issue is not fully placed the issuer agrees to take the unsold portion off of the underwriters' books.  Is this part of this transaction?  I have no idea but it would not surprise me.  It would not be illegal unless the laws have changed since I was in the business...and I never did anything illegal.  What does this mean and what might be the ramifications?  Tomorrow.  I'm going over to see Remy.  I won't have another opportunity until the weekend.

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