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When and How to Use Syndication to Issue Domestic Public Debt? Baudouin Richard Gemloc Peer Group Dialogue September 23, 2010
When and How to Use Syndication
to Issue Domestic Public Debt?
Baudouin Richard
Gemloc Peer Group Dialogue
September 23, 2010
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• Current practice
• Rationale for using syndication for domestic currency
denominated issues
• Factors contributing to successful syndications
• Conclusion
Outline
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1. Syndications used to apply only to external debt b/c foreign investor base:
– is less known to the DMO
– requires more marketing effort
2. In the OECD, since ’99, syndications have also been widely used for issuing
domestic debt
“domestic debt” = debt denominated in the domestic currency
placed both in the country and abroad
3. Recent illustration of innovative use of syndication: Mexico
Current Practice
Examples
Occasionally Sweden
Always a portion of every issue Austria, Slovakia
Always when opening a new
benchmark bond
Belgium , Finland, Greece, Ireland,
Netherlands (DDA), Portugal, Spain
When launching a new instrument France, Germany, Italy, Korea
Syndications are always complemented with reopenings through auctions
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Syndication:
• Achieves four things which an auction cannot do:
– Larger size
– Flexible timing
– Diversification of investor base
– Firm secondary market prices
• Has two ancillary benefits:
– DMO Marketing
– Strong PD motivation to perform
Rationale for
Domestic Market
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A syndication allows to place larger amounts than does an auction
1. Investors are more attracted by syndications than by auctions
– Easier price discovery (book building)
– Lower risk of winner’s curse (uniform price)
– Better liquidity (larger size; balanced distribution)
– Expectation of (small) capital gain (firm secondary market prices)
2. PDs are more motivated to find buyers for the securities
– Commission
– League table
3. A syndication can be done when the timing is right
– (next slide)
Larger Size
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A syndication can be done out of the auction issuance calendar
• When market conditions are right
• On a date chosen by the DMO at its discretion
Flexible Timing
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A syndication provides an opportunity to the DMO to:
• Widen its investor base
– PDs marketing
• Increase the transparency of its investor base
– PDs order book
• Strengthen the relationship with some selected investors
– when giving an allocation in spite of oversubscription
Investor Base
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A syndication offers 2 opportunities for secondary market prices:
1. The appointment of lead managers makes a few designated PDs
specifically responsible for ensuring that prices stay firm during a
certain period.
– The ideal outcome is when an issue’s yield decreases 1 or 2 bps after
launch. When investors expect this to happen, their capital gain is not an
opportunity cost for the DMO.
2. The allocation of orders allows to strike the right balance amongst
holders of the security between traders and buy and hold investors.
Firm Secondary
Market Prices
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1. Syndications are an opportunity to do road shows
– “Deal related road shows”
– Opportunity to advertise the country’s fundamentals and debt market
2. Syndications are widely reported in the press
– Opportunity to demonstrate the DMO’s expertise and professionalism
DMO Marketing
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This applies when the DMO informs its PDs that :
1. The best performing PDs will be appointed as lead managers, all
other things being equal
– assuming equal degree of expertise in managing syndications
2. Membership to the syndicate is reserved for PDs
Strengthening
PDs’ Motivation
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• Selection of lead managers
– Complimentary strengths
– Not too many
• Commissions
– DMO should pay going market rate
• Structure of the syndication
– Pot system for lead managers
– Strategic reserve for co-managers
– Full transparency to the DMO of PDs’ order book
• Investor Base
– DMO should play an active role in: o directing PDs where to look for orders
o allocating orders
Factors Contributing to
Successful Syndications
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Syndications can be a powerful issuance instrument
Usual arguments for the use of syndication in emerging markets:
• Diversified investor base– Ability to attract either foreign investors or a varied group of domestic
investors that may not participate in regular auctions (e.g., pension funds,
mutual funds), or both
• Greater liquidity– Ability to place larger volumes of medium and long term bonds faster
• Improved price discovery– Ability to achieve price formation in markets where secondary market prices
are unreliable. Placing first tranche through a syndication gives participants a
clearer idea of how to price an issue in subsequent auctions.
Conclusion
Selected topics for discussion:
• Are syndications always valid for EMEs?
• Are there minimum prerequisites that need
to be considered?
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Topics for
Discussion
