Adding value to new bond issues is a relationship business

Dan Barnes Welcome to Primary Markets TV – I’m Dan Barnes. This is your update on new issues in the equity and fixed income space. Joining me today is Santino Bibbo, managing director at Cabrera Capital Markets, and we’re going to be discussing how he adds value to the new issuance process. Santino, welcome to the show.

Santino Bibbo Hi Dan, thanks for having me.

Dan Barnes So you guys have been involved in deals as co-manager of Morgan Stanley, Citi and Bank of America. How would you characterize investor appetite at the moment? And what do you base that on?

Santino Bibbo You know, it’s been a great start of the year. A lot of deals have seen a lot of support from investors. This month we saw roughly a 130 billion price in the investment grade US and it was a jumbo deal price from 7-Eleven. They started marketing the bonds in Asia, and by the time you got to price in New York, the deal was six times oversubscribed with almost 65 billion in book size. The way I measure appetite, books is one, but also how the market is performing. And we look at the usual concessions, which is basis points where dealers are required to price the transaction and if we compare January versus December. Essentially, we have the same level. Right now the average concession for the month is minus three basis points. Back in March of last year, we would see concessions coming in double digits. So that gives you a measure on the leverage that investors have right now. And then finally, looking at bond fund flows this week, we saw another six billion in net inflows in investment grade bond funds, and that’s the 11th consecutive month that we see that. So strong appetite, strong market and great performance. So issuers are confident they can get deals to market right now.

Dan Barnes And the deals that you’re involved in, explain to us, how do you add value to the process?

Santino Bibbo Sure. So typically, if we work as a lead manager or co-lead manager, we work with the lead of the syndicate, structuring the offering, providing marketing ideas and views. But in many cases, the bread and butter of this firm, Capera Capital, is to create a diverse base of investors for our clients. Typically here at the firm, we have 400+ investor account relationships, of which I’d say 65% are represented by second and third year accounts. With that I mean, investor accounts have 500 billion or less. What we do is have some of these accounts in order to create some more liquidity and provide more transparency on the pricing conditions. So this is very important and in the long term works really well for issuers, because, again, you don’t want your bonds to be controlled by just a few investors. So that’s how we create value.

Dan Barnes Typically in primary markets with fixed income as opposed to equities, and equities new issuance can take place over up to two weeks, but in primary markets it’s more sort of usually within a day in fixed income. So I’m guessing that there hasn’t been a lot of impact from people remote working as they might have been for the sort of road shows we see in equities.

Santino Bibbo No, it has not. And we work with a lot of our accounts throughout our secondary desk. And we’ll look at a pre-marketing approach, understanding what’s their preference. I think remote has been fine, and as I said, if you look at the volume last year, we had a record year. So I don’t see any change going forward.

Dan Barnes How are middle market firms building relationships in the market in their current environment then?

Santino Bibbo So one thing that we did last year, and certainly we’re going to work on that as well this year is strengthening our relationship within the broker dealer community and with large banks as well. Perhaps, in certain deals, we did not have the expertize needed because of the structure or we worked on inquiries. Those are transactions where the interest comes from the investor, and then we work backwards with the issuer trying to create the deal. So relationships with some of the large firms; that’s one way. The other is really paying attention to the capital structure of our clients and making sure that we follow the dynamics, that we understand what is their need, and that we provide tailored solutions. Charter Communications last year started what they call a Spectrum Community Loan Fund, essentially a fund that would invest in CDFIs and would support small businesses in a lot of the local communities. We acted as a financial advisor on that, and that’s core to our mission, because we supported some of the businesses that had a difficult time last year.

Dan Barnes Compared to last year, which, as you said, was a record. How do you think this year is going to look?

Santino Bibbo If we look at the investment grade market certainly it has underperformed for January and I believe the Bloomberg Barclays US investment grade index is down 1% for the month. So high yield and municipals, especially leveraged loans have performed better. But let’s face it, US investment grade bonds is a great place to be and provides a great return for a lot of investors. And that’s why we see this appetite that keeps coming back.

If we look at the rest of the year, there’s a lot of volatility in place due to the different variances on the vaccines and also on the other side, we have a new administration here in the US, so they start touching the tax code again, perhaps we’ll see some changes on the funding plans for some of the companies. But all in all, I think this is going to be an active year. Certainly, investors are ready to support issues that will bring deals to market.

Dan Barnes That’s fantastic. Santino, thank you so much.

Santino Bibbo It is my pleasure. Thanks for having me on, Dan.

Published on April 8, 2021