Debt bankers are warning of a rise in pulled deals as a result of the EU's new Market Abuse Regulation ("MAR"), which could have a much wider scope than originally thought and is already making investors reluctant to share information with investment banks.
The far-reaching scope of the regulation has shocked bankers on both sides of the Atlantic, as even a US dollar domestic bond could fall under MAR for some US issuers.
Europe's capital markets bankers fear the worst of the disruption to their long-standing syndication process is yet to come, with supportive market backdrop and the usual summer supply lull masking larger problems.
"The regulation is overshooting," one European bank's head of treasury told IFR.
"Information is the key to efficient capital markets, and MAR restricts information. Couple that with the poorer liquidity we have now, and when markets are weak, execution will be much more challenge
The biggest concern for underwriters is that without being able to privately gauge appetite for deals – particularly those for infrequent borrowers or debut transactions – there will be more transaction failures.
"The concept of failing to bring a deal to market will have to gradually change, because there will be more announcements before investor meetings take place," said one head of FIG syndicate in London.
In fact, behaviour has already started to change to take into account the new rules. An announcement of investor meetings by Canadian insurer Fairfax Financial in early July stated a "euro deal may follow during 2016 subject to market conditions".
The addition of "during 2016" was a direct result of MAR, according to one mandated banker, who added that previously there was no need to publicly announce investor meetings at all.
Many US issuers fall within the scope of MAR because it applies to those with securities trading on a multilateral trading facility, such as Luxembourg's Euro MTF and Ireland's Global Exchange Market, which were unregulated under MAD, according to a client memo from law firm Davis Polk & Wardwell.
Unless US issuers decide to delist securities from those exchanges, US bond bankers could have to completely overhaul relatively relaxed US market practices around soundings and wall crossing when doing deals for such issuers.
The new rules could also hamstring the private placement market – which did not fall under the previous MAD regime but will be captured by MAR – as pricing grids that issuers send to investors are not deemed public unless they are published on an exchange, making bilateral negotiations tricky.
Admin, Admin, Admin
The new rules are certain to create a laundry list of extra admin for both buy and sell sides.
Issuers and underwriters now need to ensure they have in place procedures for recording when information is conveyed to investors. They also have to register all of the recipients of material non-public information, which should not be a problem for larger banks that have Chinese walls between the private and public sides, but will be for smaller banks that have origination and syndicate officials on the trading floor.
MAR even forces banks to record when they believe an investor has placed an inflated order, a requirement intended to tackle market manipulation but a logistical burden in a market where the practice is rife.
A banker selling Royal Bank of Scotland's $2.65bn Additional Tier 1 trade recently said that of the 500 orders he expected to receive, he knew over 200 would be inflated.
The same banker said the number of fields on a form his firm required him to fill out after a call with an investor had now risen to 31 from nine. A lack of consensus on best practice is forcing all involved to err on the side of caution.
The European Securities and Markets Authority has released guidelines for investors on best practice in receiving soundings, but attempts at common guidelines for DCM, syndicate and issuers themselves have so far hit a dead end.
A number of law firms met recently to work out some common compliance guidelines for their issuing clients but failed to reach an agreement, according to two people with knowledge of the discussions.
"Given the ongoing uncertainties around MAR's detailed practical application, ICMA has encouraged law firms to confer on their understanding of the rules and is also facilitating bank deliberations in this respect," said Ruari Ewing, senior director, primary markets at the International Capital Market Association.
"Industry consensus is what one ideally seeks – not least to provide practice clarity to borrowers – but ultimately it is a question of what is realistically achievable over any timeframe."
There is at least one alternative for issuers hoping to avoid some of the hassle. The high-yield market has already seen one instance where a company has effectively circumvented the new rules. The UK's Mydentist issued a bond in July that it listed on the Channel Islands Securities Exchange, a non-EU exchange that falls outside the scope of MAR, having listed its previous bonds on the Irish Stock Exchange.