new to debt syndication
Hi all - I hope this question is posted in the correct forum topic. I am new to the debt syndication world and learning now how to calculate concessions on new issues. I've been reading about 3s/5s curve and 8s/10s curve, and having a hard time figuring out what exactly those are, and when to use them when trying to calculate a new issue concession (straight forward way - for relative value, comparing outstanding issues with comparable tenor).
Any help would be greatly appreciated.
Many thanks
When someone says "3s-5s" curve, he means the spread pickup when extending from 3yrs to 5yrs. New issue premium is calculated by taking the spread of a new issuance (lets say 10yr Microsoft) and checking where the old Microsoft 10yr bonds were trading pre-issuance.
Bingo. And to give a numerical example:
Let's say AT&T wants to issue a new 5-year bond and only has one bond trading in the market: a 3-year at T+75. Verizon, on the other hand, has newly issued 3-year and 5-year bonds trading at T+85 and T+120, respectively.
So if you're advising AT&T on its new 5-year issuance and you are trying to figure out what the market might require, you would look at Verizon's 3s/5s curve, which implies that investors want an additional 35bps to extend 2 years. So you would tack on ~35bps to AT&T's existing 3-year bond (possibly a bit less, since the bond trades at a lower yield than the equivalent Verizon bond, implying AT&T has a better risk profile....but let's not overcomplicate), and get a prospective new issue spread of T+110bps for a new AT&T 5-year.
On top of that, you'd want to add your new issue premium (also called a new issue concession). New issue concessions are a bit of an art and ultimately are the yardstick of supply/demand for a new AT&T -- essentially, in theory a new AT&T 5-year would be T+110bps, but that's before you take into account supply/demand dynamics. So if people really, really, really want to buy a 5-year AT&T bond (maybe because AT&T hasn't issued a bond in a long time, or because they have nothing in the 5-year part of the curve), you might be able to price inside of T+110bps, at say T+105bps or T+100bps. But if investors are very cautious, or there's been a lot of supply lately (eg Verizon, a very similar company, just sold 5-year bonds yesterday), you might need to offer investors a little extra to get them interested -- say T+115bps or T+120bps.
This stuff is really more art than science. Bottom line is you start with as many data points as possible, filter for the relevant ones, interpolate (or extrapolate) what that means for your client, and then figure out how more qualitative factors affect them.
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