Bond Ipo

Discussion in 'Professional Trading' started by luisHK, Apr 20, 2017.

  1. luisHK

    luisHK

    Hi

    I've had a banker calling me several times (sollicited ) the last few mornings to offer bonds, including bond Ipos, mostly USD bonds from state owned chinese companies.
    I end up with quite short sleep but at least can learn about those bond ipos, the little knowledge I had before mostly came from John Lefevre's Straight to Hell.
    So my understanding is a small professional investor has close to zero chance to get allocation in a good IPO, but conditions are decent compared to buying on the secondary market (fwiw 0.5% commission from IPO price, no custody fees nor fees on payments. Not too bad compared to what I've seen in other banks, and buying similar bonds denominated in RMB in the Mainland has proven very challenging so far).
    I see bonds Ipo'd below the guidance price, and the banker is pushing me to place an order well below the guidance rate, to get a better chance to be allocated, although the allocated portion, if any, would be at the IPOd coupon's price.
    Anyone with experience in those can advise on the proper process ? I suspect the banker wouldn't bother calling and go through the order formalities if there was no chance to be allocated.
    Are they looking for enough retail players to push the price down ?
    I'm looking to buy a few positions from 200 to 400k USD each, and hold on to them. The only bond ETF listed in USD in Hk is 2821 (ABF pan asia bond etf) , and it underperforms its benchmark 50bp a year, despite expenses of 19bp, so buying individual bonds seems to make sense. There's also a HKD denominated ETF which performs better compared to its benchmark, but with higher expenses.
    I'

    Any feedback on the topic from more knowledgeable posters will be most welcome.
    Thanks in advance
     
    Last edited: Apr 20, 2017
  2. I think you should expect to get screwed... Call it a hunch, if you will.
     
    khotso and dealmaker like this.
  3. luisHK

    luisHK

    Indeed... I've thought before that for retail clients buying bond ETFs is probably better than looking for individual bonds, as ETF issuers have access to better deals - after Ipo higher spreads and commissions than with stocks must hurt the retailer' returns on their individual bond investments.
    Does that make sense ? Or do you reckon it is still worthwile to buy some bonds on the secondary market ?
    A couple of IPOs I followed over the last few days, the price went up right after, so it was better to get the IPO price than to buy on the secondary market, but I'm afraid the bonds I could get allocated would be those that'd trade down the following days.
    Is that what you mean by getting screwed ?
    Not so happy about the bond ETF offerings in HK, although I should check as well the funds specifically targetting chinese corporates (there are chinese government bond ETFs, can't remember corporates - will check), especially state owned corporates, if I'm looking at single issues from those.

    Fot those interested, below are links to the 2 asian bond ETFs worth of note trading on HKSE, good points are there is no witholding tax on dividends in HK and ETFs are no longer subject to stamp tax on HKSE

    http://abf-paif.com/hk/eng/index.aspx
    https://www.bmo.hk/etfs/en/bmo-etfs/details?fundId=3141
     
    Last edited: Apr 21, 2017
  4. Indeed. One of the relevant questions is the possibility of being negatively selected, i.e. always ending up with dogs.

    Here's the thing: new issue discount is real, although it's normally offered to large institutional investors and comes with an implicit agreement that the investor won't dump the bonds in the mkt the next day. The question you need to ask the broker pushing this stuff is what sort of liquidity will they offer in these right after issuance. It could be that the pop you've been seeing is just window-dressing and isn't real.

    To be honest, if you had money to spare, this might be a game worth playing to see if there's something there. However, I'd say that it's unlikely.