Financial institutions hope to cut costs by streamlining disjointed debt process
JPMorgan, Bank of America and Citi are developing a new platform to overhaul the disjointed bond issuance process, hoping to solidify their control of the lucrative underwriting business that last year generated billions of dollars in fees for investment banks.
The three banks, which together arranged more than $1tn of bond sales last year — a fifth of the record $7tn raised by governments and companies in offerings organised through financial institutions — want the new platform to improve communication between underwriters and asset managers.
Corporate bond issuance is a leading driver of bank revenues and has become increasingly important since the financial crisis, with low interest rates spurring a borrowing splurge. Underwriting fees have partially offset a decline in trading revenue, which some executives fear is in a secular downturn.
A slowdown in corporate debt issuance at the start of 2018 has threatened underwriting fees, magnifying the importance that banks contain costs in their bond sales units.
The debt sales process can be complicated from the initial delivery of prospectuses to the management of investor roadshows all the way to pricing, when teams of bankers must reconcile orders from hundreds of investors before settling the transaction.
The phone calls, emails and chat messages on Bloomberg had become overly cumbersome and time intensive as the bond market has ballooned in size, said several people involved in the project.
The product will allow underwriters to send bond documents and credit rating reports to investors, relay pricing information, and ultimately collect both indications of interest and firm orders for bond sales.
JPMorgan, BofA and Citi, which made nearly $5bn from arranging bond sales for clients in 2017, have not yet decided what form the new platform will take. They are considering an online-based application, a program that can be installed on investors’ computers or one that is integrated through an application into existing asset manager order management systems.
The three banks declined to comment on the project.
The trio has pitched to other underwriters to joining their project, with the view that the communication tool will launch later this year in the $6tn US investment grade corporate bond market before it is rolled out globally and to other credit and debt markets.
“We want to maintain that direct relationship with our clients, which is quite important for the industry,” one person with knowledge of the project said.
The move to establish a new platform to streamline the process underscores how banks are increasingly turning to technology to improve the efficiency of a bond market that has largely been left behind by seismic changes in other corners of the financial system.
"Bond issuance is the golden goose for the banks,” said an executive at an asset manager approached about the project. “They want to build something that will improve the process, something they own and can control."
Much of the focus has been making corporate bonds trade electronically, more akin to equities, but bankers and asset managers say that they are now looking to modernise the entire fixed-income ecosystem, as many institutions are under pressure to cut costs.
Global debt issuance rose 4 per cent to $7tn last year, netting investment banks overall revenues of $23.3bn, according to data company Dealogic.
In contrast, investment banking revenues from trading fixed income, currencies and commodities — the FICC segment that used to be one of Wall Street’s dominant money machines before the financial crisis — shrank again last year, by 10.5 per cent to $68bn, according to Coalition, another data company.