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 Fideres said it analyzed more than 700 bond issuances between 2010
and 2015, and found that, on average, U.S. corporate bond prices
rose over 0.50 percent in the first few days after hitting the
market. In comparison, bonds issued by banks rose just over 0.30
percent on average, according to Fideres.
The gains in corporate bond prices reflect strong investor demand
for the issues, which in turn suggests that the yields may be overly
steep. The higher the yield, the higher the interest payment for the
corporate issuer.
Fideres said mispriced bonds cost the issuers of the 700 corporate
bonds it studied an estimated $2 billion in excess interest
payments. The firm estimated that mispriced bonds cost the whole
U.S. corporate bond market as much as $18 billion during the
five-year period.
"When banks advise corporate clients, the bonds are systemically
underpriced," said Alberto Thomas, a former fixed income derivatives
banker at UBS and now a partner at Fideres. "But when they do their
own bonds, they seem to know exactly where to price them."
To be sure, banks are among the biggest issuers of bonds and so
there are many benchmarks to refer to when setting yields.
Non-financial companies tend to tap the debt market less frequently,
so setting yields are not as straightforward.
The U.S. corporate bond market has ballooned to more than $1.5
trillion worth of issues last year, from $666 billion in 2002,
according to the Securities Industry and Financial Markets
Association, as companies took advantage of record low interest
rates to raise money.
The fees banks have generated for advising and underwriting new
corporate bonds have swollen to more than $16.4 billion last year,
from $7.6 billion in 2002, according to Thomson Reuters data.
Fideres said banks may be torn between trying to please the
companies issuing the bonds and the investors buying the bonds. When
the price of a corporate bond jumps in value after hitting the
market, the bondholders score quick and easy profits.
Many big bond investors are among the banks' largest and most valued
clients, whereas most companies who issue bonds do so infrequently
though they pay lucrative advisory fees.
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Fideres' past research projects have been used in class action suits
against banks. The firm's mining of market data have helped
plaintiffs score over $30 billion in settlements against banks over
the alleged rigging of markets in foreign exchange, credit default
swaps, precious metals, and other key financial benchmarks.
One of the bonds that Fideres studied was an $800 million issue from
Netflix Inc in February 2015. Netflix's advisers, JP Morgan Chase,
Goldman Sachs and Morgan Stanley, set a near 6 percent yield on the
bonds. When the bonds hit the market, their price jumped around 2.5
percent within three days. Such a big gain indicated that Netflix
could have raised the same capital at a lower interest rate, Fideres
said.
Spokespersons for JP Morgan, Goldman Sachs and Netflix declined to
comment.
There are no known regulatory or other agency investigations into
the pricing of corporate bonds, though U.S. banks have come under
scrutiny for other debt market practices.
In February 2014, the U.S. Securities Exchange Commission opened an
investigation into how Goldman Sachs and Citigroup allocated
corporate bonds to investors. The ongoing investigation is focused
on whether the banks favored certain large investors over other
smaller ones. Goldman Sachs and Citigroup declined to comment on the
investigation.
(Reporting by Charles Levinson; Editing by Tiffany Wu)
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