Bailout

What?s a syndicated bond?

By Felix Salmon

The term has been around for a little while now, but only recently has the concept of a syndicated bond been commonplace in news stories, and it seems to have arrived without anybody explaining what it is.

Most of the references to syndicated bonds are coming from Greece these days, so I phoned up George Georgiopoulos, Reuters’s man in Athens, and got him to explain them to me.

The confusing thing here is that only sovereigns issue syndicated bonds, because only sovereigns don’t issue syndicated bonds.

OK, let me try again. As a base case, essentially all bonds are syndicated. If a company wants to issue bonds, it will find a group of banks to underwrite its bond issue and sell those bonds to investors. And if a sovereign wants to issue bonds in a foreign currency, it will do the same thing. None of these bonds are ever referred to as “syndicated bonds”, though — they’re just old-fashioned bonds, or global bonds, or whatever. The existence of a bookrunner and an underwriting syndicate is simply taken for granted.

The exception to that rule is when governments issue debt in their own currency. Normally, that kind of thing is handled through auctions, where a group of primary dealers, who promise to make a market in government debt, bid on new issuance. It’s always possible, however, that such an auction might fail, and that the government won’t be able to issue all the debt that it wants, for lack of bids from the primary dealers.

So Greece has started issuing occasional syndicated bonds, where it does just what companies do when they want to issue debt: it gets a small syndicate of banks together, and the banks underwrite the bond, promising to buy it if there aren’t enough bids in the market. Then they go out and build a book and sell the bond to investors just like they would with a corporate issue. This way of doing things guarantees that the government will be able to sell all the bonds it wants to sell.

Think of it this way: most bonds are syndicated, while government bonds are auctioned. If you see a reference to a “syndicated bond”, that means that a government is not auctioning its bonds, and has decided to syndicate them instead.

Which raises the question: what on earth is a syndicated auction?

Full post as published by Macroprudential on March 31, 2010 (boomark / email).