Updated Friday, September 4, 2015 as of 7:14 PM ET

Trace Illuminating 144As Portends Broker Squeeze

Bloomberg -- Corporate-bond brokers may face a squeeze on profits as regulators start publishing prices for almost $1 trillion of privately sold debt, if the past is any guide.

The Financial Industry Regulatory Authority, seeking to “foster more competitive pricing,” plans to start disseminating trading levels for securities issued under a rule known as 144a on its 11-year-old Trace system within the next year. That means the notes, sold only to institutional investors, will face the same price transparency as publicly registered corporate bonds for which buyers demand half a percentage point less in yield spreads. Brokers typically are paid larger fees from higher-yielding debt.

Firms from Knight Capital Group Inc. to Gleacher & Co. and Pierpont Securities LLC sold or shuttered credit units this year as corporate-bond trading volumes fell to the lowest proportion of the market on record and smaller price swings shrink potential profit margins. In the 90 days after Trace started disseminating prices of junk bonds, trading in the securities dropped 41 percent, according to Massachusetts Institute of Technology and Harvard University researchers.


“You get a certain amount of insecurity because of how opaque this market has been,” Ari Gabinet, OppenheimerFunds Inc.’s general counsel in New York, said in a telephone interview. “Without active market information, you don’t have a good way of assessing your execution.”

Sprint Corp. and Tenet Healthcare Corp. are among companies that have issued bonds under the 144a rule this year, according to data compiled by Bloomberg. The securities have grown to account for 33 percent of dollar-denominated junk-bond trading, the greatest percentage on record and up from about 25 percent a year ago, Barclays Plc data show.

There are as much as $300 billion of speculative-grade notes in the U.S. filed under the rule, and about $670 billion of dollar-denominated investment-grade corporate bonds, according to Barclays.

Investors are demanding an average of 54 basis points, or 0.54 percentage point, more yield to own speculative-grade 144a bonds, which require less financial disclosure than publicly registered securities, Barclays data show.


By selling bonds under Securities Act Rule 144a, corporate borrowers can avoid filing financial disclosures as long as they sell the notes only to qualified institutional buyers, saving them money otherwise spent on regulatory compliance. That often leads to higher yields to compensate investors for the reduced transparency and liquidity that can make it tougher to sell the bonds.

The change will “enhance pre-trade price discovery, foster more competitive pricing, reduce costs to investors and assist market participants in determining the quality of their executions,” Finra said in a July 17 filing with the U.S. Securities and Exchange Commission, asking for approval to expand Trace to include price dissemination on 144a bonds.

“The Trace expansion is coming at a time when dealers already are dealing with increased legal, compliance and other costs, including tightening capital regulation,” said Russell Sacks, a partner at law firm Shearman & Sterling LLP. “You can see how small dealers especially, but dealers of any kind, would see themselves as being under pressure from both sides.”


Elsewhere in credit markets, Wal-Mart Stores Inc. plans to sell bonds in a two-part offering that includes its second 30- year securities this year. China National Offshore Oil Corp., parent of the nation’s biggest offshore energy explorer Cnooc Ltd., signed $3 billion of syndicated loans with 11 banks.

The cost to protect against losses on U.S. corporate debt was little changed. The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, declined 0.3 basis point to a mid-price of 78.7 basis points as of 11:55 a.m. in New York, according to prices compiled by Bloomberg.

In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings increased 0.2 to 97.7.


The indexes typically fall as investor confidence improves and rise as it deteriorates. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The U.S. two-year interest-rate swap spread, a measure of debt-market stress, fell 2 basis points to 13.25 basis points, reaching the lowest intraday level since Sept. 16. The gauge typically narrows when investors favor assets such as corporate bonds and widens when they seek the perceived safety of government securities.

Bonds of Verizon Communications Inc. are the most actively traded dollar-denominated corporate securities by dealers today, accounting for 7.7 percent of the volume of dealer trades of $1 million or more, Trace data show. The New York-based telephone carrier raised $49 billion on Sept. 11 in the largest corporate bond issue ever.

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