Traditional manual ways of primary bond issuance could be swept aside by a new digital platform that claims an end-to-end origination experience for issuers, brokers and investors.
The bond issuance process is outdated and is ripe for change. Whilst many parts of the financial services sector are forging ahead with the streamlining effects of digital processing, primary bond origination remains one of the few asset classes that still relies on manual effort and a system that has changed little in the past 50 years. However, a new digital platform for bond origination could signal the end of manual processes.
At least this is the hope of Vuk Magdelinic, CEO and co-founder of Canada-based fintech firm, Overbond. He believes the firm’s BPS platform for bond issuance – the first of its kind anywhere – has a very good chance of dragging the industry into the 21st century.
The platform, launched earlier this year and updated with full investor access last week, is the first fully-integrated platform to connect bond market issuers, dealers, and fixed-income investors. Its “end-to-end” processing capability includes a support framework for primary bond origination offering “advanced analytics” (including market sentiment and visualisation tools) and direct, real time access to key market participants.
As a “secure, cloud-based technology”, Magdelinic says the system’s APIs (which specify how software components talk to each other) allow tight integration with treasury systems, such as a TMS or ERP, and should require minimal intervention to implement. Once on-boarded, he says it can take users from pre-deal research right through to deal execution, “cutting out the enormous amount of traditional background activity that takes place over the phone and email”.
With “enhanced” communication channels, real-time market updates, customisable reporting and proprietary analytics tools (third-party sources may be made available in future iterations), Magdelinic explains that issuers are able to access information on size, pricing, tenors, timing and structure to “better uncover the needs of investors” prior to a deal.
Issuers can also expect the platform to increase their exposure to the investor base, delivering diversification, better access to capital, and “stronger relationships with the providers of capital.” The latter could be key in allowing improved price discovery, claims Magdelinic.
A primary bond is priced by looking at outstanding bonds of comparable companies and how they trade on the secondary market, he explains. During times of “very dry secondary market liquidity” – and there has been a significant reduction in secondary bond market trading volumes in recent years – benchmarks are scarce. In such an environment, the market finds it hard to be confident in terms of where a new issuer will come into the market with a new bond issue. By enabling participants to communicate more effectively on the information available, and by enabling better relationship building, he feels that the platform “allows the canvasing of a larger set of investors which can result in more confident pricing for all participants”.
Reaching more markets
Initially the platform is being targeted at the large institutional market. Magdelinic explains that the process for bond issuance in this sector, especially in North America, has been “largely standardised”. As such, he feels it is “really ripe to be enhanced within the digital space”. However, he foresees access opening up for the mid-market sector “where we contemplate seeing some of the more private deals”. This, he hopes, will particularly play to the platform’s strength in building and sustaining relationships between participants.
To date, Overbond has been working with investment-grade corporates including “some of the largest Canadian bond issuers”. It is also in the process of signing one of the ‘Big Five’ Canadian banks which, as a dealer, “will cover most corporate issuers in the country”. The firm’s ambition is to facilitate a more international approach, offering a “one-stop shop for the fixed income community”.
Clearly the platform has to gain traction in more territories before it can upset the old guard. In the meantime, for the issuers, dealers and investors who do consider using it, Overbond’s claim that digitising primary bond issuance “will reduce infrastructure and transaction costs” has a certain appeal.