Quantifying and Explaining the New-IssuePremium in the Post-Glass–Steagall CorporateBond Market

Abstract

S imilar to equity securities, corporate bonds often exhibit a new-issue premium (NIP), whereby the yield on the new issue is set at a level higher than that dictated by comparable secondary transactions or subsequent trading in the newly issued bonds. This premium has been described as a seasoning process tied to a variety of reasons ranging from compensation for information asymmetry to cartel pricing. Moreover, the corporate bond newissue market has changed drastically over the past 30 years, and even though there is evidence of an NIP, the explanation for it has varied over time. Furthermore, only recently has the trading for corporate bonds become more transparent, meaning that the actual measurement of the NIP is far more robust today than it was in years past.Prior to the 1980s, bond underwritings were orchestrated affairs played out over days, if not weeks. Investment banks put together syndicates to underwrite and seek out investors, and there was significant premarketing of transactions. Offerings were priced based on an order book of investors. Since there was little secondary trading of corporate bonds and even less reliable reporting of trade information, it was difficult to assess whether new issues or secondary trade levels ref lected fair value, and even more difficult to assess whether the underwritten bonds ref lected an NIP. However, to the extent the new bonds required a concession, it likely ref lected compensation for investors for taking on the pricing uncertainty of the new series of bonds.In 1982, the U.S. Securities and Exchange Commission (SEC) introduced the shelf registration process allowing for the preregistration of securities. Once registered, issuers could access the market on a moment's notice. This change led to an adjustment in the underwriting process, because banks were increasingly asked to bid for series of bonds, either individually or in small bank groups. Without the benefit of premarketing to investors, banks were asked to price and purchase securities, and this process strained the capital balances of banks. Up to that point, underwriting fees were considered compensation for structuring advice, selling costs, the underwriting risks associated with bearing the risk of investor failure during the pricingto-settlement period, and compensation for bearing the capital risk related to selling residual positions not spoken for during the premarketing period.With bought deals, however, the pricing uncertainty risk shifted from investors to banks, and depending on the specific underwriting structure, banks earned either the full NIP or shared the premium with investors. Therefore, the NIP ref lected a combination of extra payment to banks for bearing additional capital risk as well as payment to investors for taking on pricing uncertainty.

Investor demand in syndicated EFSF/ESM bond issuances

“…Of course, in reality there are other success factors to be considered as well, yet careful pricing can be regarded as a quality indicator for a transaction. Maitra et al (2018) and Maul and Schiereck (2018) analyse new issue premia at the European corporate bond market, whereas the bulk of the literature like Goldberg and Ronn (2013) , Ben Dor and Xu (2015) , Nagler and Ottonello (2022) and Günster et al (2023) addresses the US corporate bond market. Most studies find positive new issue premia in corporate bond markets.…”

Investor Demand in Syndicated Bond Issuances: Stylised Facts

“…In reality there are other success factors to be considered as well, yet careful pricing can be regarded as a quality indicator for a transaction. Maitra et al (2018) and Maul and Schiereck (2018) analyse new issue premia in the European corporate bond market, whereas the bulk of the literature like Goldberg andRonn (2013), Ben Dor andXu (2015), Nagler and Ottonello (202) and Jud (2020) addresses the US corporate bond market. Most studies find positive new issue premia in corporate bond markets.…”