E-bonds: Will They Fly?

Internet bond auctions can help corporate issuers lower their cost of capital. But savings from lower sales and marketing costs may not be as great as you might imagine.

Both proponents and opponents of online Dutch auctions of corporate debt say one thing is clear: the system works best for large, plain-vanilla issues with good credit stories. That’s why TradeWeb and MuniAuction are already up and running with agency issues. For corporates, that means quality investment-grade debt, and maybe asset-backed securities. Says Hambrecht’s Goldberg: “It’s always better to introduce change with well-known credits that don’t need a lot of explanation.”

Emily S. Plishner is a freelance writer based in New York.

E-Bond Trading Networks

W.R. Hambrecht’s OpenBook (www.openbook.com for a demo). Dow Chemical has used Hambrecht’s system, and Freddie Mac has committed to future reference bill auctions using the same core technology. Initial bids are marked with a time stamp. If the bidders improve their bids, they keep the initial time indicator. If more than one bidder comes in at the clearing price at the end of the auction, the awards are determined by which bid first. OpenBook offers anonymity to investors.

Bear, Stearns’s DAiSS (www.bearstearns.com for a demo). DAiSS (Dutch auction Internet syndicate system) has no time stamp, because Bear’s system builders found that investors don’t want to be penalized if their Internet connections are accidentally cut off in mid-auction. Bear’s system involves two rounds of bidding, with all bids visible to participants.

Deutsche Bank (Deutsche’s general capital markets site, www.dbbonds.com, for more information). Deutsche has capabilities for both American- and Dutch-style auctions, either open or closed. Deutsche’s own auction was blind, with bidders unable to see other bids.

MuniAuction (www.grantstreet.com). MuniAuction, now renamed Grant Street Group, has hosted more than 1,300 Web auctions for $1.3 trillion in municipal, government, and agency bonds, but none yet for corporate bonds.

BondBook (www.bondbook.com). BondBook is a start-up financed by Goldman Sachs, Merrill Lynch, Morgan Stanley Dean Witter, Salomon Smith Barney, and Deutsche Bank, whose aim is to “[improve] liquidity and transparency” in targeted fixed-income markets. Although it intends to distribute corporate new issues eventually, it has not yet done so. BondBook is not planning any auction pricing online.

Market Axess (www.marketaxess.com). Market Axess is a competing platform with intentions similar to BondBook’s. Current investors and dealers include ABN Amro; Bear, Stearns; Deutsche Bank; J.P. Morgan Chase; Lehman Brothers; and UBS Warburg. The venture is acquiring Trading Edge, a platform that allows for anonymous trading.

TradeWeb (www.tradeweb.com). TradeWeb conducts online auctions of U.S. Treasury bonds, and serves as a trading platform for government and agency bonds in the secondary market. It is not planning to get into the corporate bond market.

There are about 80 other secondary electronic trading platforms in the market. —E.S.P.

The Flying Dutchmen

Three companies have conducted online Dutch auctions of their bonds. Deutsche’s auction lasted 21 hours. Bear, Stearns’s began 2 hours after Deutsche’s, but ended first. Both claim to be first.

Company Date Web location Issue description Clearing price Number of investors
Deutsche Bank Aug. 10, 2000 www.dbbonds.com $250 million, 3-year bond 111.5 basis points 23
Bear, Stearns Aug. 10, 2000 www.bearstearns.com $700 million, 7-year bond 182 basis points 57
Dow Aug. 15, 2000 www.openbook.com $300 million, 5-year bond 101 basis points 57

Source: Issuers

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