Be stubborn with your goals, but flexible with how you get there.

 

 

On bond flexitarians and unfounded fears of jeopardizing existing (banking) relationships.
 

Companies can become bond flexitarians* in the future: issue plain vanilla bonds digitally, arrange special financing via the house bank. Thus, the fear of choice remains unfounded.

According to a study by the German Innovation Alliance, an association of leading manufacturers from the IT industry, executives see digitization as a tool for improving performance and a challenge in their corporate responsibilities. The study also examines psychological aspects of digitization: One concerns reluctance due to fears. These are greater in finance departments than, for example, at management and board level. A similar picture emerges when it is examined where digital alternatives meet with greater reluctance. Those who deal with financial issues tend to behave conservatively when it comes to changes in the wake of digitization, and not only according to this study. The development in the digital bond market is comparable.


Digital yes, but self-determined. Like after the pandemic in our personal behavior.

And how do we personally deal with digital changes? Surprisingly open and self-determined. The pandemic showed us that digital tools are a means to an end, making our lives and work easier. Here, too, however, the psychological moment must be considered: we want to decide even more self-determinedly when we exchange ideas via video conference and when we prefer to meet as a team in the office. 


Behind this reluctance there is often fear. Unfounded fear.

Some might interject: "If you have a choice, you're spoiled for choice!". Of course, we must decide when to go digital and when to hold on to the old. Interestingly, the capital market tends to fall into a black-and-white pattern here. This is shown to us by the discussions we have had with issuers, banks and investors since Valyo was founded two years ago. These conversations are about highlighting the digital issuance process. But most of the time, they are also indirectly about fears. The fear of jeopardizing existing relationships with banks if the company issues digitally via Valyo. Unspoken, it is also about the fear of having to accept disadvantages, for example the reduction or cancellation of free limits for the investment of excess liquidity by the bank.

One thing is clear: such fears are often unfounded. Digitization in the issuing process serves primarily as a diversification tool. It gives the company greater independence and allows the market of providers to play better. As Valyo, we see ourselves as having a responsibility here: we not only have the tools that make it possible to execute a corporate bond issue securely, efficiently, and completely digitally - at 30 to 50 percent lower costs. It is also our job to address the fears that can influence a decision whether the com


Bond flexitarians love the digital way, but do not disdain the traditional.

After all, they don't want the choice to be agony. It is obvious that despite digitalization, requirements remain in the capital market. Complex bond issues are less suitable for digital issuance. Plain vanilla bonds are undoubtedly predestined for digital issuance. Particularly because in the Swiss capital market, vanilla bonds are predominantly issued.

We are convinced that we will see more bond flexitarians, especially in the Swiss capital market. Many factors of digitization speak in favor of this. Companies will also increasingly move digitally in the issuance process. And if they are planning complex, advice-intensive bonds, they will turn to the bank. We see this as a healthy market development. This is what we are working towards.


* The bond flexitarian is a company that covers most of its financial needs through digital issuance, but also occasionally chooses the traditional bank route, for example, when a complex transaction is pending.

Kill a stupid rule!

 

This is invigorating, refreshing and motivating.
Focus on the essentials again and simplify your everyday life. Rules basically have no expiration date, which is why it makes sense to question them regularly.

Primary bond market:
Direct contacts, clear rules, fair prices

Sellers and buyers in direct dialog and correct pricing with a closed auction - with a spread range based on the bid-ask curve of the secondary market: This is what Valyo now offers for the first time for the primary market of bonds. The innovative concept relegates intermediation, which has been common practice up to now, to mothballs. This will please issuers and investors because it gives them a price that accurately reflects supply and demand.


In the secondary bond market, pricing takes place on exchanges and other trading places. As with any marketplace, supply and demand determine the price. But one thing is always the same: buyers and sellers face each other directly.  


Opaque primary market

The situation is completely different in the primary market: Here, an intermediary - the bank - always stands between the investor (buyer) and the issuer (seller). This leads not only to an asymmetrical distribution of information, but also to a high degree of non-transparency. For example, both bookbuilding and allocation are carried out by the banks - without issuers and investors being able to inspect the process and without clear and transparent rules. One rightly wonders who has an interest in this lack of transparency. And because the price range (spread range) is defined by the banks on the basis of their own assessments, it is also fair to ask whether the issue price corresponds to the optimal balance of supply and demand. 


Kill a stupid rule!

So what can be done to eliminate this intransparency and achieve a symmetrical distribution of information? The recipe is as simple as it is efficient: Kill a stupid rule! Or, to put it in less brute terms: We replace the intermediation practiced by banks to date with disintermediation. Here, issuer and investor face each other directly. Bookbuilding is determined by auction - and allocation follows clear, fully communicated rules, as has been common practice on the secondary market for years (matching rules). 


Closed auction for optimum price

Auctions are the ideal way to ensure fair pricing in the primary bond market. Valyo has decided to follow the approach of the Swiss National Bank and the U.S. Federal Reserve (Fed) and therefore relies on the closed, Dutch auction with uniform-price technique. In this process, investors submit their individual bids without knowing those of the other buyers. The allocation is then made to all investors at the same price (or spread) at which the volume of the issue is reached. This approach follows the assumption that the institutional investor base in the Swiss capital market is relatively small and that the participants are well informed.


Real market price for undistorted valuation

If pricing in the primary bond market is most effectively determined in an auction, it should ideally take place directly between the issuer and the investors. The spread range set by the seller at the start of the auction can be based on the secondary market curve and will therefore tend to be wider than in conventional bookbuilding. This allows the market to find an optimal price. The advantage of this "real" market price is the unbiased valuation of a given bond at a given point in time. It also gives all auction participants the certainty of having achieved the right price.


Valyo brings together what belongs together

While the secondary market for bonds is fully digitized and correspondingly transparent, the primary market has a lot of catching up to do in this respect. With direct auctions between issuers and investors, Valyo ensures maximum transparency and always guarantees a market price that reflects supply and demand. While Valyo recommends the wide spread approach to issuers, the narrow spread approach is also possible. In either case, Valyo's revolutionary approach to disintermediation in the primary bond market provides fairness, transparency and efficient price discovery to all parties involved.