The dog days of summer saw the debut of a new treasury trick, as a trio of borrowers turned to the Internet to auction their latest debt offerings. Bear, Stearns & Co. was first out of the gate on August 10 with $600 million in global notes; however, Deutsche Bank AG and The Dow Chemical Co. were close behind with smaller issues over the next three business days.
Earlier this year, DaimlerChrysler and Ford Motor Co. peddled their bonds on the Internet, but these latest transactions mark the first time a real-time online auction process was utilized. Using a proprietary system to conduct its Dutch auction, in which qualifying bidders paid the lowest price in a range of accepted bids, Bear, Stearns allocated the 7.8 percent, seven-year notes to 57 investors, pricing the transaction at a spread of 182 basis points over the relevant treasury benchmark.
Although similar in approach, Dow used an online system developed by W.R. Hambrecht & Co. that gave investors two hours to electronically submit bids, which they could withdraw or change. Bidders watched a split screen, half devoted to their own accounts while the other half showed other orders coming in without identifying the other participants.
“You can watch the deal unfold minute by minute, second by second,” says Mitchell Stapley, who added Dow’s notes to the $3.5 billion he oversees as chief fixed-income officer at Lyon Street Asset Management Co., in Grand Rapids, Mich. “The technology will change the face of how bonds are distributed.”
Just how quickly remains uncertain. “Lining up buyers is not as hard as getting share-of-mind on the issuer side,” says J.D. Delafield, a senior managing director at W.R. Hambrecht, who helped conduct the Dow sale.
Count Dow treasurer Geoffery E. Merszei as one who is steadfast in his embrace of the Web. “Providing investors with the ability to directly establish the market clearing price is a stair-step improvement in transparency, which benefits both investors and the issuer,” he says.
In all, 57 investors were awarded a portion of the $300 million, five-year issue, with a clearing yield of 7.108 percent. Typically, Merszei notes, 15 to 20 investors would have ended up with paper. The fees Dow paid to Hambrecht and three other syndicate members were about 50 percent below those of an offline offering, in part because the transaction was one of the first of its kind, and because it was not fully underwritten.