Corporate investment grade bond issuance has been remarkably resilient in the face of 2018’s rising interest rate environment. Though underwriting fees have dipped slightly Y/Y, the investment grade bond fee pool remains well above near-term annual norms. However, another set of rate-sensitive securities – REITs and MLPs – has been much more negatively impacted..
This month, banks’ fees from underwriting REIT and MLP equity offerings dropped below 2009 levels for the first time. These products represented nearly one-third of all U.S. ECM fees at their 2013 height, but are now just 9% of the ECM fee pool. MLP offerings in particular have been virtually non-existent in the last year, plagued not only by rising interest rates, but also by the elimination of a key tax benefit.
Though REITs and MLPs are only a small portion of many banks’ ECM franchises, they’re a critical client base for lending-focused universal banks. Since most REITs and MLPs also rely on debt financing, lenders are able to win seats at the table for ECM deals. This isn’t the case for other major segments of the ECM market, like the Biopharma and Internet sectors. Even private-equity-backed IPO mandates tend to go to the bulge-bracket, rather than to smaller lenders. The dynamic presents a major strategic challenge to the many lending-focused banks that have been attempting to expand their ECM businesses.