A bank proposal to pool corporate bonds of a single borrower into an ETF-style "trust" to help solve the credit markets' chronic illiquidity problem is being circulated among issuers and investors, and finding some support. Though still conceptual, the idea initiated by Morgan Stanley reckons investors could find more liquidity in a single instrument that represents several bonds issued by one borrower in a certain maturity, than in the individual bonds themselves.
According to the proposal, the trust would get positions in all of an issuer's outstanding securities in the secondary market. It would then group them according to whether they have short, intermediate or long-dated maturities, and issue separate trust certificates against each of those maturity buckets. An underlying unit of bonds to represent each maturity trust certificate would be created and redeemed in a similar way as existing bond index exchange-traded funds.
"This is still very much just in the conceptual stage, but what we're trying to do is solve the fragmentation problem in the market, where liquidity is scattered across thousands of different CUSIPs," said Steve Zamsky, head of global credit trading for Morgan Stanley. Morgan Stanley's idea was borne out of a BlackRock suggestion that bond markets become more standardised. The fund manager suggested that frequent borrowers should just add to an existing bond issue in a maturity, rather than continually issue new bonds in the same part of the curve that trade separately.
BlackRock argued that this would create just a handful of jumbo-sized bonds in a maturity for an issuer, making them more liquid than the dozens of smaller individual transactions. BlackRock's idea, however, has not gained much support from issuers, who fear that multiple reopenings of only a few bonds would build potentially damaging maturity cliffs on their balance sheets. Morgan Stanley, however, claimed it had good support for its trust idea.
"We've had a number of discussions with our issuing clients and they overwhelmingly say that as long as a market structure gives them full flexibility for liability management, then they are generally supportive," said Leo Civitillo, global co-head of fixed income capital markets for Morgan Stanley. Jim Switzer, global head of credit trading at AB (the renamed AllianceBernstein) in New York, thought the proposal had legs. "This is something we think could work well," he said. "[With a trust that groups bonds into maturity buckets] you are basically creating potential tools that make it easier for investors to go long or short on that name in their portfolio," he said.
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