Nicolas Corry, Managing Director,

Last week Bloomberg writer Zeke Faux’s piece on Death Spiral Financing allowed a small chink of light to shine on the Private Issuance market. Death spiral structures are not new, and generally appear to be above board, but it is hard not to recognise the risk and damage they pose to investors in a company that chooses to source finance in such a manner. Private transactions tend to be by their nature private. They tend to be structured between (one hopes) sophisticated parties that are able to shoulder the burden of reduced disclosure and consequent increased risk. One wonders though what consideration is given to other stakeholders? Smaller shareholders, employees, customers, suppliers to mention a few.

In the Public Issuance market recent reporting by the Financial Times offers insight into the activities which may occur during the book building process. While activities such as order inflation may be known, the allegations made regarding fake order creation to win more paper, will shock many.

It seems clear that Control Functions should review their organisations’ issuance procedures, with careful attention given to where business lines meet, such as at Syndicate and in the Private market, where transactions are handled together between banking and markets. These areas represent gap risk, as consideration may have been given to each business individually, but not together as a whole.