Aiming for higher revenues, banks are ready for more risk to assist companies in selling big amounts of stock.
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In block trade agreements, a bank traditionally purchases stock from a company with a discount and then tries to flip the stock following the closing of the market on the same day. In case they can receive a premium, it proves to be beneficial for them. But if they are unable to do that, and stock prices fall, the bank encounters losses plus fees.
Around 50% of all stock sales by the U.S. public companies have been blocked trades in 2016, according to Dealogic. In recent five years, these agreements presented a third of all stock sales, while in the past ten years that number was at about 20%. Energy corporations often used block trades to raise money fast and repay their debt.
Banks typically offers block deals to their important customers, like private-equity companies. But recently, banks have been doing more block-trade operations, subjecting them to higher risk.
The growth of block trade deals happens due to falling in trading revenue of banks and low-interest rates adversely affected profits.
According to Daniel Klausner, a managing director at PricewaterhouseCoopers, 2016 is a particularly difficult year for equity capital markets, meaning the business of raising funds through selling shares.
Corporations and shareholders use block trades as it guarantees a particular price and the certainty they can’t have selling stocks by themselves in the market.
Ten years ago, not many banks actively used block trade deals. Currently, Wall Street biggest banks fight for block trades.
Lately, two deals have presented the possible risk for the banks.
KKR & Co., a private-equity firm, sold 15 million shares of Walgreens Boots Alliance Inc. to Citigroup Inc. at the beginning of May.
The bank has paid $80 per share and proposed the shares to customers for $80.10, trying to earn $1.5 million, by the regulatory filings and Dealogic.
Walgreens’s shares lost 2.5% to $79.43, on the next day after the sale was announced. It’s unknown if Citigroup managed to sell these stocks. Walgreens’s shares closed higher than $80 in the three following trading sessions. On Wednesday, Walgreens’s shares were at $77.63.
Wells Fargo & Co. purchased 5 million stocks of PRA Health Sciences Inc. from shareholders on May 2 for $46.70 per share. The bank later offered the shares at $46.90, according to an insider. We don’t know if the bank could trade all of it before the trading session the following day when they dropped by 8.7% to $44.64. On the next day, PRA’s shares grew to $47.13.
Typically in 2016, the stocks traded in block deals have increased the following day, adding to their popularity. According to Dealogic, the average return from the offer price for such sales was 0.5%.
Current market instability can limit the popularity of block trade deals even now when bank is trying to enlarge fee revenues, according to Brian Reilly, global head of equity capital markets at Barclays PLC.
Analytical review at Alpari