What it means
Bonds mostly trade by negotiation between dealers rather than on a screen with one visible price. That makes it hard for a holder to know what a position is really worth, and easy for a single dealer to quote conservatively.
Running a competition addresses both problems at once. The mechanics are simple and tightly timetabled.
The seller or its agent circulates a list with the identifiers, sizes and a deadline, dealers submit their bids by that time, and the results are usually shared so participants can see the best and second-best levels. The seller then decides which lines to sell and which to keep.
The information produced is often as valuable as the trade itself. Even a seller who sells nothing comes away with real, executable bids for its holdings, which can be used to support a valuation or to challenge a price supplied by a pricing service.
There are costs to using the process too freely. Showing a list tells the market what you hold and that you may be under pressure to sell, which can move prices against you on everything you keep.
Sellers manage this by circulating smaller lists, varying the timing and using an agent so their own name is not attached. The cover bid, meaning the second-highest bid, is the number experienced sellers watch most closely.
A wide gap between the best bid and the cover suggests the winning dealer had a specific reason to want that paper, while a tight cluster suggests the whole market agrees on the price. In structured credit the same process is used to clear entire portfolios, sometimes after a fund closes or a lender takes possession of collateral.
The published results from those auctions then become a reference point for how similar positions are valued elsewhere.
In practice
Real-world examples.
Example
A pension fund needs to raise $40,000,000 in cash to pay a transfer out and puts twenty bond lines into a BWIC. Six dealers bid, the fund sells the eleven lines where bids beat its own valuations, and keeps the rest rather than accept weak prices.
Example
A credit fund being wound down sells its whole portfolio of loan obligations through a series of weekly auctions. Spreading the lists over six weeks avoids showing the market the full size at once, and the average price achieved is better than the single-day estimate the liquidator had assumed.
Example
An insurer's accounting team cannot get a credible price for three illiquid bonds at the year end. It runs a small BWIC with no intention of selling, uses the bids received as evidence for its valuation, and hands the auction results to the auditors.
Formula
Calculation
Proceeds from a line sold in a BWIC = (face value x best bid price) / 100
A fund offers $10,000,000 of face value of a corporate bond and receives bids of 97.25, 98.10 and 98.60 per 100 of face value. The best bid is 98.60, so proceeds would be (10,000,000 x 98.60) / 100 = $9,860,000. The bond is carried in the fund's accounts at 98.00, which is (10,000,000 x 98.00) / 100 = $9,800,000, so selling at the best bid produces a gain of 9,860,000 - 9,800,000 = $60,000. The cover bid of 98.10 is 0.50 points below the winning bid, which is 9,860,000 - 9,810,000 = $50,000 of extra proceeds won purely by putting three dealers in competition rather than calling one.Case study
Seen in the real world.
Stanwell Credit Opportunities is an illustrative, fictional credit fund holding $220,000,000 of loan obligations. Facing redemptions of $45,000,000, the manager's first instinct was to call its usual dealer and ask for a price on a block of bonds.
That dealer quoted an average of 96.50 across the lines. The manager instead ran a BWIC with eight dealers on a $50,000,000 list, and the winning bids averaged 97.80, with cover bids clustered around 97.40. On $50,000,000 of face value the difference between 96.50 and 97.80 is about $650,000.
The manager also learned something uncomfortable: two lines attracted only one bid each, which told the investment team those positions were far less liquid than the model assumed. The illustrative lesson is that an auction produces two outputs, a price and a map of where liquidity actually exists.
Watch out
Common mistakes.
- Treating a BWIC as a commitment to sell, when the seller can decline every bid and often does.
- Putting the whole portfolio into one list, which signals distress and invites lower bids on everything, including the lines being kept.
- Looking only at the winning bid and ignoring the cover, which is usually the better guide to where the market really values the paper.
Questions
People also ask.
Who runs the auction in practice?
Usually a broker acting as agent for the seller, which keeps the seller's identity confidential and gives dealers a familiar process to bid into.
Can a BWIC be used just to get a valuation?
Yes, and it is a recognised way to support a year-end mark, although doing it repeatedly without ever selling damages the seller's standing with dealers.
Is there an equivalent process for buying?
Yes, the mirror image is an offer wanted in competition, where a buyer asks dealers to compete on the price at which they will sell.
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