Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Wednesday, November 26, 2008

Help at hand in what to disclose. FSA offers its thoughts.

Its one of the more difficult sections of the compliance courses I moderate for the IRS and others: identifying and handling the inside information from public companies. The regular information – corporate reporting for want of a better word – or even the disclosures around a transaction, are less troublesome than the occasional disclosure required in unusual circumstances.

So any steer from regulators is welcome. The speech from the FSA’s Mike Knight at a conference last week was helpful in setting the scene as to how the FSA is viewing companies’ disclosures in challenging financial times.

The problem that always comes up is that no two companies are the same, and a theme of ‘make your own mind up based on the information you have’ runs through the FSA rules and List! guidance.

However the FSA’s remarks were helpful in number of ways. There was an acknowledgement that the current markets have “tested the disclosure regime as never before”, and Mike’s speech highlighted the importance of continuing to recognise disclosure obligations.

However, the FSA appears to be more than usual open to discussion about whether a disclosure is appropriate. Not all IR professionals would agree that this has been the case in the past, so it is encouraging to hear that ” we will seek to understand the drivers behind that price movement and the truth or otherwise behind any rumour or speculation - this provides the basis for us to discuss whether an announcement from the company is warranted.”

Directors of public companies and those that advise them are taking advantage of this in growing numbers, arguing that that disclosure of a particular issue is not desirable as it may have an impact on share price and on confidence in the company generally. The FSA offers little sympathy for this, but ultimately will fall back on the rules. Selective disclosure is not to be allowed.

Another area in which IRO’s can expect focus from regulators is in ways in which PR colleagues seek to reassure the media about rumours. Sometimes that reassurance amounts to inside information, notes the FSA. Meanwhile, the FSA is also stepping up its post event enquiries, looking at major price movements after an announcement. The FSA notes they undertake around 200 enquiries a year, and look at how inside information has been handled and the chronology of events around the disclosure. So be prepared.

However from the companies’ point of view, deciding how to handle a specific piece of information is one thing; identifying that a situation exists is another. Which is why I was interested in some work done by KPMG’s Audit Committee Institute. According to their research, audit committees are paying particular attention to the recession-related risks that are facing their companies, and looking at their company's risk-management processes, especially in identifying risks in the first place. Tapping into that process may be helpful.

Wednesday, November 12, 2008

Time to dust off the debt IR strategies

Neither a borrower nor a lender be. I don’t suppose that Polonius had debt investor relations in mind in giving this advice to his son. However this has prophetically come true.

In the search for reasonably priced capital, many companies are turning to the bond markets. And indeed many have maturing debt that needs to be renewed or replaced over the coming months. However that is turning into a real challenge as the corporate bond markets face real issues.

The market for debt issuance has changed almost out of recognition. Debt investors have become more risk averse, with the number and value of deals dipping sharply. Until July 2007, corporate bonds were frequently oversubscribed, easy to arrange, and cheap to service. However since then, apart from brief interludes such as in May this year, corporate debt issuance has been hit with concerns about inflation, leading to wider spreads and higher yields. October was the poorest month for these issuers in nearly two years.

And according to Morgan Stanley, high-quality investment-grade corporate bonds are now at their cheapest since 1925. Bonds rated BBB (the lowest that qualify for investment grade) yield more, relative to government bonds, than at any time since 1932.

Credit ratings agencies have lost credibility. Regulators from the European Commission to the SEC are hot on the trail of more robust regulation of credit rating agencies. But until this is in place, buy side investors performing more in-house credit analysis, as they rely far less on the ratings agencies. Companies can expect far more interaction with credit analysts and bond investors, in investor meetings, company presentations, simple phone calls or website visits.

Lack of liquidity has caused problems in pricing, and as result pricing, instead of the traditional yield curve, is increasingly based on credit default swaps, which in turn at 1400 basis points are at their highest levels ever, resulting in still higher prices.

Time for a serious look at the debt IR programme. As always, the place to start is with existing holders. But how to find them? Public data is of minimal help. Perhaps 20% of holders – mainly mutual funds – can be identified this way. And the allocation lists from the investment bank syndicate are almost always out of date. Often a solution may be found through by looking at the chain between paying agent, the Euroclear settlement process and the custodian. This is far from easy, and requires dedicated, skilled resources.

And once identified, targeting of new investors and communication can kick in. A quick trawl of corporate websites, for instance, shows some with great info on outstanding debt; others simply provide the telephone number of the Treasury department.

From disclosure of debt covenants to debt non deal roadshows, it is time to dust off that IR debt strategy.

Wednesday, November 05, 2008

Now for the start of the regulators response…

Each month I dig around to find out the latest moves in regulation and best practice in transparency and IR. I put them into a summary. You can the latest – and the archive – here.

This month's trawling showed some interesting trends.

First the whole fair value debate. The means by which financial institutions assess the value of their assets – especially illiquid ones – has been the subject of a spat between the bankers and investors with regulators in the firing line. IASB and FASB together proposed changes, in part aimed at bringing together the approach of IFRS and US GAAP. The EU weighed in with its ideas, as did the SEC. (sorry for the alphabet soup of initials).

However with the users of reporting making their views plain, the issue looks like it has now been given more careful, lengthy consideration, with the IASB’s consultation, and the SEC holding its workshop. Is this purely an arcane debate for accountants? No, it speaks directly to heart of how financial institutions approach transparency, and communicate the value of their businesses. Watch this space, change is potentially coming.

In another favourite of this blog, we were pleased to see the FSA’s response on CFD disclosures. 2 notes of caution: we should watch how the exclusions for market makers work in practice. And second, I cannot see how it should take till September 1st 2009 to implement. Regulators can move a lot faster when they have a mind to…

And on the same theme, the report by the AMF in Paris on derivatives disclosure (which hints at a similar outcome to the UK decision), together with other markets such as Australia, suggests that this will become the norm globally? And a commercial lawyer in the FT noted that his phone is buzzing with alternative investors seeking advice on how legally to achieve the same result. Mind you, hedge fund investors in VW may be thinking twice now…

Meanwhile in this election week – go Obama! – US regulators launched a couple of unsung changes that will have a substantial impact. FINRA now requires reporting of foreign DR’s traded OTC. Does this impact the recent move to OTC from exchange listing?

And companies with US disclosure obligations should take note of an important speech by John White at the SEC, on how the CD&A reporting of exec comp needs to change in light of the new emergency TARP regulations.

Plenty more where that came from I suspect!