Mark Hynes - thoughts on corporate disclosure

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

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.


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