Disclosure improvements needed to win new sources of capital: HM Treasury

So we are out – sort of – from recession. Good news, but the hangover will continue. This will include huge changes to the availability, cost and degree of freedom for companies to use capital. So discussion of how to increase access to alternatives is welcome. However the discussion paper on this issue from the Treasury, also suggests tougher disclosure rules for companies. (What, again, I hear you cry?)

One of the legacies of the crunch is likely to be the cost and availability of bank finance for a considerable period. Increased scrutiny and regulation of the financial services industry, the capacity of the banking sector, their balance sheet repair and reaction to the previous under- pricing of risk are some of the factors driving this change. So HM Treasury is looking at ways to help larger companies sell corporate bonds to institutional investors.

“Transparency” is once again the centre of attention: how much information needs to be reported to encourage investor demand? The Treasury has published a discussion paper to seek market views on the costs and benefits of increasing reporting requirements.

First, the Treasury’s paper highlights the differences between the UK and US regimes. US companies rely much less on bank debt, and more on bond issuance. The paper suggests that the corporate information disclosure regime in the US is more transparent and that reporting is more frequent. Therefore monitoring of investment risk is easier and cheaper for investors, with knock effects on companies’ access to debt.

So the willingness of companies to publish their debt covenants is again in the spotlight. As the Treasury’s paper notes “uncertainty about the credit quality of companies, and in particular the quality of investors’ claim on the company can be clouded by the presence of (often undisclosed) covenants imposed by lenders. Again, those with experience of the US suggest that more loan covenant information is publicly disclosed, creating more certainty for non-bank investors.” However any move to require this level of disclosure will almost certainly be contentious.

So debt IR is once again in the headlines. With good timing, Capital Precision has just published a study which benchmarks best practice debt IR. Worth a read.