Bondholder value is becoming an increasingly important issue at a time when companies are being pres...
Bondholder value is becoming an increasingly important issue at a time when companies are being pressured to provide shareholder value, at the expense of lenders.
Event risk in the corporate bond market is increasing the importance of bond covenants, which can provide protection for specific actions within the company, such as corporate gearing levels or the sale of some of specific assets.
An example of the usefulness of bond covenants is when Stagecoach recently sold its leasing unit off, Ian Spreadbury, senior portfolio manager of fixed income at Fidelity, says.
This unit within the business represented almost half of the group's revenue but because of the covenant, UK bond holders were repaid on preferential returns while euro bond holders, who had no such covenant, suffered from the credit deterioration of Stagecoach and the subsequent widening of spreads on the bonds.
Fay Watson, vice president fixed income at Credit Suisse Asset Management, says: "Old economy stocks were badly hurt by the technology boom, so pressure for shareholder value was great, often at the expense of bond holders.
"You have to pick names very carefully in today's market and look at the bond covenants.
"Companies do not like to provide protection for areas that will restrict them too much but they can help provide protection from an action the company takes that will take them below investment grade."
Over supply in the market has also caused investors to become more demanding, looking for greater protection clauses within the bonds, which corporate borrowers are not wanting to concede, Jennifer Chirrey, corporate bond portfolio manager at Abbey National Asset Managers, says.
The over supply of UK corporates has also caused the market to reach historically wide spreads, which is now creating some value in a market that has underperformed relative to gilts over the past few years, Spreadbury says.
He adds: "Some sectors have been poorer performers than others, such as property and utilities, especially water companies.
"This has largely been due to a fear of securitisation, in which a specific part of the business assets is tied directly to the debt. Financials have been okay but we have been focusing more on the AAAs rather than the BBB corporates.
"Looking forward we do not expect the spreads to tighten in the next six months so in the interim investors should be looking at the real AAAs."
Chirrey says she prefers old economy corporate bonds and is negative particularly on telecom issuants.
She says: "Old economy stocks have been doing well, especially some of the water companies. There has been a return of confidence to these companies aided by little issuance. However, we do tend to think this is little more than a summer lull and come September and October we will see more supply.
"We are very wary of issuance in the telecom sector due to the supply and risks within the sector. There is potential for some positive event risk in this area, there is likely to be a lot of consolidation."
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