According to Capital Data Bondware, western European corporates issued bonds worth $43.4 bn in the year to the end of April, compared to just $19 bn for the same period the previous year (see tables, page 67). Add to that a recent report from credit rating agency Moody’s Investor Service showing that newly assigned ratings more than doubled over the course of last year and you might come to the conclusion that European corporates are gaining ratings as an essential step toward raising more and cheaper funds in the fixed-income markets. You’d be right.
Stephen Wilson-Smith at Moody’s explains why this should be. ‘From an issuer’s standpoint particularly, European issuers want to broaden their investor base, and bonds can be a good way of doing that. From a banking standpoint, European banks are seeing that the pricing of their loans is becoming too competitive, and they are probably going to be reducing their loan book. Therefore the bond market will be a more attractive funding route.’
In addition, European corporates now have plenty of investment banks at their disposal, both European and American, to help them bypass the bank lenders and place their paper with investors.
This so-called disintermediation process echoes the corporate funding market in the US where roughly 70 percent of funds raised by companies now comes through the corporate debt paper markets, while the other 30 percent comes via the banks. In the UK the comparable proportions are 20 percent and 80 percent respectively, and across continental Europe as a whole, estimates are that an even higher proportion of corporate funding still comes from bank lending.
History lesson
Historically, investor relations functions within European corporates have focused most of their attention on equity investors. The scale of shareholders’ risk is greater for one thing. Share price movements can mean that the capital value of holdings can be eroded, influenced either by the performance of the company, economic factors or wide sectoral or stock market movements. Companies may reduce dividends or pay none at all. Overall, equity investors, whether fund managers or private individuals, need to focus closely on empirical analysis of the companies in which they are invested. Therefore, the role of IR or IR consultants is vital as a conduit for good, timely and confidence-giving information.
Bond investors are different. Many large corporate issuers deal with their debt investor relations via their treasury department. They see the bond markets as a funding route driven by the price of money and the structure of the deal. But then often there is little, if any, need for a more intense IR effort.
Volkswagen’s CFO Rutbert Reisch explains that he leads equity investor roadshows twice a year in the UK, Switzerland and the US. Institutional investors want to know the company’s plans, the prospects for share price development and a variety of other information.
‘In principle,’ says Reisch, ‘I would treat a debtor just the same as I would treat an equity investor if he called me for information. But they never call. So it doesn’t make sense to make roadshows on the debt markets. They are driven by name and credit rating. If they are familiar with the name, that’s fine, if not they look at the rating. And so in a way you can say that the rating agencies provide the service of investor relations.’
He adds that, in any case, the company cannot determine the level of interest rates or the price at which a company’s bonds sell in the secondary market. And as the bonds are typically placed in the market by investment banks, the company has no idea who its bondholders are at any time. There is, it seems, a pretty limited role for investor relations because the market doesn’t require it.
In some respects, this approach is echoed by Abbey National, although it has paid more than the usual level of respect to debt investors for many years. Thomas Coops, Abbey’s head of IR, says that joint debt and equity roadshows don’t really happen as it is rare to find both types of investor in the same room. The bulk of the effort is directed toward equity investors, although to save on executive time it is possible to make use of similar material when presenting to fixed-income fund managers.
Different tack
But others take a completely different approach from VW and Abbey. Take Electricite de France, the French multinational utility and a major bond issuer. As a state-owned company its relationship with its shareholders is entirely different in character, and its investor relations wholly concentrated on liaising with bond investors. As a highly-rated borrower, its bonds are quickly taken up by investors, which are typically fund management institutions familiar with the company’s risk.
Another French company, insurance giant Axa, takes a more holistic approach to its bond issues as its E1.52 bn convertible issue in early February illustrates. The funding, which was flagged as being used to finance the purchase of UK insurer Guardian Royal Exchange, was denominated in euros and substantially oversubscribed. Axa’s Christophe Dufraux explains that the company has developed a strategy with its ‘community of investors’ over a number of years, and this is not dependent on whether they own bonds or equity.
‘Over the years, we’ve tried – and succeeded – in building up close relations so that people still recommend us and see Axa as a good investment compared to other insurance companies, or indeed any other share,’ says Dufraux. ‘We have developed various tools to assist our [capital-raising] business, such as convertible bonds and subordinated debt. We have always done this keeping in mind that we want to ensure that investors in Axa have a high regard for our ability to pay our debts, our ability to raise more debt, and how we will monitor our capital.’
Bearing in mind that convertibles enable bondholders to swap their holdings into equity, in effect investors are investing in both; hence a holistic approach to investor relations. ‘The convertible structure,’ continues Dufraux, ‘offers good protection and security for investors. It can be regarded as equity by the rating agencies, so that it doesn’t damage our ratings in terms of debt to equity. And, of course, we are very careful in the movement of our share capital to ensure that we do not damage the image that we have built up over the years of being a responsible issuer.’
Same line
In fact, this might well be an approach common to a number of French firms which issued euro-denominated convertibles in the early weeks of this year. But according to Oliver Schmidt, head of investor relations at Munich-based international insurer Allianz, a number of German companies may be about to follow a similar convertible or exchangeable structure for their debt issues in the coming months. Last year’s DM2 bn issue by Allianz was convertible into Deutsche Bank stock. This was possible due to the substantial holding which Allianz has in Germany’s largest bank.
‘An exchangeable structure is really a bet on new tax rates in the future,’ says Schmidt. There is tax reform going on in Germany, and the government will reduce corporate tax rates step-by-step. This structure presents us with an opportunity to postpone selling our Deutsche Bank equities and protect our unrealized gains on that holding.’
Schmidt thinks it is likely that other German firms with similar holdings and potential tax liabilities may follow Allianz’s lead. Part of the IR function in such circumstances is to help explain the issuing structures to investors, enabling them to support such issues. ‘We do not separate equity and bond investor relations,’ says Schmidt. ‘We are responsible for both parts and both types of investors. Our activities as far as shareholders are concerned are much more intense and more active, however. We receive only a very small number of inquiries from bond investors.’
But could this be about to change? Allianz is expecting to redenominate its bonds into euros ‘as soon as possible’. This is particularly important because it is now very much a European, not just a German, insurance company following its investment in other European insurers. The group’s strategy is to appeal to a wide investor base spread geographically across the entire eurozone where, following the arrival of the euro, investors are now largely protected from currency risk.
Euro push
So the euro is undoubtedly a catalyst for the changes in investor environment. And nowhere is this more evident than in the local regulatory environments governing pension fund and insurance company investment funds.
Recent research published by Flemings notes that in most of Europe, with the exception of the UK where regulation is less prescriptive, insurance companies are required to invest the majority of their funds in instruments denominated in their domestic currency. Usually, that proportion is around 80 percent. Pension funds and mutual funds are also subject to broadly similar rules. The arrival of a new domestic currency for the eleven eurozone member countries means that such funds may be invested across borders, within the eurozone, or into a wider investment universe (see Winners & losers).
Giovanni Maggiora, head of investor relations at Fiat’s Turin headquarters, is keen to seize this opportunity to tell the company’s story to a broader audience. ‘My department used to be entirely equity focused, but we are acknowledging the fact that banks are becoming less relevant as far as raising debt is concerned, and a direct appeal to investors is of interest from the point of view of explaining the story. This is something which has been taking shape in the last few months, especially as IR plays a coordinating role as far as any kind of financial communication is concerned.’
Accustomed to roadshows – particularly in North America, where Fiat’s ‘presence on the street’ is not as widespread – it may now be worthwhile, according to Maggiora, to spread the word more widely to international bond investors who may not have thought about buying Fiat debt before.
Names take the strain
As the competition for investment funds across Europe hots up, corporates are going to need to make themselves better known to potential debt investors. For the big names – Volkswagen, Abbey National, EDF, Fiat, Allianz, Axa and similar – name recognition and strong ratings will take a good deal of the strain out of the investor relations effort, but there will still be a good deal of work to do pressing the flesh to win and retain investor interest.
What is not so clear, is how investors will treat smaller or less well-rated corporates, those with ratings below investment grade. For them, it may well be a different story entirely.
