As the equity markets went from bad to worse in early 2001, a lot of institutional investors looked for a safe haven in corporate bonds. Instead they hit a meltdown in 2002. The second quarter saw a record $42.6 bn in bond defaults, never mind the $30 bn WorldCom defaulted on in July.
A Merrill Lynch study finds that most US bond fund managers dramatically lagged the indexes in the first nine months of this year, particularly as their enthusiasm for corporate bonds meant they missed out on a rally in Treasuries. A longer time frame looks brighter. In the UK, the face value of investment grade corporate bonds outstanding has doubled in the last four years while the FTSE 100 is down nearly 40 percent from two years ago, according to financial PR consultancy Makinson Cowell.
Market commentators expect the failure of index benchmarking strategies in 2002 to make bond investors more aggressive in their approach to corporate issuers, which will hasten an existing trend: the convergence of equity IR and bond IR.
Ugly duckling
Companies have traditionally treated bonds as the ugly duckling of corporate finance, dedicating much more attention and interest to the potentially lower cost of capital inherent in issuing equity. Thus, investor relations officers have been trained and paid to target potential equity investors and to keep equity analysts and existing shareholders happy.
Bond investors say their stock market counterparts receive much more attention and have easier access to companies’ information than they do. While some are content with the status quo, others are infuriated and feel ‘neglected’, in the words of Karl Bergqwist. He is head of credit research at Gartmore, the UK-based investment house which manages £9 bn in fixed income assets.
‘Bondholders would like to be given stakeholders’ status and to receive fair and honest information,’ says Bergqwist. He warns that ‘IROs should communicate with bond managers in the same way that they do with our equity colleagues. Otherwise we are not going to support their companies in difficult times when they have liquidity problems.’
Bergqwist complains that only some large companies treat both equity and bondholders equally, providing them with timely and good quality information. And he is not alone. Financial Dynamics, a London-based consulting firm, conducted a survey of bond analyst attitudes toward information disseminated by bond issuers. The results show that only 48 percent of 285 respondents are satisfied with the information they get while 43 percent are unhappy with the timeliness of disclosure. ‘Credit analysts feel that they rank way below equity analysts,’ says Scott Fulton, managing director of IR at FD.
Similarly, investor relations firm Makinson Cowell’s survey of buy-side fixed-income institutions detects that many European companies are seen as bad communicators with bond investors and appear reluctant to respond to their needs. Bondholders find it more difficult, the study also finds, to meet with senior management and feel that in some cases ‘they are taken for granted.’
According to Norman Cumming, bond advisor at Makinson Cowell, the message behind the outcry is that companies are good at getting out on roadshows and meeting fixed income managers when they have a new bond issue, but they consign them to oblivion once the bonds are sold. Cumming was head of fixed income at UBS Global Asset Management for 14 years and knows first-hand how companies treat bondholders as second-class investors.
‘Issuers should realize the importance of communicating on a continuous basis with bondholders,’ says Craig Bawson, vice president and high yield product manager at Pimco, the US investment house, which has $250 bn in fixed income assets under management. ‘Fixed income managers need the same and even more information than equity managers,’ he adds.
Both groups of investors want balance sheet details; they want to understand the company, the management, the strategy and how all these factors fit together. In addition, ‘Credit analysts want to hear about sustainability, cash flow, bank agreements, stability and predictability,’ says Bawson.
But above all, bondholders want to know they’re going to get their money in the end. ‘They definitely want to know whether the company is going to be able to fulfill its commitments and pay off its debt,’ summarizes Ivan Vela, director of finance and equity markets at Mexican house-builder Corporación Geo.
Geo has wide experience in the fixed income market, and was nominated for best debt IR in the Investor Relations Magazine Latin America Awards. Last year Geo repurchased part of a Eurobond from three years earlier, completing the deal quickly and saving $2 mn. ‘If we hadn’t already established a good relationship with bondholders, organizing roadshows and one-on-one meetings with them, the process would have been much more complicated and couldn’t have saved that much money,’ Vela avows.
At Cemex, a Mexican blue chip that has also relied a lot on fixed income financing, bondholders get the same access as equity holders. ‘You need to have them on your mailing list and send press releases to them, invite them to conference calls and roadshows, and provide them with timely and quality information,’ says Humberto Lozano, managing director of corporate finance.
In-house research
Both Lozano and Vela are aware that bondholders make independent decisions based on their own research. They don’t simply rely on their equity colleagues’ assistance or external research sources. Although rating agencies and sell-side bond analysts play a strong role, the primary factor in deciding what to own in bond portfolios is their in-house analysis.
‘Since the corporate bond market today is of lower average credit quality than it used to be, the risks of corporate bond investments are greater, and institutional investors depend on the performance of the issuing company,’ explains Cumming. ‘So in-house bond analysts at buy-side institutions need to conduct their own research of the same caliber as equity analysts.’
Of course bond investors rely heavily on rating agencies like Moody’s or Standard & Poor’s, but they use ratings as a starting point rather than a conclusion. Similarly, they increasingly regard investment bank research as biased, and are wary of banks’ need to sell new issues or to move paper off proprietary books, explains Cumming.
For all these reasons, IROs should be more responsive to fixed income analysts’ requests for information, whether they’re from the sell-side, the buy-side or rating agencies. The Financial Dynamics survey shows that analysts want meetings with issuers between results – whenever there is a material event, for example, and in particular to increase the level of communication when financials have deteriorated or are about to. ‘Bond analysts feel very strongly that instead of being tagged onto equity analyst communications, they would like to see bond-specific communication initiatives,’ Fulton insists.
Vela couldn’t agree more. From his point of view, the IR team should always invite bondholders to presentations even if the company isn’t currently issuing debt. He suggests, too, that it may be appropriate to have separate briefings: ‘Try to customize the message and adapt it to your audience. Equity and bond analysts may be interested in different aspects of your company, so don’t bore them with information they don’t need. Meet them separately, unless they request the opposite.’
Patricia Gutierrez, vice president at New York-based consulting firm Zemi Communications, confirms this targeted approach: ‘It’s important to know who you are talking to, who is your public.’ The same investor relations team should deal with both equity and bond analysts as a channel to both equity and bondholders.’
As a specialist in Latin American IR, Gutierrez knows the value of bondholder relations because of the region’s history of large debt issues to finance businesses. She says Latin American companies have learned that to catch bond investors they need to treat them the same as equity holders. Indeed, it was Gutierrez who originally proposed the award for best debt investor relations to Investor Relations magazine – the only such award among ten regional awards events: ‘You don’t understand IR in Latin America if you don’t include IR with bondholders.’
Another Pimco fund manager remarks, ‘Latin America investor relations officers are more friendly and pay better attention to credit analysts than their European counterparts.’ He says the style of Latin American companies is closer to the US in their understanding of bond investors.
UK investors, too, are doubtful about European debt IR, according to Makinson Cowell’s research: ‘European companies continue to lag those in the US, both in the quality of the financial data they provide and in their general approach to the bond investment community.’ Still, the situation is improving, the study concludes. For Gartmore’s Bergqwist, European telecoms companies in particular have improved, although ‘they have learned it the hard way.’
Analyst interconnection
Sometimes the same story is not appropriate for shareholders and bondholders. ‘We are not at all interested in growth,’ claims Bergqwist. Nonetheless, Gartmore’s equity and credit analysts have become more interconnected, exchanging information and comparing company messages.
And a company’s reputation is at risk if the message is inconsistent, which is what happened to one UK utility company caught supplying misleading information, according to Bergqwist: ‘Gartmore will not support this firm as long as the current management team stays there.’
Another investor interviewed by Makinson Cowell expresses the concern that many companies still sing different songs for different audiences: ‘I like going to see companies along with the equity group because then I know that we’re getting a consistent story. A lot of times a company talking to bondholders gives a very different story from when they talk to equity holders.’ In reference to the convergence of bond and equity IR, this fund manager says, ‘There are companies that are not pleased about it and, frankly, if they’re not pleased about it, we’re not pleased with them.’
In parallel with the confluence of bond and equity research at buy-side firms, there are signs the sell side is moving that way, too. Matthew Westerman, co-head of equity capital markets at Goldman Sachs in London, revealed at Investor Relations magazine’s recent Eurozone conference that the firm is debating whether to combine its fixed income and equity capital markets groups.
Face-to-face
Just like equity investors, bond analysts want to get face-to-face with management. ‘In one-on-one meetings you can detect aspects that numbers don’t show,’ affirms Pimco’s Bawson. ‘An experienced analyst can tell lots of things from the way a manager answers or reacts to a particular question.’
For Bawson, talking to people is the most difficult part of the research but it’s also a strong influence on his investment decisions. According to FD’s research, 71 percent of UK bond analysts prefer to meet with the finance director in the first place. Only 5 percent actually want to meet the CEO, while the treasurer ranks in between.
Another bond investor interviewed by Makinson conveys his frustration: ‘I wanted to get on everyone’s IR lists. One response was we don’t have any bonds, and I thought, well, that’s interesting because we have some of your bonds. A lot of the time I get put through to the treasurer’s office, but they mainly focus on funding policy, not necessarily on the strategy of the company.’
Blanca Hirani, partner at New York-based i-advize consulting firm, has this advice: ‘We always recommend that IROs dedicate the same attention to both kind of investors. The effort is the same. The only difference is the way you target debt analysts and investors: for potential shareholders you use the 13F system in the US; for bondholders you use the Depositary Trade Company (DTC) system.’
Capital Access is a US company that provides issuers with crucial details regarding their bondholders. It gives IROs a clear picture of who is and is not holding their bonds. It provides the ability to communicate with bondholders, learn why and investor may be selling the bonds and ultimately lower his or her firm’s cost of capital, explains David Farrington, chairman of the market intelligence firm.
Farrington puts it succinctly: ‘Information is only good if it’s fresh, only beneficial if provided regularly; only useful if accurate; and only effective if it reaches the right audience.’ Proactive communication is essential to enhance the efficiency of the bond market, he reminds.
‘Value exists in best-in-class communications, which directly translates into finer bond pricing, a lower cost of capital and also higher return for shareholders. If you ignore the bondholders, you are putting the whole company at risk,’ adds FD’s Fulton. Farrington has the last word: ‘Good sense simply requires that those who borrow capital talk with those who provide it.’
