IR professionals have built up decades of experience dealing with shareholders and equity analysts. Now they face a new challenge of establishing good relations with a much more diffuse community of debt investors.
The rapid growth of the fixed-income markets – covering corporate bonds, derivatives and securitizations – has created a wealth of new fund-raising opportunities. But at the same time it has increased the complexity of finance and dealing with investors.
‘As the credit markets become more technical, it is important for the investor relations people to understand the new instruments,’ says Mike Mitchell, general manager at the Investor Relations Society in the UK. The society’s most recent technical seminar covered derivatives, debt and the credit markets alongside the more traditional equity-related issues.
Banks and other corporate issuers of large amounts of debt have also had to adapt their approach to this new category of investor. ‘We have moved from being primarily a retail-funded organization when we floated 10 years ago to raising a growing amount of wholesale funds to support our balance sheet growth,’ explains Mark Jones, head of IR at Alliance & Leicester. ‘Dealing with debt investors is growing in importance. Last year we did our first major securitization deal for £2.5 bn ($5 bn) of mortgages.’
Elena Ershova, head of IR at Moscow-based Alfa-Bank, says maintaining good relations with debt investors is essential today. ‘International investors are experiencing a boom in debt coming from banks in the Commonwealth of Independent States, all with approximately the same level of credit risk and price,’ she says. ‘The losers in this competition will be the banks that pay less attention to their debt IR program.’
The same but different
In some respects debt investors have the same information needs as their equity counterparts.
Quarterly or half-yearly results announcements provide a strong pointer to the health of the issuer standing behind a particular bond issue or securitization. But in other respects they are different.
‘What we communicate about our results and our strategy is the same,’ comments Mike Oliver, IR director at Lloyds TSB. ‘But there is a difference in the emphasis.
Long-term investors want to know we are safe and solid, and will be around in 30 years’ time to repay the debt. The equity markets are more concerned about the next half-year’s earnings and our rate of revenue growth. Debt investors want a good-quality risk profile while equity investors tolerate higher risk for a higher reward.’
A crucial factor in molding investors’ views of an issuer and its bonds is the credit rating agencies. ‘Ratings are important for lots of investors because they act as a filter [when investors make investment decisions],’ says Brian Kealy, head of capital management at Bank of Ireland.
Large debt investors check an issuer’s credit rating against their own analysts’ assessment of its creditworthiness but in debt markets where retail investors play an important role – such as Japan and Italy – the credit rating is the main indicator many people use.
Lloyds TSB leveraged its strong credit rating – triple A from Moody’s and double A from S&P – with a recent offering to Far East retail investors. ‘It helped with the pricing and meant we could go to the retail market,’ explains Oliver.
A problem facing IR managers in these new markets is the difficulty in keeping track of their debt holders. While many bonds go into the hands of long-term holders, trading is increasingly active. An issuer might know who bought its bonds on issue but the secondary markets are more opaque. ‘Often you don’t know who you are dealing with because you don’t have a share register,’ says Kealy. ‘You know who bought the bond when you sold it first but you won’t know who owns it now because it has been traded.’
New categories
Matters are further complicated by different investors being interested in different categories of debt.
Some want long-term preference issues, others, covered bonds; a third group may be attracted to very short-dated paper.
Maintaining long-term relations with investors is often managed by the investment bankers. Issuers maintain a team of banks guaranteed a role in new issues in return for a pledge to maintain a market in the debt that has been issued.
These banks provide a conduit to investors. But many IR professionals say contacts with debt investors are concentrated at the time of a new issue. ‘Debt investors are too deal-focused,’ says Kealy.
‘We want to move away from that.’ ‘There are very few non-dealrelated roadshows,’ agrees Oliver. ‘A couple of years ago we decided to do more non-deal work. We regularly hold one-to-one and group lunches to bring debt investors up to speed. We invite the debt guys along to our equity roadshows.’
Establishing good long-term relations is important when problems arise. GMAC Financial Services formed part of the General Motors group until GM’s financial difficulties forced the sale of a 51 percent stake to an investment consortium headed by Cerberus Capital Management in April 2006.
GMAC’s IR effort had always been focused on debt holders as it had no outside shareholders. GM’s downgrade to a junk rating from the big three credit rating agencies had a knock-on effect on GMAC, and the financial group is seeking to regain an investment rating.
‘It is all about getting out accurate information so people understand the story,’ says Rick Buxton, GMAC’s senior IR manager. That applies to both categories of investor – debt and equity.
