Investors in European high yield are once again unhappy at
the erosion of safeguards in the region’s booming
Six firms met with the Association for Financial Markets in
Europe (Afme) last week, hoping to reinforce language in
documents governing bond sales.
The objections raise the possibility of another dispute
between sponsors and buy-side in high yield, the first since
wrote a letter to sponsor banks in April 2011, calling for
more disclosure on offering documents.
"A number of investors have felt that some of the points
agreed during the 2011 discussions were not being followed
through completely," said Gary Simmons, director at
Afme’s high yield division, who hosted the
investors last week.
Decisive action is a possibility.
"Investors might decide to write another letter, either to the
sponsor market such as in 2011, or just a document of reference
for themselves," said Simmons.
European investors have complained about the
erosion of safeguards in high yield
Key concerns include the dilution of change of
control provisions and shortening of non-call
A lack of dedicated buy-side forum will make
meaningful reform difficult though.
Change of control
As volumes of European high yield pass $110 billion
and the balance of power continued to move towards borrowers,
investors’ biggest grievances are the dilution of
change of control clauses, as well as shortening of non-call
Classic high yield contracts included a put option in favour
of the bondholders, who were entitled to their bonds back at
101% of their face value in the event of a change of control.
But since 2011, a growing number of deals have included a
provision for keeping the bond in place even in the event of a
change of control.
Investors are not happy though, with many believing that any
new owner should allow for the possibility of a put. Sponsors
counter that if the credit position remains unchanged following
the change of control, the investment won’t be
One counsel said that the clauses are often redundant
following a buyout anyway, with bidders opting put in place
their own financing structure.
"So unless the change of control occurs very soon after the
issuance, the buyer will want to get rid of the existing bond
and finance the deal to their preferences. It
hasn’t had a major impact," he added.
Simmons says that, although the
clause is rarely enacted, investor opposition is
understandable. "From the point of view of investors, when you
buy a credit you buy it based on the then current structure and
management and you would like to know what you are getting
One in-house counsel that IFLR spoke to believes that
investor opposition to change of control and non-call erosion
was down to little more than the clauses’ relative
" There have been many
dilutions to protections of bondholders but the change
of control provision is the most visible "
"Those clauses are in your face and easy to understand,"
added one issuer’s counsel. "There have been many
dilutions to protections of bondholders but the change of
control provision is the most visible. It’s
something very easy to pick up on."
According to DebtXplained, 43% of high yield deals in 2014
included this so-called portability clause, up from 14% last
One issuer’s lawyer argued that despite
the news of buy-side opposition to such weakening of covenants,
he hadn’t encountered objections on recent
"This anger is the first I have heard about it. You know
investors are really furious when they push back on the deal
itself. But we haven’t had any opposition when
dealing with them on particular credits," he added.
Others have said that despite
effective representation by Afme, the European buy-side
community does not have a dedicated platform to lobby and is
too fragmented to push for reform.
It’s unsurprising then
that Simmons believes pushing back on structural developments
is important. "You sometimes have to fight against precedent.
If things become so prevalent that they become precedent then
when the market changes – which it will – you
are fighting precedent as well as common sense."
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