Across the Atlantic, the European corporate bond market is preoccupying itself with a weighty debate. In early October, a group of 26 euro and sterling corporate bond investors released a list of demands for new issues.
The list included such ‘inflammatory’ demands as a requirement for basic financial disclosure – astoundingly, there is no obligation to release financial data in Europe for bond issuers that are not listed. The investor group also demanded that the bond prospectus, or ‘red’, be sent out before the bond and not after; and that in a crisis situation non-bond lenders shouldn’t be able to carve out assets in return for lending to the detriment of bondholders.
The demands have unsurprisingly encountered a wide mixture of reactions from market participants. Some companies have been supportive but the majority are up in arms at the idea that they should give up any of their operational flexibility, however slight, without some compensation.
While no one would argue that financial disclosure or covenants are perfect in the US market, they are well ahead of what European investors receive. And for all the arguments that the ascent of the euro credit market now makes it a rival to the dollar market, that is only true in terms of its size not in the treatment of bondholders.
The most amusing part of the discussion in Europe is the notion that if European investors start demanding minimum covenants and disclosure, these issuers will turn their backs on the euro market and use the dollar market instead. As if the more mature dollar market wants these companies’ poorly covenanted opaque bonds any more than Europe does.