Jump-start for G26

Just when it looked like the Group of 26’s proposals for bond market reform were withering in the new-issues drought, a number of major investors in Germany announced theirintentions to band together to push similar claims. Hardeep Dhillon reports

Key points • BVI, a body representing German asset managers, is producing its own proposals for improving market standards. • Group covers 18 of Germany’s largest asset managers. • Proposals very similar to those put forward by Group of 26: more emphasis on financial disclosure and less on covenant protection. • Similar proposals are being worked on by other asset management associations in Europe, including Italy.

Since the start of the year a dearth of new issues has forced investors to buy just about any bond that comes to market. This seller’s market has prompted several senior bankers working in debt capital markets to speculate in private conversations with Credit that the ‘improving market standards’ proposals put forward by a group of 26 bondholders in October last year is all but dead.

The proposals have suffered because they came at a time when the corporate bond market was performing well and new issuance levels were falling. To make matters worse, the initiative’s primary aim – reduction of event risk – has become something of a non-issue in the current market climate.

But according to senior bankers, the main reason for the sidelining of the initiative is the patchy representation of euro investors within the so-called ‘Group of 26’. While the group includes a good proportion of the largest investors in sterling corporate bonds – including Barclays Global Investors, M&G Investment Management and Morley Fund Management – it is seen as speaking for only a fraction of the euro-denominated market. As a result bankers have been advising their corporate clients that they can quite easily bypass the vociferous sterling market and borrow instead from the more acquiescent Continental investors. Worse still, 24 of the 26 firms behind the group come from France, the Netherlands and the UK; the list includes no German or Italian firms and only one from Switzerland: Lombard Odier Darier Hentsch.

While the investment banks have been careful not to be seen to be favouring either the issuers or the investors – both important client bases – in this debate the Association of Corporate Treasurers (ACT), the International Primary Markets Association and several big corporates all came out shortly before Christmas with comments rebuffing the proposals. Since the New Year all were pretty much banking on the issue having been settled.

But Credit has learned that a group of German investors, along with the Bundesverband Investment und Asset Management (BVI), is working on proposals for better bond standards that are similar to those put forward by the Group of 26. The BVI is a Frankfurt-based association that represents German institutional investors, and the group, which includes firms such as Activest, ComInvest, Deka, DWS/Deutsche Asset Management, Meag Securities, Union-Investment and WestAM, invests more money in euro-denominated credit than the firms behind G26.

Beginnings

Though the German BVI group of investors is not signing up to the ‘improving market standards’ initiative per se, the proposals are very similar and the BVI group has been working closely with the investors behind the Group of 26 to formulate its proposals.

The links between the two groups date back six months when, in an effort to drum up support for ‘improving market standards’, Andrew Winn, senior credit portfolio manager at Barclays Global Investors, and Stephen Wilson-Smith, head of credit research at M&G Investments, conducted a succession of roadshow-type presentations in Germany to institutional investors.

One such meeting was conducted on November 17 at JPMorgan’s offices in Börsenstrasse, Frankfurt. Wilson-Smith and Winn met with Michael Hünseler, head of credit research at Deka, Peter Walburg, global head of fixed-income research at DWS/Deutsche Asset Management, Marion Stommel-Hatzidimoulas, head of euroland investment-grade credit at WestLB Asset Management, and a representative from Union Investment. A similar presentation was given to investors in Munich, including Erich Rombach, head of credit at Meag Securities and Jürgen Rauhaus, head of fixed-income corporates at Activest, also in November. Wilson-Smith and Winn also gave a presentation to investors in Italy.

According to DWS/DeAM’s Walburg, the initiative was still at too early a stage for many in the meeting – a probable explanation for the lack of any German name on the original document.

Nevertheless, at the Frankfurt meeting in November, it was decided that in order to bring the debate to a larger audience, a platform was required for bondholders to express their views and opinions. Deka’s Hünseler suggested contacting the BVI about setting up an Arbeitsgruppe (working group).

The BVI’s managing director, Rudolf Siebel, had already been following press reports of the G26 initiative and after a meeting on November 26 with Hünseler, both agreed that to bring the debate to a wider audience, the interested parties needed to organise themselves. So the BVI prepared to discuss the matter with its members, by convening a new committee, the Corporate Bonds Standards Committee.

For Siebel, the BVI’s role is that of a facilitator, informing its members who can voice their views through the association, which represents roughly 90% of German asset managers. “We are firmly behind the standards. The most important point is that the BVI board has identified this as a matter for all buyers of securities and the whole industry, and all 74 BVI members back this initiative,” he says.

The first meeting took place at the BVI’s Frankfurt headquarters on January 22 involving leading credit representatives from the 19 German institutional investors and four representatives of the association. And although this German group has yet to release its final proposals, Siebel says that the BVI has contacted the German Pension Fund Association (ABA), via its head of investment issues, Dr Peter König, who is also head of the German Analysts Association. The German Insurers Association is also understood to be debating the topic when it next meets in the summer. But one of the leading participants in the Group of 26 believes that one of the biggest challenges to the German initiative has already been overcome: that of assembling everyone together and organising the German investor base to continue the efforts to enact market reform.

According to the institutions behind the BVI group, establishing an official set of proposals sounds more a matter of when rather than if. “We support any initiatives that improve communication and the standards that are currently in the market,” says WestAM’s Stommel-Hatzidimoulas.

Same idea, different priority

Further meetings between the BVI group have fine-tuned the thoughts of the German contingent. Their proposals are understood to be very similar to the original G26 initiative, the only major difference concerning the order in which the proposals are listed, and thus their relative importance to the BVI group. For instance, BVI’s Siebel explains that the group’s number one proposal would concern disclosure, an issue that comes fourth in the ‘improving market standards’ document. The documentation proposal comes a close second in the BVI’s list of priorities.

Deka’s Hünseler explains that the BVI group discussions outlined the importance of receiving a prospectus prior to a bond launch and documentation on bonds in competing currencies; having regular meetings with issuers; and maintaining good investor relations departments. There were also suggestions of borrowers having a blackout period around results season to give analysts time to analyse the numbers and avoid nasty surprises shortly after launch of a new issue.

For German investors, the stream of information from issuers and banks can sometimes seem more of a trickle than a constant flow. “We are continuously saying to issuers that we are struggling for information,” says Hünseler.

One recent annoyance for German investors has been the new Allianz subordinated structure, a €1.5 billion issue launched in February. The lack of information on the new deal led to many investors contacting the borrower directly – a fruitless task for some as the borrower neglected to respond to their queries.

According to ComInvest’s head of corporate bonds, Volker Marnet-Islinger: “There is some support for the movement springing up across the market, as more companies realise the importance of talking to bondholders.”

Nevertheless, the overriding stance is that the more transparency and disclosure from issuers and management on events that impact bondholders, the better a fund’s investment strategies. “Although we have strong credit analysis in place, without detailed issuer and issue information, we have the power but cannot turn on the lights,” says Deka’s Hünseler.

For DWS/DeAM’s Walburg, if analysts do not receive annual reports or prospectuses in time, how are they expected to analyse? “We are not looking at tarot cards here: we need tangible information to be able to maximise our capacity to analyse,” he says.

The BVI group places less importance on credit ratings than the Group of 26. While Siebel acknowledges the importance of the rating agencies for corporates and regulatory purposes, the mood in Germany is that ratings are only one piece of the investment puzzle. “The funds have internal credit research and believe that a better job is done in-house, as internal credit research should make up for the lack of a rating assigned,” he says.

Less emphasis was also given to the standard on covenants because many investors view this issue as a potential minefield for negotiations. For Hünseler, the problem is that covenants are very issuer-specific and have to be treated on a case-by-case basis, and issuers are very reluctant to think about covenants.

“The initiative is about corporate bond standards, but it would be difficult to define and agree a standard for covenants. We are aiming to get to first base with the initiative. The covenant standard is not a quick win, but it would be a big hit if we could achieve it,” he says.

Deka’s Hünseler stresses that the different emphasis on certain standards should take nothing away from the general thrust of the G26’s proposals. He does not think there will be a huge discrepancy between the two initiatives. “Sometimes you have a similar direction; sometimes this deviates to a certain extent. But at the end of the day, we are all going along the same path,” he says.

The investors’ cause is not being helped by the current seller’s market, with corporates seemingly able to tap the capital markets at any price. But Hünseler warns that borrowers should not expect sunny climes to persist forever.

“Treasurers have not forgotten the world of two years ago, when many issuers struggled to raise money. It will rain again someday and I don’t think companies will let themselves be shut out of the market for failing to deliver sufficient information,” he says.

Cool response

Reaction from the non-investor side has hardly changed since last year, with many still viewing the proposal document as a list of demands. RWE’s senior manager, group treasurer Peter Matza, who contributed to the ACT’s December 15 response to the G26, says that the German utility’s attitude towards the ‘improving market standards’ initiative has not changed. But he does concede that by employing the services of the BVI, the German investor group has allayed one of his concerns that the initiative was too unstructured and lacked a focal point for responses.

Matza is still wary of the proposals being anything other than grounds for discussion between issuers and investors. “In broad terms, we are still cautious of committing this into law. The tone of the meeting in the Houses of Parliament was more prescriptive than considered,” he says.

Matza is referring to the November 2003 meeting of a wide group of investors to debate the pros and cons of the G26 proposals. One criticism of that meeting is that the relevant parties focused too much on detail. “And by doing so, they generated a fear that this may end up as an attempt to control corporate strategy and independence,” suggests one German fund manager involved in the BVI group.

The response from the ACT to the initiative is still as muted as before, although John Grout, technical director, says the association does have some sympathy with certain proposals. “We might try and look at one or two of those later in the year,” he says.

But whether the BVI group can change these attitudes may hinge on the outcome of the April 30 meeting in Frankfurt between the BVI group, 10 German issuers – including RWE’s vice-president of finance Georg Lambertz and representatives of DT, DaimlerChrysler and Eon – and six investment banks.

The BVI group has always maintained that it views the proposals as a discussion paper and just one stage in the process of achieving better terms. WestAM’s Stommel-Hatzidimoulas says she is not looking too much into the finer points of the paper. “It’s the first step in bringing bondholders together, formulating a general common view and improving corporate bond standards,” she says.

Comments from fund mangers in the weeks prior to the April gathering were positive. Stommel-Hatzidimoulas believes that the meeting will be conciliatory rather than confrontational. “We do not want to attack anyone, it is all about appreciating one another and respecting the reasonable needs investors have. We will have an informal discussion of something that I understand as a draft, an idea, rather than something that is law,” she says.

DWS/DeAM’s Walburg concurs: “We want to have a balance, it is not a power game,” he says. He dismisses talk of buyer’s strike, stressing this course of action is not an option and not at all appropriate. “Funds have a fiduciary duty to buy the best bonds for our clients, banks are paid to issue bonds, and issuers need to issue at the best level for them to refinance corporate activity,” he says. “The three of us need each other – it is a tripartite activity.”

Deka’s Hünseler believes that the proposals work for all sides and could be a watershed event for the market. “The more investors feel safer about an investment the more likely they are to buy bonds from the same issuer in the future. And that will decrease financing costs for the issuers. It is a win-win story and I am sure we will have a result by the third quarter,” he says.

But it is unlikely to be as simple as the investors hope. Credit has also learned that the ACT is currently speaking to investment banks about making bond documentation available before the deal is launched. While the ACT and its members do not support all of the G26 proposals, they agree with the requests for better disclosure. However, according to industry sources, the ACT’s request has so far “met a wall of silence” from the banks, though talks will continue in the coming months.

Nevertheless, the BVI group’s determination to produce a new set of guidelines shows that those set out by the Group of 26 last year have not wilted, but instead might need to be presented in a less dictatorial manner.

The word spreads across Europe BVI managing director Rudolf Siebel is confident that the investor base supporting improvements in euro and sterling fixed-income markets will swell, not least because of the BVI’s own work in contacting domestic and foreign associations. “We expect that over the next few weeks there will be much more active discussion on the investor side,” he says. The Comité Européen des Assurances, a European federation of national insurance associations, is understood to be broadly behind the contents of the document. There are moves afoot in Italy too, as Credit understands that Fabio Galli, the secretary general of the Italian fund association Assogestioni, has discussed the initiative with the association’s board members, who are in support of the proposals. Siebel adds that the European Federation of Investment Funds (Fédération Européenne des Fonds et Sociétés d’Investissement) has also been contacted. But before the proposals are put forward to the European Association of Corporate Treasurers, consolidation is needed. At the moment, the G26 needs to define its structure, believes Siebel. “It is difficult to support such a large initiative on a European scale when you just have a handful of people doing it in their spare time,” he says. But discussion between the original members of the group is now focusing on whether there should be a stand-alone initiative or whether the cause should be espoused by an existing association. “The reforms in the German marketplace are just the beginning. And the initiative will grow to be pan-European either though the BVI or another European board,” says Andrew Winn, senior credit portfolio manager at Barclays Global Investors. And Siebel says that the BVI is more than ready to offer its help, either through direct involvement or by helping to dock the group at one of the European associations.