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IA calls out bond market inefficiencies

The Investment Association has called for reform in the bond markets to address certain inefficiencies which are leaving investors ill-equipped to make informed investment decisions and trapped in illiquid positions.

Where next for bond flows?

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In a paper published on Wednesday, the trade body put forth a number of proposals to tackle several areas of concern within the exchange and tender offer processes, whereby an issuer exchanges existing bonds for new bond issuance or buys them back for cash.

These include a general lack of transparency around transactions, overly short timescales and investors being left behind in illiquid remnants of fixed income investments.

The bond markets are “a cornerstone of the global economy” and “a critical source of capital for companies,” said Galina Dimitrova, director of investment and capital markets at the IA. But the current inefficiencies are making life difficult for both issuers and the end investors.

“A well-functioning bond market is essential to allow companies to borrow more affordably, enabling economic growth and the creation of jobs. Investors are concerned that the lack of transparency risks undermining bond market integrity to the detriment of both issuers and investors. Our best practice guidelines aim to improve transparency and outline what a well-conducted offer process should look like.”

Among the proposals put forth by the IA is a suggestion that tender offers be constructed in “as simple a manner as possible”.

The commercial objective for an exchange or tender offer should be made clear, it said, and issuers should publish the results of the offer, including a breakdown per security where multiple securities were subject to the offer.

The IA also took issue with the window of time investors have to make decisions about participating in tender offers.

Investors should have the exchange or tender documents in their possession for at least 48 hours and up to a week or more depending on the complexity of the offer before having to make a decision on whether they want to participate.

Liquidity 

Issuers and advisers also need to take into account the impact the tender offer can have on the liquidity of bonds, the UK trade body said.

There are a number of reasons why issuers decide to retire debt via trade offers. They could be looking to cut net interest costs or refine the capital structure of the fixed income instrument.

Investors who do not participate in tender offers can find themselves stuck in illiquid holdings when an issuer decides to retire debt.

The IA has proposed that for up-to-all tender offers, a clean-up put option should be available to investors at the same price as the initial tender offer.

For specific tender amounts, issuers should reduce the size of the tender if it will leave remaining investors with an illiquid holding or implement a clean-up.

Link resolutions 

The IA also recommends that issuers and advisers should ensure that participation in the tender offer process is not contingent on the passing of another resolution, a process known as link resolutions.

Similarly, it maintains consent fees should be paid to all noteholders in the event a resolution is passed regardless of whether they voted for or against the proposed modifications.

Tilney managing director Jason Hollands called the IA’s proposals “welcome guidelines to improve simplicity, allow investors a reasonable timescale to consider the implications of bond market offers and to require issuers to give greater consideration to the liquidity implications of tender offers”.

“The IA’s positon on consent fees is rightly a robust one,” he added.

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