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Investor rep needed to challenge bond market status quo

01 May 2019

Article

An investor representative that would act in the interests of bondholders is strongly supported by those who want bond market transformation

PUBLICATION: BUSINESS DAY | WRITER: CHRIS GILMOUR | DATE: 01/05/2019 

Last week was the first of a two-parter on the state of SA’s bond market. I bemoaned its lack of progress in terms of transparency, efficiency and fair play. I looked at how the JSE has managed this platform for the past decade, after fighting quite fiercely to buy it from a mixed bunch of shareholders, including Mark Barnes’s Purple Capital and the New Zealand Stock Exchange.

I looked at a key suggestion, being the proposed establishment of an investor representative that would act in the interests of bondholders, allow for the quick calling of bondholder meetings, especially important in the case of credit events such as defaults.

This function is strongly supported by vocal bond market transformation proponents, such as the Association for Savings and Investment SA, and Andrew Canter, chief investment officer of Futuregrowth. Canter lists PPC, Umgeni, African Bank, Consolidated Infrastructure Group and Steinhoff as instances in which bondholders were not empowered to call a meeting and take action to protect investors’ rights, and when an investor representative would have been invaluable.

“The inability of investors to act quickly on defaults allows bank creditors to grab all the goodies and negotiate terms adverse to listed bondholders”, says Canter, “It’s like watching a house burning and quickly trying to organise a fire brigade with no co-ordinator, budget or hose-pipe”.  

Despite push for change, there is furious objection and resistance, especially from the banks, to improving transparency in this market. Looking specifically at the objection to the investor representative, the opposition argues it would be too costly. However, this expense has been estimated at less than 3% of total costs of a bond issue, and investor benefits would surely outweigh the small charge.

Looking back in time, banks were the original architects of the bond market structure in the 1980s — so changing a long-standing status quo may endanger lucrative fees. They play several, sometimes, conflicting roles in the debt market: they are large issuers themselves at 39% of the pool; arrangers for other issuers; market makers; and may also have direct loans to the bond issuers. They stand accused of selling bonds on terms and at pricing levels at which they themselves would never consider; they don’t provide liquidity to the market; they protect their own lending interests with security and covenants, which they deny to other bondholders; they often subordinate institutional bondholders interests to their own loans to a company; when there is a credit event, they work for the issuers and against investors. 

They appear to oppose transparency and disapprove of investors that challenge the well-established club.

Investors vs issuers

The JSE has previously and diplomatically noted the strong disagreement that rages around suggested improvements to this market: “The interests of investors and issuers seem far apart on the proposed amendments to the debt-listing requirements dealing specifically with the introduction of the investor representative; and the increased corporate governance arrangements applicable to all debt issuers.”   

Recent developments indicate the JSE has now ‘blinked’ and is deferring to the banks. Canter reports that in a letter to investors on April 2 2019, the JSE reveals it is no longer considering the investor representative recommendation, a key role that would sit at the foundation of debt-listing requirements, being investor confidence. 

“The JSE has not offered a solution to the problem of investor prejudice” he says. “In effect, it has chosen to dismiss investors’ concerns and continue to undermine investor confidence.”

Bond investors put the blame firmly in the lap of the JSE, as it continues to strengthen equity market regulations, while lagging on debt platform improvements. With another round of debt-listing requirements draft amendments due out soon, followed by public comment, it needs to be boldly independent. It must deep-clean, develop, and oversee this market with due regard to public interest, offering suitable and empowering protections for bond investors and ultimately the pensions and investment portfolios of the everyday person.    

Read the original article here.