fresh thinking

Debt IR is in focus once again

The debt section of the corporate website has been brought again into sharp focus. A paper from the UK Treasury has highlighted the change from bank debt to the corporate bond markets. Companies are likely to have significant changes in the cost and availability of bank finance for a considerable period.  Increased scrutiny and regulation of the financial services industry, the reduced capacity of the banking sector to lend as they repair their balance sheets, and the residue of mispricing of risk will see companies finding equity markets and corporate bond markets better value in terms of cost of capital.

Indeed the Treasury notes that:

"Market investors rely on publicly available information to assess the quality of a company’s credit. In principle, therefore, the better the quality of that information, the less the uncertainty investors will face in pricing the risk of lending, and the less likely they will be to charge the borrower a premium to protect themselves from uncertainty. The costs to investors of collecting that information may also have an impact on the pricing of debt. The greater the ease with which investors can access information, the lower the cost of assessing a company’s credit. This should in turn reduce the cost to the company of borrowing."

Debt IR Programme. As a result, companies have developed a wide range of means of communication with debt investors. These include:

• Roadshows. The majority of public companies organise non-deal road shows at least annually; only a few corporates have communications centred exclusively around new issues and those held in conjunction with equity roadshows. 
• "Broadcast" tools such as the corporate website have become important. The range of debt information on issuers’ websites has grown hugely in the last year. Content may now include: 
  – A bond maturity and call schedule
  – Details of senior bank debt facilities, amounts and maturity
  – Debt presentations
  – Links to specific debt sections of the company’s report and accounts
  – Agency ratings, and an explanation of different ratings
  – Treasury accounting policies on risk management and hedging practices
  – Cash flow reconciled to movement in net debt
  – Descriptions of the loan capital, prospectuses, (and possibly full debt covenants)

So the willingness of companies to publish their debt covenants is again in the spotlight. Many argue that uncertainty about the quality of investors’ claim on the company can be addressed by providing more loan covenant information, creating more certainty for non-bank investors. However any move to require this level of disclosure will almost certainly be contentious.