The Investment Association (IA) has today published a series of best practice principles designed to improve the functioning of the bond markets during exchange and tender offers – the process whereby an issuer exchanges its existing bonds for new bond issuance or buys them back for cash.
Bond markets are a cornerstone of the global economy, providing a critical source of capital for companies, as well as key investment opportunities for a wide range of investors. Asset managers, as investors in fixed income instruments, are keen to ensure that bond markets function well and continue to serve the interests of both issuers and investors.
However, the IA has identified a number of areas of concern within the exchange and tender offer processes, including a general lack of transparency as to the rationale, process and outcome of such transactions, potentially leaving investors with insufficient information to allow them to reach a sound investment decision.
Asset managers are also concerned about overly short timescales which do not give adequate time to assess the offer and the presence of linked resolutions that may pressure investors to support aspects of proposals which they would not otherwise support. Additionally, for those bond holders who do not wish to partake in the process, there is the further potential risk that they are left in an illiquid rump, unable to sell their holding.
Galina Dimitrova, Director of Investment and Capital Markets at the IA said:
“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.”
The IA is therefore calling for exchange or tender offers to be constructed in as simple a manner as possible. In particular, the commercial objective for an exchange or tender offer should be made clear and issuers should publish the results of the offer, including a breakdown per security where multiple securities were subject to the offer.
Linked resolutions should have no place in the offer process, with the IA calling for issuers to ensure that participation in an offer should not be contingent on the passing of any another resolution.
Under the IA’s new guidelines, investors should also 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. Issuers should also ensure that all offer announcements are made via a RNS and available on their website to ensure that the information is readily accessible.