British insurers look to improve standards, transparency in European bond market

New York, July 7 - The Association of British Insurers is pushing for improved standards in the European bond market covering such areas as disclosure, covenants and trustees.

To promote its views, the trade association has published a position paper which, it says, emphasizes "the value investors place on timely access to information, transparency and clarity with regard to their entitlement to security."

The ABI added that it is now seeking to work with other investor groups in Europe to promote discussions with issuers on raising standards of documentation in the sterling and euro fixed-income markets.

"More and more institutional investment is going into corporate bonds," said Rod Paris, director of Standard Life Investments and chairman of the ABI Bond Committee.

"ABI members are part of this trend, but there has been little opportunity for dialogue with issuers, especially in the euro-denominated market.

"Our initiative aims to achieve better understanding of how issuers can make their paper more attractive to investors. It is not prescriptive, but reflects the desire of a broad cross section of investors for better communication and to establish an agreed view of best practice."

The ABI, which has more than 400 members covering more than 97% of the insurance business in the United Kingdom and controlling £1 trillion of funds, said in its position paper that its "primary objective is to promote timely access to information, transparency and clear labeling with regard to the seniority status of individual issues, which avoids misleading use of language."

ABI's recommendations

Specifically, the ABI said:

* Investors should receive a red herring before the start of the roadshow to assist them in deciding whether to invest. All investors should receive a final prospectus. "High standards of disclosure are paramount," the ABI commented;

* Documentation should include a covenant committing the borrower to continuing disclosure if it is taken over, taken private or merged. Disclosure should include an annual bondholder meeting and timely publication of price sensitive developments on the same basis as with equity issuers;

* It strongly supports new European legislation requiring debt issuers to publish half yearly figures - which they believe should apply to all corporate issuers, including those sold in denominations of €50,000 or more;

* Bonds labeled "senior unsecured" should have covenant protection so that they retain that status;

* Fixed-income investors should have protection through change-of-control provisions allowing them to redeem the debt on the original terms;

* Covenants should include a negative pledge clause explaining and safeguarding the bonds' position relative to any future debt;

* Investors should have protection from disposal of assets;

* There should be "an orderly process" for early redemption and refinancing in the euro market. The ABI noted that investors are prepared to consider call options which provide the issuer with flexibility to redeem and refinance debt "at a fair and reasonable level";

* Independent trustees will improve investor confidence. The indenture should make clear who will pay for legal and other costs in a restructuring.

Welcome from Fitch

The proposals were welcomed by the rating agency Fitch Ratings.

It said the document represents "an important and promising step" in the development of the European corporate bond market.

"If a more durable corporate bond market in Europe is to develop, investor associations and issuing interests must work together toward addressing the market and legal frameworks which to date have failed to adjust to the clear and increasing trend toward disintermediation," said Edward Eyerman, senior director in the Fitch Corporates Group, in a news release.

Fitch called for the ABI to encourage other investor associations in the United Kingdom and Europe to adopt similar proposals.

But Fitch said investors also have to recognize that issuers are working under a legacy of market and legal factors which put them under greater accountability to shareholders and bank lenders than to bondholders. It noted that because they are potential lenders of last resort, "banks are able to demand protective covenants to ensure existing facilities are neither abused by shareholders nor jeopardized by attempts to raise new debt that is secured or ranking senior unless the existing lenders themselves arrange the new debt.

"Banks also want to work exclusively with management to develop restructuring plans, often including the sale of assets without the need to consult other creditors," Fitch noted.

Fitch also proposed that investors should also demand that issuers obtain at least two credit ratings from the three major international rating agencies.

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