Last week I attended the Association for Financial Markets (AFME) 12th annual conference. I was trying to remember how many I had attended in the past - I think I counted ten - and it is good to see how the event has grown and flourished. It was fantastic to see so many Debt Explained clients – both new and long-standing – represented at the event.
There was a high level of confidence and generally positive view of the future – I shuddered slightly as I heard the market had been “risk adverse” this past year and hopefully next year would want more risk and “innovation". I confess the atmosphere felt more like 2006 than any other year I remember - I hope I am wrong!
AFME has been at the forefront of industry-wide initiatives to bring more transparency to high yield bond terms for investors. Among the initiatives that it has led in the last 12 months include a comprehensive set of HY best practice market guidelines; a standard set of investor questions to help guide quarterly calls and guidance on regulatory impact of MAR and MIFID II on the market.
Nevertheless the debate about covenant erosion rages on – as it has for many of the years I have attended this event. However, in a market which favours Issuers, it is no surprise that they are using loose terms in other deals to negotiate their own favourable terms. Many of the speakers echoed the theme that the market was data and precedent driven. I should note that there was one well-respected figure who claimed that each deal should be looked at on its merits and precedent was not relevant. But for better or worse, I think that ship has long since sailed.
At Debt Explained we are focused on the roll out of our new innovative bond covenant scoring system. Aggressive Covenant Terms Scoring (ACTS) allows us to draw on the data we hold on over 700 bonds and allocates each deal an individual deal score which can then be compared to other deals using a wide variety of criteria including past years, same rating, sector, sponsored/non sponsored etc. I won’t tell you if YTD is the most aggressive ever but data does not lie- I see this ACTS scoring system as a numerical answer to an otherwise subjective assessment.
The data, and my personal experience, tells me that like the tide covenant strength (and the focus on particular covenants) comes and goes. But the changes are gradual and are matters of degree in the main part.
The discussions at the conference around (for example) the finer points of value leakage (!) made me think of another market which is a serious competitor to high yield bonds (and acknowledged as such at the conference) where investors have had to accommodate genuine and dramatic covenant protection change - leverage loans.
Investors in term loans have seen the cov lite TLB market remove financial covenant protection, build in incremental facilities, tighten liquidity via greater sponsor control, adopt totally different (HYB based) covenants………..to mention but a few.
Change is challenging at any time but HYB investors seem to be in a better place that Leveraged Loan investors (though many play in both markets). Whether you see these changes as positive or negative developments of course depends upon your perspective. Nevertheless, arming all participants in the market with the relevant deal terms data can only be positive - hence the importance of loan and bond databases!
-- Stephen Mostyn-Williams, Chairman of Debt Explained
Stephen founded Debt Explained in 2009, following a 25 year career in leveraged finance. He has held senior positions at Cadwalader, Wickersham & Taft LLP; Shearman & Sterling LLP and Ashurst. Stephen co-founded the European High Yield Association and served as its chair for the first three years of its existence.
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