I received an early Valentines day present today- a story in the Financial Times referencing Debt Explained and its new high yield bond scoring system - Aggressive Covenant Terms Scoring (ACTS).
While the story focussed on the differential between scores for corporates and private equity backed issuers (in itself a very interesting topic and see the Debt Explained article on the same topic here, I want to move the focus to the concepts behind ACTS and how it works.
I learnt yesterday about a database called PEACH which (for the uninformed like me until yesterday) collects data on an unnamed basis from multiple participants in the restaurant trade on pre selected criteria. Users can benchmark against that industry data. Are they performing better- or worse.
The use of data has created a new world of informed benchmarking. Even in the burger world - but not in the world of high yield bond covenants. Perhaps surprising given the difference between the price of a burger and an investment in a high yield bond!
Until now. ACTS uses a consistent criteria of specified score points for every fully covenanted high yield bond. These include relative to market (top 25%) criteria. The higher the score the more aggressive the covenant package. Better for issuers, less protective for investors.
Aggregate scores are broken down into scores for risk areas- again consistent for every deal. Users can look at risk area scores (for example value leakage or redemption risk) and/or the aggregate.
ACTS provides risk assessment for each individual deal plus benchmarking against the total market by way of user selected criteria (we provide pre-selected benchmarking to other sponsor/non sponsor deals, sector and projected rating).
We have scores for over 600 European high yield deals going back over several years. Users can find the difference (for example) between health care sponsor and non sponsor deals in early 2016 as opposed to early 2017.
Or track the market month by month, year by year- the sponsor v non-sponsor difference was the area the FT focussed on.
Average ACTS Score for European High Yield Bonds issued in each calendar month
Please note that there is no data for August as there were no relevant deals scored for ACTS.
I have never made any secret of the fact that I think transparency is good for markets. Investors should make informed decisions as to risk. Longer term markets cannot thrive if parts are hidden in shadow. The “debate” between HYB buy and sell side in Europe is an example of this.
Covenants are an important part of decision making in our market. Until now there was no criteria for benchmarking and often considerable debate (sometimes well informed, more often not) about individual deal terms which distracted from the key credit elements of the deal.
Now the market has access to a data driven approach. Better execution will result, ultimately benefiting all parties.
Risk assessment and benchmarking in one tool. What’s not to like? Welcome to the world of data!
With thanks to the development team at Debt Explained.
To find out more about ACTS, click here.
-- 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.