With companies recently tapping debt markets at an unprecedented scale and speed, Li Zhao, Consultant – Capital Markets at Maitland/AMO, explains what this means for IROs and companies
For companies, shareholders and bondholders are known to wear two separate hats. Shareholders focus on profitability and growth; bondholders are more concerned with cash and covenants. But does this all mean that they are nothing alike, that bondholders deserve less attention than their vociferous shareholder neighbours? Recent trends in the investment arena might offer a few clues for the answer. The recently revised UK Stewardship Code 2020 requires signatories to apply stewardship across all asset classes, including fixed income, extending the remit beyond its previous focus on listed equities. Asset managers that invest in both equities and bonds argue that in most cases, the interests of bondholders and shareholders are increasingly aligned – with a shared focus on sustainable growth and value creation. So what does it mean for companies and their investor relations officers (IROs) dealing with bondholders?
It means first an awareness that bondholders are no longer a passive group who were assumed to react only when companies went bust. They speak to bond issuers during roadshows, reissuance and other occasions. If needed, bondholders seek further engagement to escalate issues by threatening to divest or refusing to refinance future bonds. It is notable that in recent corporate collapses due to governance or COVID, despite having a higher priority of claims, bondholders were often among those who got hit hardest and many of them have now started to incorporate risk and ESG considerations into their investment process. They have become increasingly active in raising their voices to their portfolio companies, especially on ESG-related issues that can impact companies’ ability to service debts as well as the ability to sustain growth and create value.
For IROs, this highlights the importance of having a good debt IR programme to build a direct dialogue with bondholders – answering their questions and addressing their concerns. The benefits it brings can be significant. Companies can get easier and cheaper access to capital and funding in the future, due to increased transparency with investors, amongst other factors. Sound debt IR practices can also help management build long-term credibility with the investment community, as well as an enhanced corporate image. More importantly, on a strategic level, engaging with bond investors as a key part of debt IR programme, can provide valuable inputs for companies to assess risks and unlock opportunities, which may become integral in their strategies and business models. For example, Federated Hermes, an active bondholder of Barclays, engaged with the bank’s Chair and senior management on setting an objective for its climate-change strategy and lending policies.
However, these benefits won’t be achieved overnight. A long-term debt IR programme needs to be in place and in action. It can start from a reactive function – handling incoming inquiries from investors, analysts, credit rating agencies, credit data researchers and media – and then grow into a proactive programme with effective engagement meetings with the above stakeholders throughout the year. To maximise the value of debt IR, and IR in general, the function needs to be positioned on a strategic level, as an adviser to management and Board, an educator to investors and broader capital markets, and a facilitator of communication between the company and the markets. Depending on corporate structure, a debt IR team works well when it has the financial expertise from the treasury / finance team, and the market intelligence and marketing expertise from the IR team. The two teams need to cooperate with distinct responsibilities and ownership of relationships with different stakeholders.
At Maitland/AMO, we believe that for companies entering debt markets, expert IR advice is critical to running an effective IR function to make sure it creates strategic value for the companies. As a trusted adviser, we’re proud of our success of working with bond issuers over the world in building their debt IR capabilities pre and post-transactions. We focus on helping clients achieve their debt IR communication goals. Our extensive expertise and experience include developing debt IR communication materials, advising on best practice of ESG communication and engagement, managing outsourced IR programmes, supporting financial calendar events and IR training. Should you need any help or further information, please don’t hesitate to get in touch with us.