Future corporate bond issues must include clauses that allow creditors to have a say in structural changes, large mergers and spinoffs, said Juhana Heikkilae, a senior portfolio manager who helps manage 3 billion euros ($3.9 billion) of fixed-income investments at Evli Bank Oyj in Helsinki.
“When the company isn’t clearly investment grade, the domestic bond documentation needs to include more high-yield style clauses that limit the company’s management and owners from acting against bondholder interests,” Heikkilae said. “There is pressure to change documentation to better protect bondholders, because it appears that companies aren’t very bondholder-friendly in these cases.”
The demands come as companies across Europe try to broaden their access to debt markets after stricter bank capital rules left loans more costly. YIT bondholders argue the company offered them inadequate compensation for spinning off its building maintenance services in a move that Danske Bank A/S (DANSKE) says will prompt it to cut its shadow rating on the issuer one step to BB+ from its previous investment grade of BBB-.
“The decisions were taken unanimously at both meetings and no investor even asked to speak,” Janne Tallqvist, group treasurer at YIT, said by phone. “We’re satisfied that this was decided according to our proposals.”
Finnish bond documentation standards that were created in the 1980s only suit investment-grade issuers, said Ville Talasmaeki, head of credit investment at Sampo (SAMAS) Oyj. He helps manage about 17.5 billion euros of assets. “The documentation should be different when unrated companies warranting a high-yield rating enter the capital markets.”
Creditors get no say in YIT’s decision to split its business units, while shareholders will vote on the move at an extraordinary meeting on June 17. Shareholders are being offered one Caverion Oyj share for each share they own in YIT. YIT bondholders on May 31 approved the company’s offer to raise coupons by as much as 87 basis points on notes due 2015 and 2016 after YIT said the proposal wasn’t open to discussion. Bondholders won’t have access to assets in the de-merged unit to cover their investments in case of a default.
“It was the best of bad options,” said Juuso Rantala, portfolio manager at Aktia Asset Management, who helps manage about $10 billion in fixed-income and equity investments. He ended up backing the proposal, even though the compensation is “absolutely inadequate” and doesn’t reflect the weaker credit quality after the split, Rantala said.
Finland’s Companies Act stipulates that mergers and splits can go ahead without bondholder approval, provided the company redeems the notes at par, according to Ville Poenkae, adjunct professor of commercial law at the University of Helsinki. That offers creditors little protection when interest rates are low and bonds already trade above par, he said. Bond terms should stipulate a price at which the company will redeem the notes, Heikkilae at Evli said.
“It depends on the market situation whether the Finnish Companies Act affords protection or not,” Heikkilae said. “That’s why it would be good to have clear clauses on what the price is at which the company has to buy back the notes. The settlement could be a fixed price or a spread, from about 101 to about 103.”
Finnish businesses can’t afford to anger debt investors as they look for funds to pay for growth. The northernmost euro member is struggling to adjust to the decline of its flagship company, Nokia Oyj (NOK1V), while its forest industry continues to founder. A gauge measuring Finnish business confidence has remained below zero since August 2011.
“It’s going to become more common,” said Ilkka Saksa, Helsinki-based corporate credit analyst at Pohjola Bank Oyj. “At least for companies where the business is split into various operations that could potentially be spun off, it may be in the investors’ interests to demand terms that stipulate that if a significant part of the business is divested, bondholders would have some safeguards or get compensated.”
The pool of outstanding long-term Finnish corporate bonds rose to about 33 billion euros by the end of 2012 from about 15 billion euros in 2007, according to the Bank of Finland. Loans from banks and other investors reached about 89 billion euros last year.
“Investors collectively need to push for a change,” Talasmaeki said. “If more investors begin to demand this, it will change. Investors don’t learn until they suffer losses.”
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