A tight squeeze: debt IR
After the recent upheaval in the debt markets, many IROs are probably loath to use the ‘D’ word. But the current situation makes good debt relations more important than ever. ‘Bondholders have often felt neglected in comparison with equity holders,’ notes Erfan Hussain, a spokesperson from the UK’s Association of British Insurers.
It’s not hard to see why: equity holders have long been pandered to by firms hungry for liquidity, while bondholders have been the ugly stepsister, shunned in favor of a more popular and attractive sibling. Post-credit squeeze, however, the dynamic has shifted.
‘Most companies don’t do debt IR but IROs really need to understand the fixed-income environment,’ explains Damian Watkin, director of strategic intelligence at Thomson Financial. ‘Many companies don’t issue debt, so they don’t worry – but even when they do, IR tends to operate on a reactive basis.’
Debt can provide companies with key strategic opportunities, yet many IROs are doing next to nothing when it comes to communicating with their debt holders. In fact, a recent survey by Thomson estimates that as many as 40 percent have never even met with fixed-income analysts.
But this could all be about to change. ‘We’ve had a lot of questions from clients recently about debt IR. The credit crunch has really transformed things,’ Watkin notes. ‘The cost of issuing credit has grown substantially, new corporate issues are down massively, and it’s now harder and more expensive to come to the market.’
Hussain concludes that all these factors combined are making IR professionals take the issue of debt more seriously. ‘The credit crunch has altered the dynamics,’ he says.
As well as being a challenge for IROs, developments in the market are giving corporations the opportunity to set themselves apart from the competition and win brownie points from debt investors. ‘The credit crunch means there’s going to be a premium on the regular flow of easily accessible information, as is the case in any dynamic, changing situation,’ argues Hussain. And all this will make improved communications more of an imperative.
One company leading the way is KPN Royal Dutch Telecom. It launched the debt part of its website in 2002. ‘We had significant leverage from 2001 to 2003 and we wanted to be open and committed to good communication,’ recalls Christiaan Schieven, investor relations analyst at KPN.
The firm now works with Thomson, which offers peer ownership and analysis of a similar style to that available to IROs targeting equity holders.
Whose work is it anyway?
Key decisions regarding debt are normally made by the treasury department but, increasingly, more progressive companies are getting their conventional IR departments to work in tandem to ensure bondholders are kept more frequently updated.
‘We know our debt holders and we work with the treasury function to communicate with them,’ says Sarah Gerrand, head of investor relations at international retail group Kingfisher, which encourages debt investors to use the IR department as the first port of call for information. ‘Normally I’ll be the conduit. If someone is asking questions about maturity of debt or rating agencies, I’ll answer them, but if things get more technical I’ll either go to the treasury department and get the answer or refer the individual straight on.’
Schieven also believes it’s up to IR departments to communicate with debt holders. ‘But it needs to be in cooperation with the treasury department,’ he says. ‘Investors, whether debt or equity holders, should obviously get the same information, which is best safeguarded when a single department is responsible for providing it.’
Not everyone is convinced the IR department should be doing the lion’s share of the communicating, however. ‘If it’s good news – just an update, say – there’s no reason why a conventional IR department couldn’t communicate with bondholders,’ argues Hussain. ‘But often, if there’s an issue that needs to be resolved, maybe the treasury department would be more appropriate.’
The show must go on
Disagreements tend to arise over the kind of provisions that should be made for debt investors. Bondholders are certainly different beasts from their equity-holding counterparts. The nature of bond investing is more passive and does not lend itself so easily to regular meetings, but that doesn’t mean it’s not worth organizing separate roadshows and conference calls for debt analysts after quarterly results and trading statements.
‘Some companies have regular bondholder meetings, and they often say these experience very low attendance,’ Hussain notes. ‘Of course, issuers should not mistake that for a lack of interest. Bondholders are naturally more concerned when there’s a problem.’
Who should be facilitating roadshows and meetings is another consideration, and practices vary widely. At best, companies might host a roadshow in conjunction with their treasury team and an investment bank, prior to an issue. At the very least, companies will simply invite debt holders to the same meetings they organize for equity holders.
The problem with this lies in the fact that debt investors have very different needs. Bondholders have a longer investment horizon, for example, and are more interested in cash flow and earnings than shorter-term metrics like EBITDA.
Kingfisher ran an event solely for debt investors last year. ‘We organized a store visit in 2007, but we are thinking of running a debt roadshow this year,’ Gerrand says. ‘Logistically the treasury team sets up the meetings, which we then go along to as well. And if we do conduct a debt roadshow, it will be me going with treasury.’
KPN’s main debt IR activities revolve around its annual non-deal roadshow, ‘although last year we also presented at a bond conference,’ Schieven adds.
British American Tobacco (BAT) is another firm that has been running debt roadshows for some time. ‘We work closely with our treasury department and we hold regular roadshows in the UK and overseas,’ comments Ralph Edmondson, head of IR at BAT. As well as organizing events, the firm includes lots of useful information on the debt IR part of its website and organizes meetings with credit analysts.
Taking the credit
Even now only a minority of IR people conduct meetings with credit rating agencies. ‘We don’t have much contact with the rating agencies; we believe that’s more a job for the treasury department,’ Gerrand explains. ‘The agencies tend to ask more complex questions about the debt structure, so it really is the treasury function they have a relationship with on a day-to-day basis.’
At any rate, the credit crunch has called into question the role of credit rating agencies. ‘Typically investors are relying less on rating agencies and more on their own in-house research, so it’s now even more important for companies to reach out directly to debt investors,’ Watkin suggests.
At the most basic level, companies can make a start by improving the debt section of their websites. As well as ingratiating yourself with your debt investors, having a decent web offering can save you time. ‘We launched our debt section only last year and it has been really helpful because we don’t get so many questions now,’ notes Gerrand.
Providing more information could give your company a competitive advantage, too. ‘In general, debt investors appreciate our openness,’ explains Schieven. ‘Being open and responsive to investors has also enhanced their understanding not only of our financial position but also of our strategy. This clearly helps in the dialog between us.’
Companies can also use their web pages to publish credit ratings and breakdowns of all debt and off-balance-sheet items, something Thomson recommends. And while banks may have qualms about publishing the exact extent of their liabilities, other sectors have less of an excuse.
IR professionals should think more seriously about the competitive advantages of meeting with fixed-income analysts. There really is little doubt: progressive companies that keep bondholders informed are more likely to be recognized as best performers against their peers.
And companies that are more proactive will be better placed to capitalize on the market once it picks up speed again.