Welcome to Fidelity

Select a location so we can provide you with the appropriate information

Bienvenue chez Fidelity

Veuillez sélectionner un pays afin que nous vous communiquions l'information appropriée

Willkommen bei Fidelity

Wählen Sie Ihren Standort aus, damit wir Ihnen die für Sie passenden Informationen anzeigen können.

Benvenuti in Fidelity

Seleziona un paese in modo da consentirci di fornirti le informazioni appropriate

フィデリティのウェブサイトへようこそ

適切な情報を表示するため、現在お住まいの地域を選択してください。

Important information

I confirm that I am accessing this website for the purpose of acquiring information as, or for, an Institutional Investor (a corporate or other non-retail investor acting for their own account).

By accessing the restricted area I confirm my agreement with‚ and understanding of‚ the following terms of use and the legal provisions. If I do not agree to the terms and legal conditions‚ I must not access this website or any pages thereof. I acknowledge that access to the information contained on this website is available to "Qualified Investors" only as defined below. A private individual or legal representative or any other party without this qualification should not enter this website.

By accessing this website or any of its pages‚ I confirm that I am a qualified investor in accordance with Art 10.3 CISA.

The following are considered to be qualified investors:

  • supervised financial intermediaries such as banks, securities dealers‚ management companies and asset managers of collective investment schemes‚ as well as central banks;
  • supervised insurance companies;
  • public-law bodies and occupational pension institutions with professional treasury;
  • companies with professional treasury.

I understand the information contained in this website is not directed at, nor is it intended for distribution to, or use by, persons in any jurisdiction in which the dissemination of such investment related information is not permitted. I also understand that the information contained in this site is not directed to any party that may be defined as a ‘retail investor’ by the home regulator of the country in which the website is being accessed. I understand that the information or opinions contained herein should not be construed as an offer to sell or the solicitation of an offer to buy any investment product nor shall any such investment products or services be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful. Fidelity has expressed its own views and opinions on this website, and these may change and there is no obligation to update them. Nothing in this website should be construed as investment, tax, legal or other advice. The information contained herein is subject to change without notice.

I understand the information contained in this website is not directed at, nor is it intended for distribution to, or use by, persons in any jurisdiction in which the dissemination of such investment related information is not permitted. I also understand that the information contained in this site is not directed to any party that may be defined as a ‘retail investor’ by the home regulator of the country in which the website is being accessed. I understand that the information or opinions contained herein should not be construed as an offer to sell or the solicitation of an offer to buy any investment product nor shall any such investment products or services be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful. Fidelity has expressed its own views and opinions on this website, and these may change and there is no obligation to update them. Nothing in this website should be construed as investment, tax, legal or other advice. The information contained herein is subject to change without notice.

This website has been issued by FIL Fund Management Limited, a Bermuda company licensed to conduct investment business by the Bermuda Monetary Authority. Neither FIL Fund Management Limited, its parent company FIL Limited, nor any of their group companies or affiliates makes or gives any warranty or representation that any information contained on this website is accurate, complete, or fit for any particular purpose.

I acknowledge that neither FIL Fund Management Limited, FIL Limited, nor any of their group companies or affiliates will have any liability for any losses arising directly or indirectly from any information accessed from this website. By accepting this representation I also confirm my agreement to the website Terms and Conditions, which I have read and understood.

Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited, a company existing under the laws of Bermuda.

If the above representation is correct, please click 'I agree' below to continue to the site.

Information importante

Je confirme accéder à ce site Internet afin d’obtenir des informations en qualité d’investisseur institutionnel.

Je comprends que les informations contenues sur ce site Internet sont destinées exclusivement aux investisseurs résidant en France et ne doivent pas être diffusées à quiconque pouvant être considéré comme un investisseur particulier. Je comprends que les informations ou opinions présentées sur ce site ne constituent pas des recommandations d’achat ou de vente. Fidelity a exprimé ses propres vues et opinions sur ce site Internet, et celles-ci peuvent évoluer sans que Fidelity n’assume aucune obligation de les actualiser. Aucun élément de ce site Internet ne doit être interprété comme un avis d’investissement, fiscal ou juridique ou autre. Les informations que comporte ce site peuvent changer sans notification.

Ce site Internet est présenté par FIL Gestion, SGP agréée par l'AMF sous le n°GP03-004, 29 rue de Berri, 75008 Paris. Ni FIL Gestion, ni sa société mère FIL Limited, ni aucune des sociétés ou affiliées du groupe ne garantit ni ne fait aucune déclaration sur l’exactitude, l’exhaustivité ou l’adaptation à une finalité donnée des informations présentées sur ce site Internet.

Je reconnais que ni FIL Gestion, ni FIL Limited, ni aucune des sociétés ou affiliées du groupe n’assume une quelconque responsabilité au titre de toute perte découlant directement ou indirectement de toute information obtenue à partir de ce site Internet.

Ce site présentant des informations en langues française et anglaise, j’accepte de recevoir des informations non exclusivement rédigées en français.

Je confirme également, par l’acceptation de cette déclaration, mon accord sur les conditions et modalités du site Internet que j’ai lues et comprises.

Fidelity, Fidelity International, le logo Fidelity International ainsi que le symbole F sont des marques déposées de FIL Limited.

Si vous accepter les termes de la déclaration ci-dessus, veuillez cliquer sur « j’accepte » ci-dessous pour poursuivre votre navigation sur ce site.

Wichtige Informationen

Hiermit bestätige ich, dass ich diese Website zur Informationsbeschaffung als institutioneller Anleger (ein auf eigene Rechnung handelndes Unternehmen oder ein anderer nicht als Privatanleger geltender Investor) bzw. für einen institutionellen Anleger besuche.

Mit dem Zugriff auf den zugangsbeschränkten Bereich bestätige ich, dass ich die folgenden Nutzungsbedingungen und rechtlichen Klauseln verstanden habe und mit ihnen einverstanden bin. Andernfalls darf ich auf diese Website oder Teile davon nicht zugreifen. Mir ist bewusst, dass der Zugang zu den Informationen auf dieser Website nur für „qualifizierte Anleger“ gemäss untenstehender Definition vorgesehen ist. Eine Privatperson, ein rechtlicher Vertreter oder irgendeine andere Partei ohne diese Qualifikation sollte nicht auf diese Webseite zugreifen.

Mit dem Zugriff auf diese Website oder Teile davon bestätige ich, dass ich ein qualifizierter Investor gemäß Art 10 Absatz 3 des schweizerischen Bundesgesetzes über die kollektiven Kapitalanlagen bin.

Als qualifizierte Anlegerinnen und Anleger im Sinne dieses Gesetzes gelten:

  • beaufsichtigte Finanzintermediäre wie Banken, Effektenhändler, Fondsleitungen und Vermögensverwalter kollektiver Kapitalanlagen sowie Zentralbanken;
  • beaufsichtigte Versicherungseinrichtungen;
  • öffentlich-rechtliche Körperschaften und Vorsorgeeinrichtungen mit professioneller Tresorerie;
  • Unternehmen mit professioneller Tresorerie.

Mir ist bewusst, dass sich die Informationen auf dieser Website nicht an Personen richten bzw. für sie bestimmt sind, in deren Land die Verbreitung solcher anlagebezogenen Informationen nicht erlaubt ist. Mir ist bewusst, dass die hier zu findenden Informationen oder Meinungen nicht als Aufforderung zum Kauf oder Verkauf eines Anlageprodukts zu verstehen sind. Es sollen auch keine solchen Anlageprodukte oder Dienstleistungen Personen angeboten oder verkauft werden, in deren Land ein entsprechendes Angebot, eine Aufforderung, ein Erwerb oder Verkauf ungesetzlich wäre. Fidelity äußert auf dieser Website seine eigenen Ansichten und Meinungen, die sich jederzeit ändern können, ohne dass eine Verpflichtung zur Aktualisierung besteht. Kein Inhalt dieser Website ist als Beratung in Bezug auf Geldanlagen, Steuern, rechtliche oder sonstige Aspekte zu verstehen. Die hierin enthaltenen Informationen können sich ohne entsprechende Mitteilung jederzeit ändern.

Mir ist bewusst, dass sich die Informationen auf dieser Website nicht an Personen richten bzw. für sie bestimmt sind, in deren Land die Verbreitung solcher anlagebezogenen Informationen nicht erlaubt ist. Mir ist ebenfalls bewusst, dass sich die Informationen auf dieser Website nicht an Adressaten richtet, die von der Aufsichtsbehörde in dem Land, von dem aus die Website besucht wird, möglicherweise als „Privatanleger“ klassifiziert werden. Des Weiteren ist mir bewusst, dass die hier zu findenden Informationen oder Meinungen nicht als Aufforderung zum Kauf oder Verkauf eines Anlageprodukts zu verstehen sind. Es sollen auch keine solchen Anlageprodukte oder Dienstleistungen Personen angeboten oder verkauft werden, in deren Land ein entsprechendes Angebot, eine Aufforderung, ein Erwerb oder Verkauf ungesetzlich wäre. Fidelity äußert auf dieser Website seine eigenen Ansichten und Meinungen, die sich jederzeit ändern können, ohne dass eine Verpflichtung zur Aktualisierung besteht. Kein Inhalt dieser Website ist als Beratung in Bezug auf Geldanlagen, Steuern, rechtliche oder sonstige Aspekte zu verstehen. Die hierin enthaltenen Informationen können sich ohne entsprechende Mitteilung jederzeit ändern.

Diese Website wurde von FIL Fund Management Limited eingerichtet, einem Unternehmen mit Sitz auf bzw. nach dem Recht der Bermuda-Inseln, das über eine Genehmigung der Bermuda Monetary Authority zur Ausübung von Investmenttätigkeiten verfügt. Weder FIL Fund Management Limited noch sein Mutterunternehmen FIL Limited oder irgendein anderes Konzernunternehmen oder verbundenes Unternehmen übernimmt die Gewähr dafür oder erklärt, dass die Informationen auf dieser Website zutreffend, vollständig oder für jedwede Zwecke geeignet sind.

Ich erkenne an, dass weder FIL Fund Management Limited noch FIL Limited oder ein anderes Konzernunternehmen bzw. verbundenes Unternehmen für etwaige Verluste haftet, die direkt oder indirekt aus einer auf dieser Website beschafften Information resultieren. Durch Annahme dieser Erklärung bestätige ich auch mein Einverständnis mit den Nutzungs- und Geschäftsbedingungen dieser Website, die ich gelesen und verstanden habe.

Fidelity International, das Fidelity International Logo und das F-Symbol sind Markenzeichen von FIL Limited, einem nach dem Recht der Bermuda-Inseln eingetragenen Unternehmen.

Diese Website präsentiert Informationen in englischer und deutscher Sprache. Als professioneller Anleger akzeptiere ich hiermit, Informationen in mehr als einer Sprache zu erhalten.

Wenn die obige Erklärung zutrifft, klicken Sie bitte auf „Ich stimme zu“, um auf die Website zu gelangen.

Informazioni importanti

Confermo di voler accedere a questo sito web per acquisire informazioni in veste o per conto di un Investitore istituzionale (una società o altro investitore non retail che agisce per proprio conto).

Riconosco che le informazioni contenute in questo sito web non sono dirette né sono destinate alla distribuzione o alluso da parte di soggetti in qualsiasi giurisdizione in cui la diffusione di tali informazioni relative allinvestimento non è consentita. Riconosco inoltre che le informazioni contenute in questo sito web non sono dirette a soggetti che potrebbero essere definiti "investitori retail" dall'autorità di vigilanza nazionale del paese dal quale si accede al sito stesso. Riconosco che le informazioni o le opinioni contenute in questo sito web non devono essere interpretate come un'offerta di vendita o come la sollecitazione di un'offerta di acquisto di un prodotto o un servizio di investimento, né tali prodotti o servizi di investimento possono essere offerti o venduti a soggetti di giurisdizioni nelle quali tale offerta, sollecitazione, acquisto o vendita sarebbero illegali. Questo sito web contiene giudizi e opinioni espressi da Fidelity, che sono soggetti a modifica e rispetto ai quali non sussiste alcun obbligo di aggiornamento. Nulla di quanto contenuto in questo sito web va considerato come una consulenza di investimento, fiscale, legale o di altra natura. Le informazioni qui riportate sono soggette a modifica senza preavviso.

Questo sito web è pubblicato da FIL Fund Management Limited (una società delle Bermuda autorizzata a svolgere attività d'investimento dalla Bermuda Monetary Authority). Né FIL Fund Management Limited, né la sua società madre FIL Limited, né alcuna delle loro società del gruppo o affiliate fornisce o rilascia alcuna garanzia o dichiarazione che le informazioni contenute in questo sito web siano accurate, complete o adatte a uno scopo particolare.

Riconosco che né FIL Fund Management Limited, né FIL Limited né alcuna delle loro società del gruppo o affiliate si assumono alcuna responsabilità per eventuali perdite derivanti direttamente o indirettamente da informazioni ottenute da questo sito web. Accettando questa dichiarazione confermo anche di aver letto, compreso e accettato i Termini e le condizioni d'uso del sito web.

Fidelity International, il logo Fidelity International e il simbolo F sono marchi di proprietà di FIL Limited, una società costituita nelle Bermuda.

Se la dichiarazione di cui sopra è corretta, cliccare "Accetto" qui sotto per continuare a visitare il sito.

重要な情報

私は、機関投資家(自己勘定取引を行う個人投資家以外の法人その他の投資家)として、あるいはかかる機関投資家のために、当ウェブサイトにアクセスし、情報を取得するものです。

私は、当ウェブサイトに掲載される情報は、かかる投資関連情報の流布が違反となる法域の人物に提供するものではなく、そういった人物によって拡散されたり利用されたりすることを意図したものでもないことを理解しています。また、当サイトに掲載される情報が、ウェブサイトにアクセスする場所の国の規制当局によって「個人投資家」と定義され得る人物に向けたものではなく、当サイトにある情報または意見は、何らかの投資商品の勧誘や募集と解釈すべきではなく、かかる投資商品またはサービスの募集、勧誘、売買が違法となる法域にいる人物に対して募集ないし販売されるものでもないことも理解しています。フィデリティは、当ウェブサイト上に自社の見解や意見を掲載していますが、これらは変わる可能性があり、そういった変更があった場合に当ウェブサイトを更新しなければならないという義務は負っていません。当ウェブサイトの内容はいずれも投資、税務、法務、その他の助言と解釈すべきではなく、ウェブサイト上の情報は通知なく変更される可能性があります。

当ウェブサイトはバミューダ籍の法人でバミューダ金融庁から投資事業免許を取得しているFILファンド・マネジメント・リミテッドが作成しています。FILファンド・マネジメント・リミテッド、その親会社であるFILリミテッド、またはそれらのグループ会社か関連会社のいずれも、当ウェブサイトに掲載される情報が正確であるとか、完全であるとか、特定の目的に適合したものである等の保証や表明は行っておらず、そういった保証や表明を提供することもありません。

FILファンド・マネジメント・リミテッド、FILリミテッド、またはそれらのグループ会社か関連会社のいずれもが、当ウェブサイトから入手した情報によって直接または間接的に発生した損失の責を負うものではないことに了承します。

フィデリティ・インターナショナル、フィデリティ・インターナショナルのロゴおよびFのシンボルはバミューダ法の下で設立された法人であるFILリミテッドの商標です。

以上をご確認いただける場合には、以下の「同意します」ボタンをクリックしてください。

ESG in fixed income: beware of slipping standards late in the cycle

by Martin Dropkin Head of Research, Fixed Income and Cason Moore

Published 13 November 2017

Market contextESGFIXED INCOME

As the market cycle matures, governance standards often become looser. In fixed income, that is most conspicuous in bond covenants.

Restricted payments and the calculation of ratios are two of the most insidious trends we are seeing in covenants. Investors can protect themselves against these developments by using expert interpretation, building a joined-up approach and engaging with issuers.

The ‘G’ in ESG

For bond investors who lack a shareholder vote, covenants are the ‘G’ or corporate governance in ESG. Covenant documents form the legal rights for bond holders to protect and ensure that a company’s cash flow is targeted appropriately towards the interest payments (coupons) and the ultimate redemption of its bonds. Bond covenants quality is closely related to the market cycle and we can often pinpoint where we are in the cycle by following the trend of covenants and vice versa. If we start with the market cycle, we can get a sense of why covenants are changing and then highlight some of the most important changes which investors should be aware of, and what mitigating actions they can take as a result.

Taking the bond market temperature

Corporate default rates are low, not far off the lowest they have been since the crisis (chart 1). In the US and UK, bond spreads are the tightest they have been since the crisis, and in Europe they are not too far away (chart 2). What does this tell us? A simple explanation would be that because default rates are low, spreads are low. But there’s more to the story.Corporate leverage is rising in both the US and Europe, and across the capital structure in investment grade and high yield bonds (chart 3). Part of reason why default rates are so low is because companies have taken advantage of historically low borrowing rates to refinance and push out bond maturities (chart 4).

Chart 1

Reading the signals

All these signs - low default rates, tight spreads, rising and high leverage, and longer bond maturities - are clues that we are in a late cycle stage. At this point in the cycle, investors become increasingly impatient in their search for yield, and relative power begins to shift towards issuers, who start relaxing covenants. Since 2011, covenant quality has been deteriorating, pausing in 2016, but then resuming its path in the first half this year (chart 5).

The rising leverage in Europe is following in the footsteps of the US where animal instincts have been alive and kicking for some time. Increasing M&A, large scale buybacks, and rising private equity involvement in the market is leading to demand for financing in the bond markets, resulting in higher debt levels. The problem is that in this increasing leverage environment, spreads are not compensating for the additional risk. After taking into consideration historical loss rates, the excess spread today is small, and in the lowest rated bonds it is negative (chart 6).

At this stage in the cycle, it’s crucial for investors to be aware of how covenants are changing so that they are fully briefed on the risks they are taking on, and can make an informed decision over whether the yield (return) is worth the spread (risk).

Default rates will not remain this low forever, so credit selection is paramount. Not only will it be important to own the bonds with the strongest fundamentals, but it will be equally crucial to monitor and understand covenants, which are meant to protect investors against overly risky behaviour by issuers and in the event of defaults.

Covenant package deterioration

Covenant packages as a whole have been deteriorating consistently for some time. Moody’s index of covenant quality recently measured close to its worst reading ever, even as coupons, which are intended to compensate for risk, have continued to fall. Some of the overall decline can be explained by an increased issuance of ‘cov-lite’ bonds, which by definition have less covenant protection. Yet this year, Moody’s average score for new bond issuances containing the ‘full suite’, or non-cov-lite, of high yield covenants reached their weakest level since 2015 (chart 7).

While most covenants elements have eroded over the past couple of years, it is most pronounced in provisions governing restricted payments and the calculation of certain ratios.

Restricted payments

In their simplest form, restricted payments clauses limit the issuers’ ability to make payments such as dividends, distributions, certain investments, and equity or subordinated debt redemptions and repurchases. These provisions ensure that parties featuring lower in the investor hierarchy are not paid before senior debt holders. The loosening of the restricted payments covenants has occurred in three key ways:

  • the inclusion of a leverage-based permitted payments basket, which allows unlimited leakage of cash as long as a certain leverage ratio (as defined in the indenture) is met;
  • allowing for unlimited restricted payments in connection with certain changes of control provisions;
  • permitting significant leakage via investments in unrestricted subsidiaries.

Leverage-based permitted payments

In the first half of this year, roughly 70% of ‘full suite’ European high yield bonds have contained a basket for unlimited restricted payments as long as the company meets a specified leverage ratio - this is a continuation of a rising trend, which measured 61% a year earlier1. In addition, the actual specified leverage ratio itself has also been increasing.

Companies can use this basket more easily and in potentially greater amounts before hitting the leverage ratio threshold, allowing them more scope to pay capital out the door, leaving bondholders with access to less capital in the company in the event of a default.

It’s also becoming increasingly common to find the specified leverage ratio set above the opening leverage level. The original purpose of the basket was to reward companies for deleveraging. This development gives them immediate use of the basket and the opportunity to increase leverage.

Permitted payments related to change of control provisions

Recently, there have been a number of sponsor-backed deals which have proposed including a permitted payments basket which allows unlimited payments in connection with any transaction involving a change of control of the company but which did not trigger a change of control under the bond agreement.

A change of control event which doesn’t activate the bond indenture can happen in certain circumstances; for example, if a transaction doesn’t cause a ratings downgrade or if the company continues to meet leverage requirements after providing a pro forma assessment of the transaction.

Permitted payments related to change of control provisions essentially give an issuer, and its sponsors, the ability to make payments or dividends to incentivise certain parties, such as shareholders, to allow a transaction to close without having to worry about triggering any covenants. This can save the issuer the cost of expensive consent fee/waiver requirements or even potentially redeeming the outstanding notes, and help push through otherwise unsuitable transactions.

Permitted investments in unrestricted subsidiaries

Investments exempt from the restricted payments covenant, called ‘permitted investments’, involve limited amounts of investments in unrestricted subsidiaries. But in this late-cycle stage, these limited investments in unrestricted subsidiaries are becoming substantially more flexible.

This flexibility is achieved by including a payments basket which allows any investment made by non-guarantor restricted subsidiaries as long as that investment was financed with proceeds received in a way that is permitted under the indenture. This may seem like an obscure point but it has major implications. Because virtually all high yield bond agreements allow unlimited investments in subsidiaries which are subject to the bond agreement (restricted subsidiaries), companies can invest in these subsidiaries who can in turn invest in subsidiaries outside the covenant system (unrestricted subsidiaries).

In short, this is a back alley route to transferring assets outside of the ‘covenant system’, enabling the entity more freedom in its use of assets, and the potential to take risks that are not allowed under the covenant. This development has occurred in the past but was strongly resisted by investors. It is now reappearing.

Calculation of ratios

Date selection

A key tool for investors to monitor the health of a company, and their investments, is financial ratios. How these ratios are calculated exactly has a large bearing on the result and can give the issuer leeway in how they present the status of the business.

Recently, bond issuers have been introducing increasing flexibility in how they determine the date they use for calculating certain debts. The date provision permits a company to calculate its leverage ratios and/or fixed charge coverage ratios on the date the company enters into a commitment or the date the amount is actually borrowed.

Not only can the issuer select the date option to suit its needs, it may reverse its choice ‘at any time and from time to time’. This clause effectively authorises the company to game ratio calculations to be higher or lower based on what is best for the company at that particular time.

Calculation transparency

The problem doesn’t end there. The issuer is only required to provide limited transparency to noteholders to understand which date is being used on which occasion. This complicates independently verifying ratios, and it makes it difficult for investors to challenge the issuer on whether it is in compliance with its covenants.

This seemingly small nuance has a large impact given that leverage and coverage ratios permeate throughout the covenant agreement, with many other clauses containing restrictions dependent on these calculations. Perhaps most importantly, ratios are used to determine what the company can do under its indebtedness and restricted payments covenants as well as whether there is portability in a change of control transaction.

Traditionally, bondholders could exercise a put option to sell their bonds back to the issuer if the company was bought by a new owner. Portability is a recent innovation that waives this right and makes the bonds ‘portable’ to the new owner if the original issuer fulfils a leverage test and time restriction.

This protects the investor from having to hold bonds when a highly levered new owner buys the issuer, impacting the leverage ratios of the bonds issued by the original company. If the issuer has flexibility over the date used for the leverage calculation, it can escape from the responsibility of buying the bonds back and leave the bondholder vulnerable to the worsening bonds.

How bondholders can protect themselves

While the balance of power in covenant agreements swings towards issuers rather than bondholders, there are certain actions that investors can pursue to better protect themselves.

Expert interpretation

Bond offering memoranda can run into hundreds of pages and are filled with legalese. These documents establish the legal rights for bondholders and investors need to be clear on how they will be treated under different scenarios and their avenues of recourse.

It’s important to pay close to a company’s limitation on leverage, which corporate assets are provided as security for bondholders, and the ability for companies to upstream cash flows from subsidiaries to the issuing entity.

This time-consuming work ideally requires skilled, experienced and dedicated legal resources that can fully understand, interpret and communicate the technical language contained in the bond documents.

Joined up approach

No one individual is going to be able to master all the diverse skills required to effectively invest in bonds throughout the market cycle. It needs teams working across divisions who can interact seamlessly.

Credit analysts are the central figures but they need to be able to readily access expert legal opinions, and work in tandem with equity analysts to get a fully comprehensive view of a corporate. Portfolio managers have to be able to lean on all these skillsets at very short notice.

One effective approach is to apply an active and co-ordinated policy to shareholder voting, where equity investors, through close co-operation with credit analysts, incorporate the perspective of bondholders (among other elements), in their voting decisions.

Push back

It’s often necessary to engage issuers and sometimes push back on terms. This is not easy, and requires credibility with the issuer and the capacity to engage in resource-intensive negotiations. Investors must commit to lengthy, ongoing, time-consuming discussions, and be strategic in their dealings with the issuers.

Investors also need to engage with other investors and discover points of agreement and ways to combine efforts effectively. Investors can participate in industry groups and standards boards, and by liaising with market regulators it’s possible to promote bondholder interests in general and establish a voice over time.

The objective of these pursuits is to influence bond covenants or at least protect the interests of debt investors, but the ultimate discipline is to vote with the wallet and sell if the position if it becomes untenable.

Conclusion

Bond covenants are an essential line of defence for bondholders and the gradual erosion we are seeing in their standards not only signals the maturity of the cycle, but it also alerts investors to the need to adapt their approach to bond investing.Investors need to monitor much more closely how bonds are performing and whether these bonds are fulfilling their covenant requirements. This is time consuming work but becomes increasingly important as the cycle grinds towards its peak, when those covenants take centre stage in guarding investor interests.

Much of the trend in watered down bond covenants is being driven by private equity, which has large pools of capital deployed in the market. Dry power is approaching $1 trillion, the highest it’s ever been. As this money starts entering the market, covenants could corrode further.

Despite the pressures on covenant quality, we are still seeing good opportunities for investment in the bond market, but those opportunities require more due diligence and discretion. Fundamental analysis should be complimented with a thorough review of the covenant agreement to ensure the best outcomes.

Takeaways

Bond covenants are an essential line of defence for bondholders and the gradual erosion we are seeing in their standards not only signals the maturity of the cycle, but it also alerts investors to the need to adapt their approach to bond investing.Investors need to monitor much more closely how bonds are performing and whether these bonds are fulfilling their covenant requirements. This is time consuming work but becomes increasingly important as the cycle grinds towards its peak, when those covenants take centre stage in guarding investor interests.

What question should we tackle next?

Email your suggestion toeditorial@fil.com

Disclaimer will be here when content is signed off.