Everyone’s a winner

Sir,

The aim of the ‘improving market standards’ initiative is to improve bond documentation and disclosure in Europe. With the underlying document we do not want to dictate new rules, rather it is meant to start a broad discussion between investors, investment banks and issuers about reasonable and necessary changes of market standards.

Of course, the group might not succeed in achieving all of its goals, but even so, if only some were to become market practice, the benefits to investors would be significant. Thanks to the initial discussions about the initiative, corporate bond investors have realised that they share mutual concerns and that they do not stand alone in their views.

The fact that a large group of investors in the UK, the Netherlands and France has signed up, and the German BVI, which represents roughly 90% of German asset managers, has expressed its support, suggests that there is a broad-based interest in this initiative.

However, the benefits of better market standards are not entirely one-sided. To see the benefits for the issuers you have to take a longer-term view. A market where investors have access to financial information and are not exposed to event risk should in the end benefit the cost of borrowing from an issuer’s perspective. It could also improve their access to the market. Investment banks might also benefit by reducing the likelihood of reputational, or even financial, damage from being involved in bringing a bond that performs badly or company that behaves badly to market.

Lastly we believe arguments that a standardised market will limit your ability to outperform are invalid and represent a fundamental misunderstanding. Avoiding event risk is in our opinion not a consistent source of alpha. The compensation is hardly ever sufficient and the payoff is extremely skewed. It’s merely a drag on your return. We think that with better documentation this can to a certain extent be avoided. Lack of documentation introduces event risk, which we as credit investors are not in a position to anticipate. By reducing event risk through better documentation, we as investors can focus on what matters most: pure credit analysis, taking on pure credit risk and earning a commensurate premium. Issuer selection will remain a key element in the investment process.

The overriding principle is that bondholders are not questioning how companies should be managed, but want to be better informed and protected. Most of it is about timely information and the use of clear and standardised language. An investor should always keep their fiduciary role in mind. Poor documentation is not in the interest of the participants in our pension fund.

Yours truly,

Pieter Prins, ABP
Eduard Van-Gelderen, Prudential M&G
Michael Himmelbauer, PGGM