Don’t Ignore Debt
Bonds have become a relatively inexpensive way to raise capital. U.S. corporate debt levels continue to reach historic heights as corporations take advantage of the protracted period of low interest rates and strong investor demand for risk-averse yield. According to the Securities Industry and Financial Markets Association (SIFMA), investment-grade corporate debt issuance surpassed $1 trillion even before year-end 2017 for the sixth consecutive year of increased corporate debt issuance.
As more companies issue more corporate debt and seek to manage it more proactively, bondholder communications have been on the rise too. In this environment, a strategic investor relations program now generally includes a bondholder communications component. Increasingly, companies are having their investor relations officer or IR team identify bondholders and communicate with them on an ongoing basis. As this integrated communications approach continues to evolve within corporations, it has rapidly come to be considered a “best practice” when communicating with the corporate ownership base.
If your company is not already doing this, it may be ignoring a key constituency of strategic and financial value. Being proactive can support capital growth strategies and enables companies to establish a positive, mutually beneficial relationship with bondholders.
Start today to build a bondholder communications program or expand an existing investor relations program to include bondholders. Begin with some basic questions, like: Does your company have the information needed on bondholders? How will the program be structured and maintained? Learn more below about the five key steps to achieving proactive bondholder communications.
Passive Is Passé
Before 2008, most companies rarely engaged in meaningful communications with bondholders unless the company was issuing new debt, redeeming or buying back bonds, or needed bondholder support for a corporate action. And given the illiquid nature of the bond markets, companies tended to experience little need to communicate with bondholders on a frequent basis.
Many firms still cling to this passive approach. The two primary types of bondholder communications historically have been:
- Laissez-faire: No direct communication with bondholders. The only communications with bondholders are through the underwriter at inception and the trustee bank going forward. Generally the company is not concerned about how the bonds trade in the secondary markets and prioritize access to capital over managing the cost of debt.
- Goldilocks: Post details about the structure of specific debt instruments (such as bond maturity date, coupon, rating and covenants) on the company website, generally in the investor relations section, and direct investors there. Bond investors can also access any additional information they seek on the company’s performance and fundamentals. This approach can support a strong focus on placing debt, while also providing information to address ongoing demand for the bonds post-issuance in the secondary markets. It’s also efficient, since bonds trade less frequently than equity, making the investor base more stable. And unlike equity investors, bond investors are focused on buying debt, not buying a stake in the company.
Strategic Inclusion of Bondholders
Traditionally, only multinational banks, telecommunication companies, real estate investment trusts (REITs) and other capital-intensive corporations developed bondholder communications programs. Such companies typically manage a significant level of corporate debt and frequently tap the debt markets for financing.
Since 2008, however, many other types of companies have discovered the benefits of cultivating bondholders through targeted communications. Companies that frequently place debt have developed new strategies to engage bondholders. The goal is to lower borrowing costs by creating more investor interest in new debt issues. By creating investor interest in a bond ahead of placement, companies find they can influence the subscription rate for new bonds, making it a priority to place this debt with investors who are already familiar with the company. It’s been a win-win situation that makes the debt raise much easier for all involved.
Five Steps to a Proactive Program
Following the five key steps below can help your company achieve a proactive and sustainable model for bondholder communications. Keep in mind: A formal bondholder outreach program generally mirrors and builds on an existing equity investor relations program and is an integral part of a more extensive corporate integrated communications program.
- Step 1: Know the customer
Engage and work with an ownership intelligence provider who can furnish the necessary bondholder identification and analysis to support the program on an ongoing basis. The necessary detailed information about outstanding bonds will include:
- Current equity holdings
- Top holders, buyers and sellers
- Potential buyers and sellers
- Key decision-makers’ names and contact information
- Key drivers of the equity income markets
- Insight into investing strategies
- Cross-ownership analysis showing each firm’s total dollar investment (combined equity and debt holdings)
It is generally possible to arrange for delivery of a periodic report on the frequency that suits the program, ranging from one-time to quarterly to semi-annually. When applicable, the reports can help focus in on the ultimate beneficial owner for investment advisors, insurance companies, hedge funds and pension funds.
- Step 2: Determine the strategy
Knowing who owns the bonds, and the financial intermediaries promoting them, was the first step. Once the investors are identified, your company is positioned to develop a bondholder communications strategy.
Determining the communications needs with bondholders will help formulate the strategy and action plan based on what actions are desirable to motivate in bondholders. Strategies will differ significantly from company to company. What they all share in common is establishing the goals and objectives of the communications and informing how they will be directed.
- Step 3: Plan the communications
The next step is communications planning. Once a strategy is developed, investor relations will spend a significant amount of time determining which tactics to employ to execute the strategy. Tactics are most successful when their targets are accurately defined, underlining the importance of solid ownership intelligence reporting on bondholders as outlined in Step 1.
- Step 4: Define the outreach
Outreach – making contact with bond investors – will often depend on communications standards at the firm, as well as available contact information. The ascent of digital communications means email is generally the first choice today, and it has advantages for monitoring response (such as opening or clicking a link in the email). That doesn’t mean it’s necessarily the best means for reaching all types of investors. If the company hasn’t communicated previously to these investors, the email may wind up in a spam folder. And for some, a hard-copy mailing marked “Important Information” will draw more attention, especially initially. Whatever medium is chosen, remember that a successful outreach always considers both frequency and ability to monitor response.
- Step 5: Monitor success
Monitoring, the final step, not only allows the company to measure communications efforts, but also provides valuable feedback that can be used to enhance the strategy and tactics. Listening to bondholders and potential investors, and understanding their needs and concerns, can positively impact the bondholder communications program.
These are the basic tools needed to create the program or expand an existing IR program moving forward to include bondholder communications. And once your company starts communicating with these investors, keep them engaged, active and aligned with corporate goals!
Louis Cordone is senior vice president at AST and leads the Ownership Intelligence team. He consults for companies on securities ownership in regard to regulatory compliance and investor outreach. Before joining AST, he was the head of the Advisory Services in the Americas division for Thomson Reuters. Reach him at [email protected].
Published August 9, 2018.