Bond Investors to Table LBO-Protection White Paper

The Wall Street Journal said Monday a group of about 50 large debt investors have formed a consortium called the Credit Roundtable, and plans to publish a white paper Monday detailing problems and proposed fixes related to protection in contracts of investment-grade bonds. The Roundtable consists of pension funds, insurance companies, mutual funds and other money managers, including AIG, BlackRock Financial Management, Dodge & Cox, Fidelity Investments, Loomis Sayles & Co. and MetLife. The Roundtable is primarily concerned with the negative impact leveraged buyouts and large stock repurchases have on bond prices.

Earlier this year some corporate bonds fell as much as 10% overnight due to fear of credit downgrades because of increased debt burden following announcements of LBOs and stock buybacks. Debt investors were unprotected since many high-grade bonds lacked covenants for recovery of full value in the event of a takeover or recapitalization. Protective covenants were not in place because debt issues were modeled at a time when large-scale buyouts were uncommon. Although LBOs and recaps have dried up since summer, the Roundtable is not taking any chances. Key proposals include a "change-of-control put" and "step-up coupon."

Additional Reading: Bond ETF Offerings Explode in 2007 • Junk Bond Default Rate to Quadruple - Moody's • Primer on Broad U.S. Bond ETFs and U.S. Govt. Bond ETFs

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Comments

[nico_]

To the best of my knowledge, the covenant ("super poison put") would only protect the investor in the case of an unfriendly take over. But almost all takeovers are eventually approved by the board, and end up as friendly.

So even today when large-scale buyouts are common, still the investors are not protected.

2008 Jan 05 10:45 AM