Got those zombie company covenant lite blues
One of the big drivers of the debt balloon that imploded so spectacularly was the trend for covenant “lite”, which has allowed zombie companies to stumble on long past the point at which it would have been useful for creditors to intervene. This has sharpened the appetite for stronger corporate governance around covenants and persuaded investors that they need to take more of an active interest in what companies are actually doing with their money.
Enter the engaged bond investor – for a long time the domain of equity investors with a social conscience, socially responsible investing (SRI) is now being applied to bond portfolios by asset managers Aviva Investors and F&C.
Paul Abberley, CEO of Aviva Investors UK, told Reuters that Aviva is adding a specialist bond fund manager in its SRI group, with scope to increase the headcount depending on how client interest develops. “Historically SRI has been viewed as an equity activity but we think there is a strong case for fixed income to be considered as well,” he said. Initially any offering would be mandate based, he said, with a fund launch dependent on client interest.
The move follows F&C’s recent decision to extend its corporate governance engagement to corporate bonds. “We are initially focusing our engagement where there is an overlap between our interests as shareholders and our interests as creditors,” said George Dallas, director of corporate governance at F&C. “We think this will enhance the assets under management that we are representing because a lot of companies are very debt focused.”
The development is part of the broader trend amongst ethically-inclined investors to extend SRI principles to all areas of their portfolios. Fund firms have been busy trying to add SRI overlays to emerging market equity strategies, for example - far from simple given the quality of information and poorer corporate goverance in some of these markets.
Both Aviva and F&C are closely involved with the UN’s Principles for Responsible Investment which is driving this trend. This now has some 199 signatories and requires asset owners to promote higher standards of disclosure from companies and to integrate environmental, social and governance issues across the management of their assets. “You need to annually validate that you are living up to these commitments so it encourages you to think about it,” said Abberley.
Some have argued that the opportunity for effecting change through ownership of a corporate bond is lower than through ownership of the stock, but there are certain areas of influence, such as bond covenants. Some issuers of bonds aren’t listed, so in those cases the only way of engaging with the company is through bond ownership, and brokers have been looking to attach climate change-related commitments to covenants for example.
Although bond investors don’t get to vote at AGMs, they do hold the purse-strings, and can set appropriate borrowing terms. If that helps prevent another debt bubble, or leads to companies taking a more responsible position on climate change, the UN can sleep easy in its bed.
(Additional reporting by Raji Menon)