Unstructured Finance

Got those zombie company covenant lite blues

Zombies 2One 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.

Deals du Jour

At long last, Europe may see its first sizeable IPO: Aviva says it expects to complete the flotation of its Dutch unit, Delta Lloyd, in November. And shares in Telenor jump 15 percent after it settles a long-standing row with Russia’s Alfa Group. The agreement will involve a pooling of assets between the two companies. For these and other stories on deals, click here.

And here’s what we found of interest in other media today and over the weekend.

Shoprite Holdings Ltd chairman Christo Wiese is looking to swap some or all of his stake in Africa’s biggest grocer for stock in furniture maker Steinhoff, a South African newspaper reports.

Embracing the activist

Activist investors have traditionally been kept at arm’s length by the mainstream fund houses. Fund managers at the major players haven’t felt able to align themselves with those agitating for change for fear their cosy chats with company chairmen might be compromised.

There are clear signs though that the mood has shifted.

Cuddle for a tigerNot only are institutions getting rapped over the knuckles for failing to apply active ownership principles, but the credit crisis has purged short-termist activists from the market, helping to soften the sector’s association with financial engineering and slash-n-burn tactics.

Of course, mainstream houses have always afforded themselves some measure of collaboration; they just did it well away from the public gaze and in the UK were careful not to fall foul of so-called ‘acting in concert’ rules which limited the conversations shareholders could have with activists. The activist funds, after all, effectively create their own insider information while planning a campaign.

Insurance policy

Shorting UK banks, it seems, is so last year.

Having profited from the implosion of the sector in 2008, many funds believe prices have fallen far enough, and in some cases are actually looking good value.

rtrp8722Outspoken star fund manager Crispin Odey this week revealed he’s now buying UK banks, having made money shorting them last year.

Instead, hedge funds have another sector in their crosshairs – insurers.

Many believe the sector will have to raise more capital or cut dividends. Figures from research group Data Explorers indicate increased shorting activity in the sector this month, albeit from a low base.