Speak to anybody about Investor Relations and they’ll assume that you’re talking about your relationships with existing and potential equity investors. But companies of course finance themselves with both debt and equity and the markets have changed enormously in recent years. Whereas the great majority of companies would have financed their debt needs 30 years via syndicated loans from the banks, now they will circumvent the banks and go directly to the markets for their money – it’s a deeper pool of capital and companies can borrow on better terms from the markets than the banks. Today, some 70% of companies’ borrowing needs in the US (which has always been ahead of the UK and Europe in the growth of its capital markets) is now obtained from the markets rather than the banks, but the proportion is rising fast here in the UK.
This means that maintaining relationships with debt investors is becoming more and more important. Debt, don’t forget, needs to be paid back (redeemed, in the parlance of the market), and the best place to obtain new debt is of course from those who are the current lenders (the current owners of the bonds). Companies may also want to take advantage of the current low interest rate environment and refinance existing expensive bonds with cheaper funds. The problem, however, is in finding out who and where the bondholders are. For historic tax reasons (a buyer of the bonds wanted to be anonymous and thereby avoid withholding tax being imposed on his interest coupon), the bond market is very largely a ‘bearer’ market, meaning that there is no register of the bond owners (the bearer of the bond is its owner).
Debt investors, of course, have a need for information flow just like their equity counterparts, although their needs are very different. A debt investor is primarily interested in being kept informed about two things – whether the company is able to finance its interest payments and its ability to repay debt as it falls due. The better a company can communicate with its bond investors about these two crucial aspects, the more comfortable those investors will in turn be to lend further funds. Welcome to the world of Debt IR.
And it doesn’t end there. Sometimes there’s a real conflict between shareholder and bondholder interests. Imagine a company making an acquisition of a highly complementary business, financed wholly by debt. The shareholders will applaud such a deal, focussing on the leveraged returns and the synergies from the fit. But the bondholders will be looking at completely different ratios, worrying about the amount of debt in the company’s capital structure and its ability to service the interest payments. The IR requirements of the two audiences are entirely different and the story is going to have to be tailored to each.
With the growth of the capital markets as a source of borrowing, Debt IR is going to become a increasingly important activity. But because of the difficulty of it being a bearer market and the further problem then in identifying bond investors behind nominee and bank holding names, there aren’t many companies who can provide the necessary information about who the bondholders are. For those who can, there’s a major opportunity ahead.