The ACT is disappointed that the TBCG have not made serious efforts to achieve a sustainable measure of standardisation but launched a mere statement of their desires. This represents a missed opportunity for an initiative supportable by both investors and issuers that would have assisted the smooth running and efficiency of the bond markets. The ACT supports the concept of standardisation. However, for any market to flourish there has to be an appropriate balance of interests between the parties as to terms, pricing, amounts and, especially, conditions. The TBCG suggestions are a unilateral attempt to move the market in a particular direction rather than taking account of existing custom and practice and suitability of terms in different sections of the market – investment grade, intermediate and sub-investment grade. Stuart Siddall, Chief Executive of The Association of Corporate Treasurers said:
The Association of British Insurers (ABI) say the proposals are building blocks that can be tailored to issuer circumstances. We see little evidence of this. Sadly, as an extreme starting point the proposals are more likely to be rejected out of hand by investment grade issuers. Stuart Siddall, Chief Executive of the ACT
Today there is a shortage of bank funding. Businesses are more dependent on capital markets where they will have to compete with banks issuing more long-term debt as a result of more onerous bank regulation. We also fear it will be more difficult for many investors to take long term corporate obligations as other regulations such as “Solvency II” for insurers are brought in. Accordingly we would welcome steps to make it easier for investors to enter the market. Elements of standardisation can help here. The ACT remains keen to continue discussions to find those areas where standardisation can be made to work or where a genuine “menu of building blocks” approach can be crafted. We hope that investors will take up the challenge to pursue these two avenues with us.
Standardisation It is worth making the comparison with the standardisation of syndicated loan documentation that has been achieved by the LMA (Loan market Association). The LMA distilled existing practice into a form that both borrowers and lenders can use as a starting point for detailed discussion of the finer points. The ACT and the British Bankers Association are formal signatories endorsing the LMA loan documentation for investment grade borrowers as a starting point for negotiations. We have been involved in its development since the project was first launched in 1996. Standardisation up to a certain extent, still leaving the ultimate freedom to contract to the parties, can help reduce the overhead of negotiating terms and simplify administration during the life of a loan or a bond. This is particularly so for non contentious elements in the terms and conditions such as the more procedural elements – notices, calculations and payments of interest, calling meetings, taxation, further issues etc. These would complement the ICMA (International Capital Markets Association) procedural standards already in existence. We look forward to working with the ABI in this area. The model bond covenants that the TBCG suggestions consider go to the heart of the commercial terms of a bond issue. It is important that many of the key covenants flagged should be open to negotiation – as to their inclusion at all, and if included, to their precise detail – depending on the issuer and the market at the time. Issuers are many and various and have their own circumstances and needs. The ACT has proposed to the ABI a “building block” approach within each covenant category that could provide the flexibility needed within which elements of standardisation provide a measure of familiarity and simplification. We hope that the ABI will want to take this forward with us. Should editors wish to commission an article from the ACT, please visit the ACT Press Room.