Europe’s bond markets are growing rapidly reflecting factors such as the socalled “search for yield” by investors and the portfolio demands of funded pension schemes. But the markets – particularly for euro-denominated bonds - are still relatively young. It is in the interest of all market participants to develop practices which will serve borrowers and investors satisfactorily under a range of different conditions, and thence help to support the broader economy.
Regulation can play a role, but it is better that practitioners themselves should work together to remove obstacles to the market’s development. Recent debate has centred on the flow of information from issuers to investors and the need for clarity with regard to covenants. With this in mind, a representative group of practitioners from all sides – issuers, investors and intermediaries - have come together in an informal forum1, the Bondholders’ Dialogue, sponsored by the Association of British Insurers (ABI) and the BVI Bundesverband Investment und Asset Management (BVI) to develop mutual understanding and look for practical approaches to resolving current issues.
This paper reflects the initial results of that dialogue. It is deliberately not prescriptive, but is instead intended as a pragmatic approach highlighting best practice. Participants in the dialogue were united in their belief in freedom of contract. There is no agenda to arrive at standard terms. But they were also clear about the potential for improvement in information flows and about the need for better understanding of the practical effect of covenants. Previously, dialogue between issuers and investors was all too rare, and mutual suspicion all too common. Participants in the forum believe that their dialogue is helping to break this down, although there is clearly further to go. Their forum is informal and is not intended to be exclusive.
It is up to the markets as a whole to decide whether to take up the recommendations set out below. But participants would welcome a wide and lively debate, hopefully leading to adoption or refinement of the ideas set out here.
