A bond sale by Schaeffler, the German engineering group, this month could usher in a new phase of increased bondholder rights and help to develop the European high-yield market, investors and bankers said.
Despite ranking alongside, or pari passu, senior secured bank lenders in recoveries, senior secured high-yield bondholders do not have the same restructuring votes or information disclosure in Europe as they do in the US, a fact that has frustrated many regional investors.
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Schaeffler’s #8364;2bn worth of senior secured bonds were the first in Europe to give full, proportional voting rights in any restructuring to bondholders.
“We understood quickly that investors were very keen on ‘one euro, one vote’,” Klaus Rosenfeld, chief financial officer of Schaeffler, said. “In our specific situation we regarded this request as a legitimate and fair demand.”
Fund managers and bankers said Schaeffler’s bond could signal a turning point for the European market as it becomes increasingly similar to the more mature and far larger US market. “At the moment the power is in the hands of those that have capital [but] . . . once you’ve let the cat out of the bag it’s hard to get it back in,” said a senior fund manager at one of Europe’s largest asset managers.
Senior secured high-yield bonds, once a rarity, have become far more common since the financial crisis, making up almost a quarter of $174bn of issuance since 2009, according to Thomson Reuters data.
Yet many senior secured bonds do not give bondholders any voting rights in a restructuring at all – let alone the “one euro, one vote” principle many investors want.
Bonds issued more recently do give investors some voting rights but they are usually capped at 25-30 per cent – no matter how large a part of a company’s senior secured indebtedness they represent.
Leading high yield bond investors formed the European Leveraged Finance Buyside Forum to lobby for market reforms in March last year.
“The low voting rights are no longer tenable,” said Greg Saichin, head of high yield at Pioneer Investments and a member of the Buyside Forum. “As our importance in the capital structure increases, so should our voting rights.”
The financial turmoil in Europe has given high-yield bond investors the leverage they need to try to force through changes.
“Investors feel they have more ammo to force through change now that the private lending markets are so difficult,” said a senior banker. “In the past, investors haven’t had the power to push through the changes they want.”
Fund managers say the emergence of a more US-style senior secured junk bond market could increase the asset class’s attraction and help it to grow.
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