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Asset managers seek credit market best practice

EUROPE – More than 25 of Europe’s largest investment management companies, including PGGM and ABP Investments, have published a consultation paper aimed at improving standards in Europe’s credit market.

The companies, led by Barclays Global Investors, Gartmore and M&G, have outlined a series of ‘best practice’ principles “aimed at jointly benefiting credit market issuers and investors”.

If the principles were observed, the group believes the European debt capital market would become more efficient and less volatile. The group is not calling for regulation, rather it seeks to promote better market standards.

Says the group: “The lack of European-wide regulation or legislation, together with the relative immaturity of the European credit markets has led to poor market practices, such as unavailability of proper documentation for investment decision-making, and lack of adequate protections in bond indentures.”

As a result, bondholders have been left vulnerable to significant capital deterioration in the even of changes in the corporate’s credit rating or capital structure.

The paper sets out proposed best practice in regard to: minimum covenants for corporate investment grade issuers; issuer call options; documentation standards; disclosure; credit ratings; secondary market liquidity; and relationship between issuers and investors.

The group is also calling for increased consultation and dialogue between all market participants. A spokesperson for the working group of investment management firms said: “Better levels of disclosure, documentation and correctly structured bonds are good for issuers, investors and the market in general. It is in the interest of all parties concerned to raise market standards so the market can operate more efficiently.

“Principles do not become market practice overnight. All parties need to see them, understand them and be convinced that they are heading in the right direction for the market to move forward. For this to happen, the market must engage constructively.”

The working group includes: ABN AMRO, ABP, Aegon, Barclays Global Investors, CDC Ixis, Credit Lyonnais, Delta Lloyd, F&C, Fortis, Gartmore, Groupama, Henderson Global Investors, Hermes, HSBC, ING, Lombard Odier, M&G, Morley, Newton, Nordea, PGGM, Robeco, Societe Generale, SNS, SPF Beheer and Standard Life Investments.

James Foster, head of corporate bonds at ISIS, however, has criticised the proposals. "This document is well-intended," said Foster, “but in practice it amounts to a wish-list of unrealistic expectations which could result in putting prospective bond issuers off altogether."

Adds Foster: "Back in the early 1990s, the debenture market demanded a minimum set of covenants. Subsequently the new issue market evaporated and liquidity dried up. The last thing we want to see is the sterling and euro corporate bond markets going the same way."

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