Preaching to the converted

In the seemingly endless annual string of global roadshows and conferences, an increasing demand for corporate access dedicated to debt instruments is developing.

Even in the convertible bond world, where investors are traditionally less focused on company fundamentals, requests for face-to-face meetings with companies are sharply on the rise.

These past two years, a large number of brokers have started setting up such events. According to BNP Paribas, which organizes a convertible bond roadshow every other month on average, the initiative has been met with great enthusiasm, especially in London and Paris, where around 60 percent of convertible fund managers are located.

This new demand has been the result of an evolution on both the sell side and the buy side. Since the financial crisis, brokers have fewer resources for research and have focused their business model on corporate access.

In addition, they have been concentrating their equity research on shares that present the most liquidity, such as large caps, which means small caps are more rarely covered.

On the credit side, there has been a similar focus on companies that are exclusively investment grade, leaving convertibles, which often fall in the high-yield category, out of the spotlight.

On the buy side, asset managers prefer to conduct their own research, often getting the information they need from companies’ IR teams directly. In search of stronger convictions, they must develop a deeper knowledge of the companies they invest in.

And for some asset classes, such as convertible bonds – which may at times suffer from a lack of liquidity – the need for long-term convictions is even more relevant.

Bonding experience

Companies with a large number of outstanding debt instruments won’t require events focusing specifically on convertibles. These roadshows are rather aimed at smaller companies that are starting to develop a more sophisticated financial structure.

‘Typically, our client has moved on from the start-up phase where it issues shares,’ explains Benoit Le Pape, convertible bond strategist at BNP Paribas. ‘It has taken out bank loans and is now ready to get into bonds. The first step it will take in the bond world is usually via a convertible bond, which acts as a sort of ‘training process’ for the bond world.’

When a company decides to diversify its financing out of bank loans into publicly traded instruments, the IR team should understand that its new bondholders expect to be looked after. IR needs to develop the same kind of dialogue the treasury department had with its bankers, but this time with its debt investors. In that sense, it is the broker’s assignment to establish this dialogue.

‘The service we offer is comprehensive,’ continues Le Pape. ‘Companies get to know their bondholders better and have the opportunity to get direct feedback from them. Bond investors, which are usually in it for the longer term, are able to establish a relationship with the company via the broker or directly. On top of this, they will generally use our services when they need to trade. It’s a win-win situation.’

While a certain level of uncertainty is tolerated when an IRO speaks about the strategy and general prospects of the business, this clearly isn’t sufficient for debt IR. It is vital that the spokesperson discussing a company’s relationship with its lenders be accurate and reassuring.

‘We often ask companies to send us their presentation slides, so we can advise them on the areas in which they should go into more detail,’ says Le Pape. ‘The questions fund managers may ask are not specific to convertibles; they are more typically debt-related. But some topics can be tricky, such as issues relating to the pledging of assets, the covenants or the holding structure.’

In terms of timing, proactivity is key. Although most companies prefer to conduct a conference call during a bond issue, organizing non-deal roadshows is a much more effective strategy.

Indeed, during a deal, a firm’s scope for disclosure is restricted by compliance, and the information limited to what is contained in the prospectus. Fund managers will often tend to disregard those conference calls as waffle. It is a lot more constructive to have started communicating with them beforehand.

Difficult comeback

Fixed income fund managers are known for having long memories. Some companies with bad corporate governance or a history of default, even partial, may have a hard time coming back to the debt market.

Conversely, certain firms that aren’t performing that well financially but have communicated continuously, always answering questions in a consistent way, will find it relatively easy to borrow money.

‘Credit investors are usually less opportunistic than their counterparts in equities but they can also be quite vindictive,’ confirms Le Pape.

In the past, convertible conferences were mainly large industry events aimed at fund managers only. This is no longer a good way to go about it, however, as Le Pape reminds us: ‘Fund managers are rarely keen to take advice from other fund managers.’

They want to attend events where they can interact with IR teams. For the experience to be a success, it is important to invite delegates from both companies and investment management firms.