Getting into debt IR

The clue to the distinction between bondholder IR and shareholder IR lies in the very words. ‘Bond’ suggests commitment, with echoes of phrases like ‘my word is my bond’; a share is merely a slice, a portion. It doesn’t have the same resonance. No one – rightly or wrongly – accuses bondholders of being gamblers; no one charges debt investors with short-termism. Day traders and short-sellers deal in shares, not bonds. Don’t they?

Like so much in life, however, it’s all a bit more complicated than that. If we restrict the discussion to corporate bonds, for example, the distinctions are all about levels of risk. There may always be the possibility of default on the part of an issuer but that’s a lot less likely in the case of the A-rated debt of blue-chip companies. Junk bonds, on the other hand, often move in tandem with equity markets, indicating that this is a point where the risk differential is small.

It’s also small at the other end of the scale: the shares of a blue-chip, dividend-paying utility, for instance, may be deemed almost as safe as a bond – and almost as unexciting. Take National Grid, the UK firm that owns and operates the electricity transmission system in England and Wales, runs transmission networks in Scotland, and owns and operates electricity distribution networks in the US. Hardly a fly-by-night business. And while it doesn’t have the growth prospects of the latest high-tech social media firm, it does offer a reliable dividend of 5 percent or more on its equity.

But no matter how safe and sound National Grid’s shares may be, plenty of investors prefer its bonds. And for John Dawson, head of investor relations in London (see National debtholders, below), there’s no question the two groups of investors require different kinds of IR; they have different goals, even in a company like his where the profile of each instrument is more alike than at many other companies.

Bonding with investors

Mark Wilson, a seasoned BNY Mellon man based at Canary Wharf in London, has spent much of his career in the ADR division. But a couple of years back he switched to debt, sitting, as he puts it, ‘between the issuer and the investor, providing the financial infrastructure.’ His experience is that corporates doing a bond issue every five years or so do only minimal IR in relation to their debt, ‘maybe a roadshow with the investment bank’ at the time of the issue. ‘But repeat issuers – typically banks and utilities – are more likely to have a specific debt IR program,’ he says. ‘You need to cultivate your debt investors – keep them warm – if you need to issue on a regular basis.’

Keeping them warm requires knowing who they are, which isn’t always easy even in equity markets, and especially in jurisdictions with bearer rather than registered shares. But bonds are all bearer instruments so identification of holders is even more difficult, and tracking ownership in the secondary market is virtually impossible.

That’s one reason Nexum ID set up shop early this year in London. Massi Gironi, who leads the business, learnt the ropes at Thomson Reuters, where she ran the European debt IR division. At Nexum ID they provide analyses of debt investors by geography and type but also by behavior, in order to build ownership profile trends so that the investor relations effort can be targeted as effectively as possible. And the firm undertakes debt investor audits for its clients, typically in preparation for corporate activity, new issues, meetings and roadshows.

It’s all in the interests of improving proactive engagement and includes an online tool for recording and maintaining interactions with both actual and potential investors. The great value of building strong relationships with debt investors is the greater likelihood it gives companies of being able to go back to known investors to refinance relatively cheaply.

Different stakeholder, same effort

So how is all this different from the equivalent effort expended on shareholder engagement? Probably the single biggest difference results from the divergent goals of the two groups.

For typical debt investors, the most important thing to consider is the soundness of the company they are lending to. After all, they want first and foremost to be sure of getting their money back – albeit with interest. Obviously, equity investors don’t want to lose their money, either, but they are more focused on the possibility of growth – or reward – rather than security.

Of course, this too is an over-simplification of the situation and one that doesn’t apply to the kind of bond investors that have been tempted by the better yields of emerging market debt or junk bonds. It’s undoubtedly the case that bondholders come in a range of styles and colors and companies issuing lots of debt need to know who’s who.

Meeting of minds

That thought is fundamental for Katerina Papamichael and Damian Watkin, who run DF King Worldwide debt IR in London. They focus mainly on bond transactions and debtholder ID. ‘We’re looking at who’s important [among the holders] and how the holders are changing,’ explains Watkin. ‘We’ve been doing this for six or seven years and it’s true that more companies are now looking at it, although it remains a relative rarity in Europe.’

Watkin describes the companies doing most in this area as ‘the more forward-looking ones’, noting that direct relationships with debtholders prove particularly helpful when times are hard. Take the credit crunch, when times in the bond market were about as hard as they could be. KPN, a regular borrower, effectively reopened the market after the period of closure brought on by the financial meltdown. It could do that because of its relationships with bond investors, built on trust that in turn is built on a company consistently delivering what it says it will.

But Watkin advises against ‘assuming bondholders don’t also want to hear about corporate strategy or meet management. They want to hear the story directly, too, and look into the eyes of the CFO or chief executive.’ That means that while treasury might be more involved in debt roadshows, such events will still need to offer one-on-ones with senior management members.

There are also times when it’s appropriate – at least for blue chips like these – to bring shareholders and debtholders together, however divergent their aspirations. The wisdom of this depends largely on whether there’s a risk of confusing either group by emphasizing an aspect of the company’s story it doesn’t usually hear. An exciting plan to venture into new strategic territory may frighten debtholders, for example, who may see it as taking on unnecessary risk. Conversely, the technical and financial detail of a bondholder presentation may leave a shareholder asking why the company is bereft of ideas.

In either case, investor relations still depends on depth of knowledge about the company and its finances, as well as on strong relationships. But there is a clear need to tailor messages differently because of the fundamentally different motivation of equity and debt investors. ‘It’s a glib phrase but the fundamental difference between debt investors and equity investors is that equity investors are greedy, debt investors are fearful,’ says Dawson. In other words, investors buy National Grid bonds because of the security of its balance sheet, ‘not because we’re Apple.’

No one accuses bondholders of being excitable. ‘Equity investors are definitely more fun,’ says one IRO, who is shy about being identified but unequivocal in his views: ‘I don’t want to say debt investors are boring – but they’re definitely more sober.’