Credit investors want a new deal

Investors in the bonds financing Sydney's Lane Cove Tunnel are getting jumpy. The tunnel operator, Connector Motorways, announced in July that it had negotiated a standstill agreement with its financial guarantor and was working on a recapitalisation plan after traffic volume fell short of forecast by almost half.

On top of that the group providing the financial guarantee for the credit-wrapped bond deal, MBIA, lost its AAA rating, triggering a fall in the value of the bonds.

So when one of those investors encountered delays getting documentation from the trustee, BNY Mellon, it called in its lawyers to confirm its right to gain access to documents supporting the information memorandum.

Bond investors say the incident exemplifies a new approach in the credit market. Investors want to dig deeper into the operations of the businesses whose credit they are buying and they want to see "line by line" details of mortgages in RMBS issues. And when there is obstruction or delay they are prepared to bring in the hired guns.

AMP Capital Investors head of credit markets Jeff Brunton said the recent insistence on greater disclosure was a reflection of the state of the markets.

"We have been through several earnings reporting cycles when assurances were given about the state of balance sheets, only to be followed by more writedowns. We are in a new market where transparency and disclosure have become critical."

Investors are asking for more detailed information about covenants, particularly in cases where bond covenants might vary from bank covenants. They want precise information about their rights in the event of certain circumstances.

They want to know what limits have been set around the business, in terms of taking on additional borrowing and also whether the company can change or diversify its operations.

And they want to have a clear understanding of the role of the trustee, the collections process and the procedures that will be followed in a default.

When it comes to RMBS and other asset backed securities, investors want the same level of disclosure, at the individual loan level, that is given to ratings agencies.

Senior manager credit at Portfolio Partners, Robert Camilleri, said: "If I am buying AAA notes the line-by-line information might not be so relevant. But if I am buying the subordinated tranches of a low-doc deal I want to be able to do some work of my own on the probability of loss."

On the issuing side of the credit market some sources are bemused by the newfound enthusiasm for disclosure. One said: "Most of this information is available from the trustee and in many cases investors have never asked for it.

"We are talking about investment teams with one portfolio manager and one credit analyst trying to cover an investment universe that ranges from commonwealth bonds to infrastructure funding deals. Usually they don't get past the information memorandum and if they did want to dig deeper they would have limited opportunity or resources to analyse the documents."

Camilleri said that whatever issuers might argue, there was no question they had work to do to improve their documentation. "In many cases the information memorandum you see at the outset will go through a series of changes as the deal progresses.

"These can be quite technical things in response to different investor requirements. They can be important things that deal with investor rights, but it is not often that you are alerted to the changes.

"What we want to see is better communication of changes to documentation and some standardisation in the presentation of that documentation. We also want to see recognition from issuers and their arrangers that bond investors are part of the financing process and should be given the same level of disclosure as the banks. We have never had that."

Camilleri is a member of the Australian Securitisation Forum's market standards and practices committee, which is working on a set of disclosure standards for credit issuers, not just when the deal is put together but for ongoing disclosure.

Camilleri said: "One problem we have with RMBS issuers is that we often don't know which of the two commonly used methods they are using to calculate arrears. We don't want to tell them which method to use, although our preference would be for them to use both, but we do want them to tell us how they are arriving at their numbers."

Brunton agreed that credit investors wanted the same standing as banks when it came to disclosure. "We don't have that standing at the moment. My sense is that it is improving but it is early days. There is no more easy money for credit issuers so they need to work harder, but how far the pendulum will shift is yet to be seen."

The head of credit at QIC, Peter Scobie, said bond investors have tended to be the poor relations compared to equity investors as well as to banks.

He said: "I think it has a lot to do with the way executives are remunerated. They are rewarded with options and shares if they produce an outcome which is usually measured in terms of total shareholder return. All their incentives are directed to the equity side of the business."

QIC is an investor in the Lane Cove Tunnel bonds and has had some contact with the trustee. Scobie said: "The documents have been released but there was a period of delay when the documents should have been available. People felt a certain amount of angst at the time. The immediate issue is resolved, although we are still waiting to see how the recapitalisation issue is worked out.

"One outcome of the frustration that investors are feeling is that they are starting to share information and get together on some of these matters."