Investors’ move on covenants rebuffed

Investors’ efforts to clarify and to standardise covenants used in bond issues have already come under attack by executives who would have to apply them.

The Association of Corporate Treasurers branded proposals by a group of leading European institutional investors as “extreme” and warned they were likely to be “rejected out of hand” by bond issuers.

A series of model covenants were published by a group including the Association of British Insurers, the National Association of Pension Funds, the BVI Bundesverband Investment und Asset Management and the Investment Management Association.

The suggestions, designed to cover the sterling and euro bond markets, are part of long-running efforts by investors to increase their protection against unexpected structural changes made by the bond issuer without their approval, long a battleground between issuers and investors.

Points covered in the model covenants include such crucial issues as change of control clauses and restrictions on disposals, which can lessen the cash available to finance bond repayments. The group, known as The Bond Covenant Group, said it intended the document to be a work in progress and subject to adaptation.

Rod Paris, chairman of the ABI’s bond committee, said the proposals could help re-establish trust and restore market confidence, particularly when reduced bank lending is forcing companies to turn to the markets.

But Stuart Siddell, chief executive of the Association of Corporate Treasurers, said: “The tighter and more restrictive the covenant, the more expensive bonds could become.”