Fixed Income  

Bond giants raise concerns about European high yield

Bond giants raise concerns about European high yield

A prominent group of the largest asset managers in Europe have written to the trade body representing the continent’s banks demanding improvements to the region’s burgeoning high yield markets.

Fund groups including the likes of Threadneedle, Schroders and Invesco Perpetual have written to the Association for Financial Markets in Europe (AFME) putting forward a series of concerns about the European high yield market.

The market for low-rated credit on the continent has grown significantly in recent years and the managers have suggested improvements are needed in the market’s infrastructure to make sure it runs effectively and efficiently.

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In the letter, the managers said their intention was to “highlight certain areas of concern that are currently foremost in the minds of investors”.

The groups brought up issues surrounding trading disclosure, the covenants on high yield bonds, voting rights and the redemption structures on the bonds.

On disclosure, the asset managers said European practices needed to improve to move into line with the standards in the US high yield market.

The managers said improvements were needed in the state of bond covenants, the legal agreements between the bond issuer and a bond holder designed to protect both parties, which the groups suggested had deteriorated in recent years.

The letter also claimed that not all bonds that were ranked as ‘pari-passu’, a Latin phrase meaning ‘equal footing’ that meant the bonds were supposed to be treated equally, had equal voting rights at the moment and called on that to be changed.

Meanwhile, the managers called for an end to the shortening of “non-call” periods, which refers to a length of time after the bond is issued that the issuer cannot redeem the bond, paying back investors’ money.

The managers said the shortening of these non-call periods recently “diminishes potential returns and increases reinvestment risk for investors” given the fact that “investors expect a sufficient level of upside for taking the risks associated with investing in high yield bonds”.

The managers added: “We believe that through open and frank discussions and mutual understanding of the relevant issues, these matters can be resolved to the satisfaction of all market participants.”

The full list of signatories to the letter was as follows: Alliance Bernstein, BNP Paribas Investment Partners, ECM Asset Management, Fidelity Worldwide Investments, First International Advisors, GLG Partners, Henderson Global Investors, Hermes Investment Management, Invesco Perpetual, Legal & General Investment Managers, Muzinich & Co, Neuberger Berman, Northlight Group, Pictet Asset Management, Pioneer Investments, Robeco Group, Rogge Global Partners, Schroders, Susquehanna Ireland, T Rowe Price and Threadneedle Investments.