Bonds  

IA demands reform of bond market

IA demands reform of bond market

The bond market is inefficiently organised in a way that makes it difficult for retail investors to make informed investment decisions, according to the Investment Association (IA).

The trade body has revealed it is concerned about the level of transparency around bond market events such as when bonds are subject to a tender offer, or there is an offer to exchange existing bonds for others.

This is topical following recent events at Aviva, where the company wished to redeem to its preference shares, which perform like bonds.

The company initially intended to buy the preference shares back at par value, despite the instruments trading at a face value above that level.

Buying the preference shares back is a form of tender offer.

The company had to retreat from doing this.

Galina Dimitrova, director of investment and capital markets at the IA said: "Bond markets are a cornerstone of the global economy, providing a critical source of capital for companies, as well as key investment opportunities for a wide range of investors.

"Asset managers, as investors in fixed income instruments, are keen to ensure that bond markets function well and continue to serve the interests of both issuers and investors.

"However, the IA has identified a number of areas of concern within the exchange and tender offer processes, including a general lack of transparency as to the rationale, process and outcome of such transactions, potentially leaving investors with insufficient information to allow them to reach a sound investment decision.

"Asset managers are also concerned about overly short timescales which do not give adequate time to assess the offer and the presence of linked resolutions that may pressure investors to support aspects of proposals which they would not otherwise support.

"Additionally, for those bond holders who do not wish to partake in the process, there is the further potential risk that they are left in an illiquid rump, unable to sell their holding.”

The IA has produced a set of what it calls best practice principals for the bond market.

Ms Dimitrova said: “Under the IA’s new guidelines, investors should also have the exchange or tender documents in their possession for at least 48 hours and up to a week or more depending on the complexity of the offer before having to make a decision.

"Issuers should also ensure that all offer announcements are made via a regulatory news service (RNS) and available on their website to ensure that the information is readily accessible.”

Alan Steel, who runs Alan Steel Asset Management in Linlithgow in Scotland, said his clients tend not to buy bonds directly and so will not be impacted by any changes as proposed by the IA.

He said: “My clients mostly invest through funds/trusts so they aren’t personally affected. Even intelligent wealthy investors prefer an easy uncomplicated life.”

david.thorpe@ft.com