European Push for Transparency from Junk Bond Issuers

Investors are campaigning for private companies to make their financial information more available in a push for greater transparency in Europe's growing high-yield bond market.

The Association for Financial Markets in Europe sent a list of companies to bond arrangers on behalf of a group of investors in an effort to spur debate about corporate disclosure, said Gary Simmons, director of AFME's high-yield division. The document names more than 75 borrowers they deem too protective of their data, with the aim of establishing standardized reporting, according to four people familiar with the matter.

The companies control access to their information by keeping their earnings behind password protection, requiring registration or only emailing their data to stakeholders, said the people, who asked not to be identified because discussions are private. Demand for better disclosure is intensifying as firms raise money more frequently in the junk bond market, with issuance swelling to a record 72 billion euros last year.

“Investors are beholden to the individual policies of companies in terms of how much visibility and access they provide,” said Mark Chapman, a senior analyst at CreditSights Inc. in London. “I understand why some companies aren't used to transparency being their top priority, but it's in their interest.”

Issuance jumped by 31 percent in 2014 and has surpassed 50 billion euros this year as companies switch from bank financing following a decline in bond borrowing costs. Bond sales can lead to hundreds of stakeholders, whereas loans involve only a handful of lenders.

“They're used to having relationship banks where a small number of people are involved, and they can control the flow of information to a small group,” Chapman said.

Information Control

German retailer Takko, British carmaker Aston Martin and Spanish theme park operator PortAventura are among the companies listed, three of the people said. The companies control access to their information by asking bondholders to register to see financial results stored on password-protected sections of their websites.

“PortAventura is in a constant dialogue with its stakeholders and has not had any requests for more financial information than already available, nor has it had any complaints from bondholders about its reporting transparency,” Tarragona-based PortAventura said in an e-mailed response to questions. “We have never changed the way we report or the detail of our financial statements because so far our bondholders have been happy with it, however, if a request would arrive we would be happy to review it.”

Spokeswomen for Aston Martin and Takko declined to comment on the companies' financial reporting. Bloomberg News' requests last week for access to Aston Martin and PortAventura websites are still pending approval. Takko rejected the request.

One of the proposals from the group is a centralized website where information for all issuers could be accessed with one password, the people said. AFME plans to hold a meeting by the end of the year between investors, bankers and lawyers to discuss disclosure, Simmons said.

Goldman Sachs Group Inc., JPMorgan Chase & Co. and Deutsche Bank AG are among banks on AFME's high-yield board. Representatives of Goldman, Deutsche Bank and JPMorgan declined to comment on whether they'd received the document.

“The sell side has seen the list and it should help discussions for more standardized reporting,” said Simmons. “This is part of a wider effort to improve the market. Both the buy side and sell side are committed to continuing discussions and jointly putting practices into place that would benefit the market as a whole.”

Most European high-yield bonds trade on the Irish Global Exchange Market or Luxembourg Euro Multilateral Trading Facility. These platforms are governed by national rules and fall outside European Union law that requires public reporting, according to David Cliffe, a Paris-based spokesman for the European Securities & Markets Authority, or ESMA.

SEC Rules

The exchanges' limited reporting requirements mean the market is governed by individual bond contracts rather than one main regulator, said Adam Farlow, a partner at law firm Baker & McKenzie in London who has advised high-yield borrowers in Europe and the U.S. The indentures govern how often and the extent to which a company reports, he said.

“There is a soft standard in Europe where companies should report quarterly and have robust disclosure, but it's been watered down substantially,” he said. “Public financial reporting means that not only do bondholders get what they need, but everyone is on a level playing field to trade.”

Even in the U.S., where the Securities & Exchange Commission's Edgar public filing system houses more than 20 million company statements, it's getting easier for private borrowers to keep their earnings private. Companies are selling bonds known as “144a for life” that don't have to be publicly registered and are exempt from minimum SEC financial disclosure and investor protections.

European high-yield investors appealed to banks to improve market standards earlier this year. AFME represented 21 firms including AllianceBernstein LP and Schroders Plc in a letter of concern in February calling for more disclosure.

Heckler & Koch GmbH is also included on the list of companies, according to the people. The Oberndorf-based gunmaker sends its earnings to bondholders through the notes' trustee, the company said in an emailed statement.

“We believe that Heckler & Koch has one of the best reporting of any mid-cap company,” according to the statement, which cited the gunmaker's quarterly calls with investors.

Heckler & Koch password protects parts of its website and Bloomberg News' registration last week for access is still pending approval.

Restricted access to corporate financial information can hinder trading, said Marc Pierron, a credit analyst at Spread Research, an independent credit research firm based in Lyon, France.

Bloomberg News

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