Issuers of high-yield bonds are reining in investor protections at the same time as the market for these instruments grows rapidly, according to research from Xtract Europe.
The firm says European convenant packages are being negotiated in great detail, sometimes more than in the US, with issuers employing a range of tactics to the detriment of bond buyers.
Issuers are retaining flexibility to incur more debt, sharing collateral for high-yield bonds with other creditors such as bank loan lenders, and developing a ‘super-priority’ strip of debt ranking that ranks higher than high-yield bond holders.
“Investor protections generally are being whittled away, sometimes obviously and sometimes by more subtle nuances, and these have a real potential impact for investors,” says Xtract Europe’s European managing director and senior European covenant analyst, James Slessenger.
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