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Bond covenants: Credit investors look to be COC-sure

Some bond investors have complained for years about the lack of covenant protection in the event of M&A activity. And during the past 18 months or so the increasing number of leveraged buyouts has heightened the fears of portfolio managers. Although some bond investors are once again trying hard to push for change of control (COC) covenants, many deals have priced recently without including this feature. In certain respects it is a simple matter of supply and demand. When demand for a bond is overwhelming it is relatively easy for issuers to refuse extra covenant protection. However, with the credit cycle widely forecast to turn it is clear that the buy side is becoming more circumspect.

“The market is still working out whether COC will be a widespread development or something that is only included for certain credits and sectors,” says Jean Marc Mercier, deputy head of syndicate at HSBC.

Not enough

A key problem is that with triple B risk in Europe offering spreads of only mid-swaps plus 60 basis points, credit investors are not being paid enough. The upside, in terms of spread performance, is limited while the downside is huge. The classic example is provided by last year’s LBO of Danish cleaning services company ISS, which went from BBB+ to B– overnight.

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