Change of control protection in new investment grade bond documentation could be on the rise according to a new report from ratings agency Standard & Poor’s.
The report Buyer Beware: Investors Seek Greater LBO Protection from European Investment Grade Bonds says with more investment grade worthy leverage transactions taking place, investors are paying special attention to the loss of value that can arise from a change of control event such as an LBO.
“In the absence of market standard practice, investors will have to continue weighing up the potential risk to their capital from a possible leveraged change of control when they evaluate the economics of an investment,” says Standard & Poor’s credit analyst Trevor Pritchard. “Where there are justified concerns, pricing pressure may provide enough incentive to the issuer to add in the protection needed.”
The current market environment of low share prices, the consolidation of European industries, the growth of private equity funds, low interest rates and the buoyant debt market is a fruitful one for large LBOs. S&P argues that it is companies in stable, non-cyclical business with limited or depressed market capitalisation that may be particularly vulnerable.
This, combined with appeals for change of control protection from the Association of British Insurers (ABI), has seen a number of investment grade bonds issued with such protection included.