Brian Bollen looks over the changes in the corporate actions space due to the COVID-19 pandemic, discussing the fallout for the travel industry as well as retail access to IPOs
If the past 18 months or so are to be defined in the history of corporate actions, there is a strong argument that it will be for two main reasons. One, in the equity sector it will be for the sheer volume of corporate actions related to voting driven by the upsurge in mergers and acquisitions (M&A) activity. Two, in the world of bonds, it will be for the anxiety generated by the potential for breaches in covenants as the operating income of bond issuers came under severe pressure.
“If waivers of covenants had not been sought and granted, borrowers would have gone into distress,” says Luke Hickmore, credit fund manager, bonds at abrdn in Edinburgh, citing the great number of companies of all kinds who were forced to turn to the secondary market as waiver supplicants.
An additional complicating factor in the background was the process of change from Libor to Sonia as the near-universal interest rate benchmark, he additionally notes.
Such a process is not without cost, Hickmore comments. “We have handled massive numbers of corporate actions over the past 12 to 18 months and we expect to be paid for the work. This is not a lot in absolute terms, in the region of a few basis points per case, but this was completely unprecedented, an event that no one ever would have thought would happen.”
The good news, if indeed any good news is to be salvaged from the chaos wrought by hysterical government reaction globally to COVID-19, is that borrowers have survived, and will continue to survive. “For investment grade bonds, the risk of default is so low as to be virtually nil,” says Hickmore.
Delving further into the context, he explains that abrdn saw requests for waivers of covenant from real estate investment trusts as the underlying tenants struggled to pay quarterly rents as they fell due, and from all of the UK’s airports, with the notable exception of Manchester, which is owned by Manchester Airport Group Funding.
The Top 20 list of names who asked for assistance reads like a Who’s Who of corporate borrowers. It includes Center Parcs, Gatwick Airport, Heathrow Airport and National Express. Channel Link (Eurotunnel) did not seek a covenant waiver, but did issue new bonds to avoid a covenant breach.
While no one could have predicted the extent of what unfolded, abrdn handled the situation with aplomb and modesty.
“From a corporate actions perspective, we saw the wave coming in June 2020, and by September companies that knew they were going to break covenants related to debt serviceability and began to ask for help,” says Hickmore. “We had to model everything and did not turn anyone down. Bondholders — who want their money back at some point — want the borrowing companies to survive.”
Knock-on effects for the wider economy, and ultimately society, soon began to emerge. Heathrow Airport, for instance, as has been widely reported, is now floating the idea of pushing up passenger fees by 30 per cent to 40 per cent to get through 2022, as plans for a third runway and other capex have all been put on hold.
Are there lessons to be learnt? The short answer is ‘yes’, but it might prove interesting to hear the thinking behind that answer. Hickmore surmises: “I have always preferred not to have covenants in a bond prospectus, but if you end up with a covenant-lite situation, you do not have the control and visibility you need. I now see the benefits of covenants, even for investment grade companies, as good and strong and safe as they are; there can always be something untoward on the horizon.”
And are there any predictions for corporate actions in 2022? Hickmore adds: “We have seen a hefty increase in M&A activity in 2021, mostly cash for equity, and we think there will be more in 2022. Companies needed help and cash in 2020 and 2021, and the presence of spare cash on balance sheets could lead to more capex which could lead in turn to the issuance of more debt. We hope this will prove to have been a once-in-100-years event, but covenant-lite investors will almost certainly be more cautious than they were before.”
Howard Rapley, global product lead, securities services at Northern Trust, suggests that a return to normality is taking place in markets, after a year which saw many decisions being deferred as the normal cycle was disrupted and dividend distribution decelerated.
Operational fundamentals remain unchanged, however; the focus in the asset servicing industry is very much on the receipt of data, the reviewing and checking of data, and the onward delivery of data to the end-clients. The introduction of the EU Shareholder Rights Directive II in 2020 has placed a new emphasis on timeliness in the transmission of data. Clients continue to expect global custodians to simplify the investment-holding process in a sector where, in some less developed markets, scanning and faxing are still a daily staple of life and work.
“Corporate actions are becoming more complex, and the timeframes in which we have to fulfil our responsibilities are reducing,” says Northern Trust’s Rapley. “The corporate actions space is an area of risk and Northern Trust spends a good deal of time managing that risk. The quality and speed of service is higher than ever. The quantity of events has also gone up, driven by the demands of debt restructuring.”
He identifies three areas of future development in digitisation: growing industry investment in data handling capabilities; growing complexity in collateral management, further highlighting the need to keep track of who holds what assets at any given time, and their resultant entitlements; and digitisation in the field of crypto-assets and the tokenisation of securities.
“Things will get quicker. Exception management will change, in that there will be less of it, but you will have less time in which to do it. And more collaboration will be required in our industry as we change the plumbing and the wiring,” Rapley says.
“The industry loves to deconstruct corporate actions into separate buckets of activity but this adds risk to the underlying event,” says George Harris, senior director, data management solutions,
at FIS Global.
“We need to work on the three ‘Ps’: people, platform and process. In the people category, there needs to a raising of educational levels. Platforms need to be support the bridging of links in the intermediary chain. Industry players need to understand the risk profile of the corporate action, from, as Americans like to say, ‘soup to nuts’.”
None of the above will mean a thing to people who do not understand the basic nuts and bolts of modern investment processing in general and corporate actions in particular. However, Mike Simmons, director of The Operations Training Company, has spent his entire career in financial services, including 21 years at SG Warburg and Warburg Securities.
IPOs
Anne Fairweather, head of government affairs and public policy at UK investment platform Hargreaves Lansdown, says: “Driving greater retail involvement in corporate actions is on the agenda for both the government and Hargreaves Lansdown.
“We have long stated that there should be greater retail access to initial public offerings (IPOs) — between October 2017 and October 2020, private investors were invited to take part in just 24 out of 352 IPOs on the main market and alternative investment market. We wrote a joint letter to the UK Government in February last year highlighting exactly this point — we hope that 2022 will bring forward legislation to address this issue.
“Moves on secondary capital-raising events are also expected to address the concerns of retail investors this year. In these situations, retail investors are often excluded, despite already being shareholders in a company.
“For example, in June 2021, Pelatro conducted a fundraising in which they issued additional shares at a 24 per cent discount. Hargreaves Lansdown clients owned 9 per cent of the company, making Hargreaves Lansdown the second-largest shareholder. Our clients were completely excluded from the fundraising, which resulted in their holdings being diluted to the tune of 13 per cent, with the value of their shares dropping by 25 per cent directly after.
“We urge the government to reform the prospectus regime to allow for more equitable treatment of retail investors in 2022.”
For the past 20-plus years he has been writing and delivering training courses on a broad range of operational topics, in many cases attended by delegates who have not been terribly familiar with back-office topics for which they have day-to-day responsibility.
“Corporate actions is a mystery area to a very high percentage of people, even among industry operational veterans,” Simmons states. “A securities operations professional cannot be considered to have all-round expertise if they do not possess an intimate knowledge of corporate actions.”
He continues: “The first major step in processing a corporate action is to know that there is a corporate action taking place. The next is understanding the nature of the corporate action. It is essential to understand it; you have to know the purpose of the corporate action so you can predict the outcome and update your firm’s books and records accordingly, where both accuracy and timeliness are paramount for the firm to prove correctness of its books and records via the reconciliation process.”
Settlement Discipline Regime
Dave Shastri is chief strategy officer of Truss Edge, a niche provider of technology and operations as a service on a pay-as-you-go basis. He points to the looming impact of the new Settlement Discipline Regime, scheduled to come into effect in February 2022, which will impose a new requirement upon asset managers.
If settlement does not occur as programmed, they will need to be aware of that in order to ensure fund valuations are accurate.
“In the past, asset managers have been able to assume a promised dividend would arrive at its destination as scheduled, but the new regulation says they need to know just what is coming in and make sure that it does. Japanese companies in particular display a tendency to restate dividends on confirmation data, which clearly affects data and data gathering,” Shastri states.
Airports
Eva Dura, abrdn airport analyst, says: “When the COVID-19 pandemic hit in March 2020, it very quickly became clear that transportation, and air travel infrastructure in particular, would be one of the most affected sectors.
“This necessitated an increased engagement and almost daily ongoing dialogue with airport issuers followed by a number of supportive actions. The first step for all creditors was to understand how each company is approaching the crisis: what are they doing to mitigate new risks, shield liquidity and essentially survive.
“As airports started to issue more debt to increase cash balances, abrdn participated in these new debt offerings on many occasions. After the sector built up liquidity buffers, which provided creditors with a degree of comfort, the next step was to address the potential technical defaults on the back of financial covenant breaches.
“A great deal of work and collaboration with the issuers went into this as we started to address incoming covenant waiver requests. Among other entities, we worked together with Gatwick Airport in the effort to both create and protect value for our customers and support one of the UK’s key airports in a time of disruption and uncertainty.
“We never questioned whether we want to support the businesses but rather approached the crisis with the mindset of how best to do it. The businesses responded fantastically to our increased information requirements and we were able to provide necessary support to essentially all of them. We now believe it is time for shareholders to do the same.”
