Bondholder Communication

Market participants have rightfully questioned how – well into the digital age – the significant limitations of the current communication system remain.

Briefing

It may surprise policymakers and regulators, as well as even some market participants, to know that it is currently very difficult – and sometimes impossible – for bondholders to communicate with the companies that issued the securities they own or for bondholders who own the same security to communicate with one another.

This perennial issue prohibits vital governance actions such as execution of consent solicitations, tender or exchange offers, investor rights or simply providing investors with monthly communication in an efficient, user-friendly manner. The current system is so unreliable that when evaluating potential solutions for the transition away from LIBOR, one of our financial markets’ most serious risk today, market participants view the option of soliciting bondholder consent for an amendment as largely unfeasible.

Market participants have rightfully questioned how – well into the digital age and long since record keeping transitioned from physical certificates to an electronic platform – the significant limitations of the current communication system remain. While there is certainly a complex chain of intermediaries that often separates the record-owner from the beneficial owner with only the final custodian retaining the record of the actual investor’s identity, today’s technology – including blockchain – provides viable solutions.

The Association is leading an effort within the structured finance market to identify the requirements for a robust and effective bondholder communication framework that could apply to all new bond issuance, if fully adopted. 

Our Bondholder Communication Task Force has commenced a review of the current bondholder communication frameworks to identify operational, legal, economic and regulatory issues pertaining to those frameworks and drafted a specification document for an improved bondholder communication platform to address those issues. This project specification document will serve as the backbone for potential industry service providers to evaluate their ability to develop a platform meeting the industry’s needs at a cost point acceptable to the industry.

“Strong governance is a key pillar of a sustainable securitization market, but we can’t fully have strong governance without a mechanism for transaction parties to communicate with each other in a timely fashion when the circumstances so require. I’m very optimistic that with the Structured Finance Association’s leadership and the commitment of industry participants we will finally be able to overcome what has been a persistent obstacle to better governance in our industry for many years.” – Francisco Paez, MetLife Investments

The percentages of security holders that are identifiable from public sources across sectors:

~85% of equities in the S&P 500 Index

~40% in the corporate debt of those same companies in the S&P 500 Index, which are the largest issuers in the world

For smaller issuers, the portion of publicly available holders drops precipitously:

~2% – 45% of securitization trust (varies dramatically by issuer and asset class)

~2% – 5% in illiquid assets that are subject to high-stakes control issues, such as CDOs, CLOs and structured credit assets

Contact

Jennifer Wolfe

Director, ABS and Investor Policy

Jennifer.Wolfe@structuredfinance.org