When European bond investors tired of private equity firms and the law firms they employ watering down key protections in junk-rated debt, they turned to the Association for Financial Markets in Europe.
Influential asset managers such as AllianceBernstein and Schroders wrote a public letter to the board of AFME’s high-yield division — the closest thing the $400bn European junk bond market has to an industry trade body — expressing their dismay. These investor members of AFME took particular aim at the deteriorating quality of covenants — important clauses that restrict companies from taking reckless actions such as raising too much debt.
That was in 2015. Today the quality of these covenants in a market tapped by the likes of French telecoms conglomerate Altice and UK sports car maker Aston Martin is even worse. Asset managers such as pension funds are worried that whittling away these safeguards will leave them more exposed to losses when the credit cycle turns. And in a sign of the tensions straining the market, these asset managers are leaving AFME’s high-yield division in droves.
Mainly funded by banks and law firms, the industry trade body had previously let investors join free of charge in order to foster a dialogue with the buyers of the debt. But after AFME said in October that would it start charging membership fees to investors, the majority of high-yield investors are exiting, according to people familiar with the matter.
The new £7,500 annual fee for investment firms is a fraction of the amount charged to banks and law firms, but several investors told the FT that they were unwilling to pay given the lack of improvement on covenants in an increasingly overheated market.