With the treasurer’s role becoming more strategic, many investor relations and treasury duties are overlapping. What makes best practice in establishing and running a sound debt investor relations (IR)? A trio of seasoned treasury professionals offer their views.
Robust liquidity and funding strategies can only be executed effectively if all investors have confidence in the business. For this to happen, there needs to be a means of imparting clear and consistent information to debt market participants, reassuring individual investors that they are making appropriate decisions. In a market where uncertainty and volatility prevail, this role increasingly falls to the debt investor relations (IR) team which today increasingly involves treasury.
In some businesses, the debt IR function is well-developed and valuable lessons can be learned from their skilled practitioners.
RELX, for example, is a BBB+-rated FTSE 100 information and analytics company, listed in London, Amsterdam and New York, operating with a £32bn market capitalisation. It has around £7bn in revenues and £6bn in debt, most of which is in bonds but with about £1bn in commercial paper. It is a company that annually delivers around 4% revenue growth, 6% profit growth and 8% EPS. In issuing in the debt markets, typically a couple of times a year (to avoid spikes that would put it at the mercy of the markets), the kind of message this business gives to investors is one of positivity. Indeed, with a cash conversion of over 90%, “there is really nothing in our company profile not to like”, says Suzanne Perry, its Assistant Group Treasurer and leader of its debt IR programme.
Both the RELX board and CFO take an interest in debt issuance and the company has a permanent equity IR team. In debt circles, Perry tends to team up with one of her equity colleagues for a roadshow – a co-ordinated series of visits to existing and potential investors – every other year. Additionally, she explains that a lot of effort is put into the firm’s explanatory debt investor website “helping to remove as many barriers to investing as possible”.
The reasons for debt issuance are manifold, and the funding strategy taken by UK retailer, Matalan, since it went private in 2006, has seen it take on a £400m debt facility. This has been re-financed every four or five years, guided, in IR terms, by Carl Walsh, the company’s Head of Finance.
Walsh, who took up the position in 2016, is charged with strengthening the firm’s IR portfolio standing, doing so in the light of “challenging” trading conditions that followed the “difficult” transition of its northern England warehouse to a new purpose-built facility in Liverpool.
With a significant impact on earnings to defend, Walsh says early engagement with investors was essential, reassuring them “and taking them on the journey of recovery”. With that route established, and the company emerging successfully from its latest re-financing deal in January 2018, it has been “quite an intense two-year period” for Walsh and his debt IR activities.
The story for Liberty Global, the world’s largest international TV and broadband company, hinges on a market capitalisation of circa US$17bn, and US$37bn of high-yield debt (mostly leveraged loans and high-yield bonds). This, says Beatrijs Woltring, its VP, Treasury, makes it a “very energetic debt capital market player”, with debt IR being run out of treasury.
As part of its debt IR effort, the team maintains an active dialogue with relationship banks (which provide capital, market access, investor feedback and credit research), debt investors, rating agencies and key financial media.
For all businesses, the structure and process of IR demands clear thought. It inevitably brings together different voices within the business – equity and debt investors having quite different needs. This has potential to create internal friction, if not managed well.
To mitigate this risk, Perry explains that RELX has adopted internally audited controls, including restricting those allowed to speak on IR matter to a small group of people (principally Perry, the Group Treasurer, the equity IR team and the CFO). “We make sure we don’t have too many people getting involved because we need to ensure we all stay on-message,” she says.
Because a lot of what is done on the debt IR side is about getting the right equity story into the public domain, the RELX debt team tends to “piggy-back” off the equity IR function, using its investor footprint and its operational model to achieve shared financial and corporate goals. It works well. “The board are very involved in terms of approving specific debt issues but they don’t generally dictate what level of engagement we have with investors,” she explains.
With the company’s CFO and CEO taking an active interest in debt IR, their regular attendance at meetings with treasury keeps them up to date with investor interactions. Having built a robust framework around the process, debt IR has seen significantly increased engagement with debt investors over the years, she says.
We’ve also started arranging one-to-one meetings with our largest debt investors, allowing us to have a more meaningful dialogue. This has been very useful so far; the conferences may give you a 30-minute slot in front of three or four investors but that allows very little time to go into detail.
Beatrijs Woltring, VP, Treasury, Liberty Global
For Matalan, although the board itself had undertaken a lot of engagement with the investor base previously (primarily as new management and leadership roles were introduced to power the business through its turnaround), the more recent adoption of a structured and honed IR approach has proven effective. Only Walsh and the CFO are authorised to interact with debt investors and banks, keeping the message “in alignment”.
The Liberty Global debt IR team similarly works closely with its equity counterparts, says Woltring. “It’s very much a joined-up approach. We both report to the CFO, we have a shared calendar for conferences and one-to-one meetings and we have monthly meetings where we discuss feedback from equity analysts and investors and from the debt investor community.”
Woltring further ensures that leveraged loan and high-yield bond conferences are well-attended (around four a year in the US and up to ten in Europe), giving the treasury team opportunities to speak to debt investors directly. “We’ve also started arranging one-to-one meetings with our largest debt investors, allowing us to have a more meaningful dialogue,” she says. “This has been very useful so far; the conferences may give you a 30-minute slot in front of three or four investors but that allows very little time to go into detail.”
All three companies here exhibit robust structuring of debt IR, with collaboration central to their success. But there can still be challenges to overcome. The reason why the teams don’t rely wholly on the banks for market feedback, and instead make a point of seeing investors face-to-face, is that this the only way to gain a full understanding of investor motivation. “RELX is a unique proposition and sometimes we find that the questions investors ask are different to the ones that the banks are asking,” explains Perry.
It’s a sign of the times too, she says, that where once a BBB+ rating was “the sweet spot between risk and reward”, rates are now so low that some investors don’t feel they are getting the return they want. This means gauging the right price for an issue can be difficult.
In the investment space, regulatory change is never far away, comments Walsh. The MiFID II directives, for example, push the principles of open and transparent trading to all asset classes. This may not pose a direct impact on the way debt IR interacts with investors but it certainly will steer the direction of any issuance and requirements to notify investors of activities likely to impact on debt trading levels (M&A for example).
Technology will serve to increase the speed and frequency of touch points; there will be a greater expectation of how many times IR will engage with investors and other stakeholders.
Carl Walsh, Head of Finance, Matalan
The broader impact on financial services of one current theme – Brexit – is also a concern from an IR perspective for Walsh. He feels that the highest level of engagement with investors, both at a macro- and micro-economic level, must be sustained, as IR necessarily builds an understanding of, and answers to their needs, in the context of Brexit uncertainty. “The real challenge here is the amount of time that businesses will need to devote to IR,” he comments.
With finite IR resources, finding a balance between time spent with the banks, the desk analysts, the ratings agencies and the investors, is difficult. “There is no perfect answer to this,” he says. “For us, it is about having a mix of regular, more structured touch points, and overlaying that with an ‘as required’ basis, depending on the investor. It cannot be a fixed approach, it has to evolve.”
Of course, when a business is performing well, then debt IR can be relatively easy. However, if a business is facing a challenge, financial (such as a rating downgrade) or even physical (extreme weather, for example) issues will see investors lining up for clarity. IR must be ready with answers. “That’s when you really get to see if you are doing a good job,” says Woltring.
The importance of getting it right should not be underestimated; access to capital markets may depend on it. “You’re only as good as your last deal,” she warns. “It’s vital to be proactive. Even if you feel it’s not needed now, it’s important to know who your investors are, and to engage with them, because they are key stakeholders.”
Although time and effort is required for good debt IR, the success of that effort is hard to gauge, especially as investments are, to a degree, subject to market behaviours. As we have seen, IR earns its keep when the company is facing a challenge. But a recent survey by the US National Investor Relations Institute offers a loose quantification of that value, at least on the equity side.
It concluded that 82% of US buy-side investors believe that IR impacts a company’s valuation. It said that good investor relations provided a 10% valuation upside, but poor investor relations had a negative impact on a company’s valuation by up to 15%. This may well translate into the debt IR realm; the only certainty is that effective debt IR demands that the function stays wide awake.
To this end, technology is playing an increasing role in ensuring a positive outcome. “Digitisation in IR is here and will continue to evolve,” notes Walsh. In terms of engagement, just a few years ago, conference calls and face-to-face meetings were the extent of interaction, he recalls. Now it includes options such as webinars and social media platforms. “Technology will serve to increase the speed and frequency of touch points; there will be a greater expectation of how many times IR will engage with investors and other stakeholders.”
There is, he adds, also now the question of how technology will be involved in investor decision-making. The current use of financial statements and business models is slowly being augmented with AI-type technology, enabling greater insight drawn from many more sources. Taken to the extreme, it may even be worth positing that, one day, IR will, on the investor side, be dealing with algorithms rather than human investors.
Until that day, it remains a very human function, and humans can sometimes be led by stories in the press, locking-on to certain themes to the detriment of the conversation. “It is our job to ensure they get the right story,” states Woltring.
As such, there are certain skills required for the good IR practitioner. These must reflect a mix of technical and soft skills, the latter particularly around communication and human interaction. “You need to be a rounded individual to be able to hold conversations with investors and to drive the desired outcomes,” says Walsh.
For anyone considering a move into debt IR, Perry says there is no set route, agreeing with Walsh that a rounded skill-set is essential. “You need the strong technical element and you need a deep understanding of the business. But investors can be quite challenging in their questioning, so you also need to be an effective listener if you are going to be able to answer their questions fully rather than resorting to stock answers.”
It is, naturally, incumbent upon investors to ask the right questions too, and in mixing with both equity and debt investors, Woltring notes that equity participants tend to probe a lot deeper, seeking quite detailed analysis. Debt investors, conversely, tend to be “a bit lighter” on some of the detail, even if many do take the time to prepare in the face of short timeframes and an abundance of complex information.
Of course, adds Walsh, as debt IR experts, “it is easy when holding all the information to know what questions should be asked”. As such, he feels that it is the lot of debt IR professionals to be sympathetic towards investors. In the digital age, as more information becomes available, so more information is expected; debt IR teams must be ready for anything.