Successful bondholder engagement with issuers is largely dependent on whether the deal is public or private, and whether the investor engages pre- or post-issuance. 

Timing engagement

Timing the engagement is a strategic decision, because the bondholder’s influence with issuers varies throughout the issuance lifecycle. If the debt issuance is privately placed, the investor is more likely to have direct engagement with the prospective issuer both pre- and post-issuance. The table below shows the bond issuance ‘lifecycle’, alongside scope and limitations to bondholder engagement with issuers on a range of potential issues, including ESG.

  Pre-issuance Post-issuance
Bondholder influence over issuers
  • Prospective bondholder has the opportunity to influence the prospective issuer by requesting or requiring the inclusion of contractual obligations to provide information on ESG matters
  • Bondholder retains some potential influence with issuer where the issuer is seeking to renegotiate contractual obligations, refinance, or where bondholders attain the required quorum to convene a bondholder meeting
Private placement
  • Greatest opportunity to require/request inclusion of contractual obligations on the issuer
  • Most likely to be direct dialogue
  • Distinction between private and public is less relevant, although buyers of private debt are more likely to have contact with the issuer postissuance
  • Scope to engage can be limited as obligations of issuers to the bondholder have been fixed in contractual agreements (such as trust deed, indenture, transaction documentation, covenants and other transaction documentation)
  • Bondholders may be able to convene bondholder meetings if, individually or collectively, have a specified percentage bondholding
  • Companies frequently need to refinance . representing another point at which, postissuance, bondholders can hold a dialogue with issuers
  • Another opportunity to get (back) earound the table f when an issuer seeks consent of bondholders to make amendments to contractual terms of existing bonds (for example to clarify ambiguities, to effect a restructuring etc.).
Public issuance
  • Potentially more limited opportunity to influence specific contractual obligations, as engagement could take place quite a lot later in the issuance process (at investor roadshows, for example, when a transaction and the proposed documentation is completed or progressed)
  • Most likely to be indirect dialogue via dealers, underwriters or other intermediaries or advisers
  • Possibility to express views on the importance of ESG matters, and how these may influence the decision to invest and at what price
  • This may eventually impact the prevalence of ESG risk factors in any prospectus regarding issuance
  Pre and post-issuance 
Overcoming challenges 
  • Whether or not bondholder requests are implemented is a matter for negotiation . potential resistance by issuers to include ESG metrics in covenant packages as breaches could lead to events of default.
  • Investors can also request that issuers prominently disclose their ESG policies in their marketing materials. By demanding this information, corporate bond funding can encourage higher standards of corporate disclosure and transparency, and promote consistent high-quality international corporate governance standards.
Contractual bondholder rights and issuer obligations Transaction documentation provides the framework for the issuer’s obligations to its bondholders, which includes any obligations in respect of ESG matters:
  • Right to information: The T&C and the instrument constituting the bonds (the trust deed or indenture) typically include obligations on the issuer to provide financial and other information, either to the trustee or bondholders directly, depending on the structure
  • Right of inspection of documents: The majority of issuances provide an entitlement for bondholders to inspect copies of transaction documents at the issuer’s registered offices
  • Convening bondholder meetings: Under the terms of many bond issuances, bondholders are entitled to convene meetings provided that they hold a specified proportion of the bonds of the relevant class
  • Issuer-led solicitations: When an issuer seeks the consent of bondholders to make amendments to the terms of the existing bonds
Regulatory issuer obligations

Relevant UK/EU regulation

  • EU Prospectus Directive (2003/71/EC/as amended)
  • Prospectus Regulation (809/2004) and Regulation (EU) 2017/1129 (the New Prospectus Regulation)
  • EU Market Abuse Regulation (MAR) (596/201/EU) and/or the Disclosure and Transparency Rules (DTR)
  • EU Markets in Financial Instruments Direction
  • Anti-money laundering, anti-terrorism financing, anti-corruption requirements, insider dealing and market abuse regulation

Relevant US regulation

  • SEC mandatory disclosure rules (Regulation S-K)
  • US Department of Labor’s Interpretative Bulletin 2015-01

Download the full report

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    ESG Engagement for Fixed Income Investors

    April 2018