Recognizing the Crucial Role of Identifying Bondholders

Corporate bond markets have become an increasingly important source of financing over the last 40 years. In 2022, the global bond market totaled $133 trillion. Valued at over $51 trillion, the U.S. has the largest bond market globally¹.

Understanding the bondholders can be crucial for an issuer. Companies and their financial and legal advisors may need to proactively communicate with investors to plan a debt restructuring more effectively, gain approval to modify the terms and conditions of the bonds, ensure the correct debt buy-back or exchange strategy, improve debt investor relations or for regulatory compliance.

Are bond issuers aware of the identities of their bondholders?
In general, no. Publicly available bondholder information only provides a small portion of bondholders’ identities and can be outdated. The Trustee, appointed to represent the interests of all bondholders, does not have visibility of bondholders either. Even if a company has a list of investors who initially bought their securities, someone can trade bonds quickly due to the liquidity of the capital markets and information about a bondholder group can become obsolete quickly. These issues are compounded for less-frequent issuers. 

Challenges of identifying bondholders
The challenges of identifying investors are numerous. Disclosure requests from companies to their bondholders are non-compulsory. In addition, the custody chain that separates bond issuers from their investors can be long and complicated. The chain of ownership starts with a clearing system that holds the bonds in deposit, for example, the Depository Trust & Clearing Corporation (“DTCC”) in the US. DTCC serves as a depositary for custodian banks, which hold bonds. These custodian banks, in turn, have clients that may act as intermediaries before reaching the ultimate beneficial owner of the bonds.

Methods for a proper bondholder identification
A well-executed identification process typically spans around ten business days. Sodali & Co, as an identification agent, can conduct bondholder identifications utilizing either a public methodology, in which the disclosure request is sent via the widest distribution channels to maximize response rates, or alternatively, an under-the-radar methodology, if the issuer prefers to avoid alerting front-office investors to the identification process. The choice between these methodologies depends on the company’s ultimate goal.

Investor communication is paramount in today's dynamic market landscape. This proactive approach fosters transparency and strengthens relationships with stakeholders, ultimately contributing to long-term success.

Why is it essential for companies to know who their bondholders are?

Strategic and operational objectives in the context of a liability management transaction.
In negotiations between the issuer and bondholders, it is vital to identify the latter to understand who is on the other side of the table. Bondholder research will aid the development of a core strategy for an upcoming transaction, helping the working group to understand the requirements of the investor population and how those needs might interact with those of the issuer, since retail and institutional investors might have different needs and requirements, for example. 

Bondholder identification reports can also help the legal team in constructing documents responsive to the circumstances of the investor base. The domicile of the bondholders and the capacity in which they hold their bonds affects the type of offer that an issuer can make. If the legal team knows where the bondholders reside, they can seek approval from the relevant regulatory entity.

Financial advisors may communicate with investors in advance of a transaction's launch if they know who they are and where to reach them. They can check potential participation in the proposed transaction and make sure that the company will obtain the threshold needed for the approval of an initiative prior to its official launch. 

Regarding the operational objectives, identifying bondholders will aid the prompt delivery of the offer materials into the correct hands. Documentation can be sent directly by the agent to the custodians, intermediaries and beneficial owners so they are equipped to analyze the offer as soon as possible. Due to the numerous layers in the chain of ownership, when an organization attempts to transmit an urgent communication to beneficial investors in a transaction, this message may not reach the decision-makers before the window of participation ends. 

Furthermore, a bondholder report might help the issuer and its advisors to match incoming instructions, that are usually only received in the name of the custodian bank, with its actual investors. This will permit follow-up with investors who have not yet responded.

Improving Investor Relations
A proactive approach to identifying bondholders enhances investor relations. Issuers can address concerns, answer inquiries, and engage in a more constructive dialogue with their bondholders, thereby strengthening the overall investor-issuer relationship.
Building and maintaining positive relationships with bondholders also contributes to a company's overall market perception. A strong reputation can also result in favorable borrowing terms and increased demand for future bond issuances.

In summary, identifying bondholders can be crucial for bond issuers. Understanding the various reasons, advantages, and challenges involved allows companies to use this knowledge to improve financial relationships. A proactive and informed approach to bondholder identification can help companies better achieve their debt-finance goals.

¹Source: The World Economic Forum, April 2023