Europe Lobby for Junk-Debt Buyers Gets CEO and Flood of Members

(Bloomberg) -- Europe’s Leverage Finance Association, a fledgling lobby group, appointed its first chief executive officer this month amid skyrocketing applications from investors worried about the rising trend in deal terms that favor borrowers over buyers.

Sabrina Fox, who helped build the lobby group from its inception in 2019, took the helm in early January. ELFA, equivalent to The Credit Roundtable in the U.S., now has 38 members in the U.K. and the EU, after it started with just 10 high-yield investors.

A rally in the credit markets spurred by the arrival of Covid-19 vaccines is once again allowing companies to take advantage of demand, Fox said in an interview with Bloomberg News. Investors need to be on their guard more than ever as borrowers seek looser terms in their contacts while the pandemic pushes more companies into distress.

“With volatility rife, risk analysis is front and center for investors,” she said.

Risky borrowers have loaded themselves up with cheap debt in Europe’s 676 billion-euro ($824 billion) leveraged-finance market, thanks to monetary stimulus from central banks since the global financial crisis.

Consequently, corporates and private equity giants have taken the upper hand due to the growing clamor for yield from investors who buy their deals.

Credibility Needed

As a lawyer, Fox worked on high-yield bond transactions for over a decade at firms including Norton Rose Fulbright, DLA Piper and more recently Covenant Review, where she published papers revealing the trapdoors hidden beneath dense investor bond prospectuses.

“I knew how important it was that investors understood the implications of some of these complex terms,” Fox said.

ELFA has engaged with regulatory bodies including the Bank of England and the Financial Conduct Authority on issues around investor safeguards, while the lobby group’s report on firms’ use of coronavirus-adjusted earnings, or Ebitdac, at the start of the pandemic spurred action from regulators.

Still, the group’s credibility, and its ability to face down private equity giants, ultimately derives from its members.

“The only way we were going to achieve that and make any change was to get the majority of the buyside behind us,” Fox said.

ELFA now counts some of Europe’s most prominent money managers as its members, including Allianz Global Investors, AXA Investment Managers and Barings Asset Management, who pay 7,500 pounds ($9,570) for annual membership.

Their willingness to pay suggests they are more enthusiastic about ELFA than its predecessor, the Association for Financial Markets in Europe. Dozens of investors quit that group in 2018 after the introduction of an annual membership fee amid a growing frustration that it was failing to address weakening protections.

Front Line

ELFA has also publicly questioned the more provocative terms in U.S. transactions, fearing that they could bleed into Europe’s markets.

A recent deal limited any single investor’s voting power to 20% of the outstanding notes. That could make it harder for holders to resist any attempt to change terms or to declare events of default, such as those arising from missed interest payments.

“It’s provisions like this from private equity firms and their lawyers that are changing the rules for investors in Europe’s capital markets,” Fox said. “There needs to be a body monitoring it. If not investors could land themselves in hot water.”

While ELFA has drawn attention to the ongoing topic of deteriorating industry standards, some fund managers say there will only be real change when investors vote with their feet.

“What it takes to get companies’ attention is a couple of large investors refusing to buy a deal and really flexing their muscles,” said Pilar Gomez-Bravo, director of fixed income at MFS Investment Management, who manages $6 billion in fixed income assets.

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