Investors have warned that a move by private-equity backed Ancestry.com to limit investor voting rights in a bond deal last week threatens to erode a “cornerstone” of the corporate debt market.
The group added a provision that caps investor voting rights to 20 per cent into legal documents underpinning a $1.2bn fundraising that is part of Blackstone’s buyout of the group.
Ancestry’s provision upended the long-held principle known as “one bond, one vote” that provides investors with voting power proportionate to their holdings.
The deal marks the latest sign of loosening lending standards and protections in the credit market that has sparked angst among some analysts, policymakers and investors. It also inhibits investors from enforcing their rights as holders of a company’s debt, analysts warned.
Typically, it requires votes by 30 per cent of bondholders to declare a default event, if for example an interest payment is missed, analysts said. Under the Ancestry provision, it would take more than one holder to make such a declaration. It could also make it harder for investors to push back against changes to the terms of the bond — known as consent solicitations — which usually require a majority to oppose a proposal from the company.
“The market is a game that we play. There are rules we follow to maintain order. One of those rules is one bond, one vote. It’s hard to believe that this is being questioned,” said David Knutson, head of credit research at Schroders and the vice-chair of the Credit Roundtable, an investor industry group in the US. “This is a cornerstone of the bond market.”
Ancestry is the first borrower to put such a provision into documents backing a debt deal, analysts and investors said. Blackstone-backed Precision Medicine Group pitched a loan deal that included voting caps in October, according to people familiar with the terms, but investors successfully pushed back on the provision.
Despite the stark warnings, investors lapped up the Ancestry deal, with the bond more than eight times subscribed, according to people familiar with the fundraising. Blackstone declined to comment.
The new language comes after a series of battles between distressed companies and their lenders during the coronavirus crisis. Analysts and investors said that should voting caps become commonplace it would tilt the balance of power in favour of borrowers going forward.
Ancestry’s deal would also give the company the ability to pick and choose when to lift the voting cap and for which bondholders, according to Covenant Review, effectively allowing them to boost the voting power of large holders that might vote in line with the company’s wishes.
“This is clearly for the benefit of the issuer, not for bondholders,” said Ross Hallock, an analyst at Covenant Review. “The point seems to be to make it difficult for any one bondholder to do something on its own.”
The bond documents also include provisions that require an investor to disclose whether it is net short the company — meaning its bets on the company’s condition deteriorating outweigh bets that its value will increase — before it is granted any voting power at all. This is to discourage investors buying the company’s bonds as part of a larger strategy to tip it into default and profit off trades that pay out when it does.
The provisions have already caught the attention of European investors as well, keen to make sure it does not make its way into debt documents across the Atlantic. The European Leveraged Finance Association published a letter on Thursday outlining the possible effects of voting caps and urging against their inclusion in European deals.
“Fundamental investor rights are being infringed,” said Sabrina Fox, executive adviser at Elfa. “It’s just awful.”