Perspective
Article
February 12, 2025
Viewed
Shareholder Activism
And How it Unlocks Bondholder Value
Shareholder Activism
Shareholder Activism

In 'Corporate America', owners decide. The relationship between ownership and corporate decision making is fundamental to market-based systems.

Markets in goods and services aren't the only market. We also live in a market of ideas. Just as markets show us which goods and services are deserving of use, on a daily basis financial markets also show us real-time appraisals of entire companies and company leadership.  Most of the time, these appraisals offer varying degrees of satisfaction with the current situation. But sometimes, these appraisals express dissatisfaction that double as a stark plea for new ideas about what can be done at a company. At this point, those shareholders who genuinely care about the value of their investment will often step onto the stage - either in front or behind the curtain. These shareholders are often labeled as “activists”. We pay close attention to situations with ‘energized’ shareholders because these situations make for great corporate bond investment opportunities.

Let me tell you why.

Bondholder Spectatorship

It is the duty, and hopefully the creed, of any board to genuinely receive and incorporate the feedback of its owners. However, in practice, boards rarely meet critical feedback with arms wide open. This is the reason why Shareholder Activism works a lot like monetary policy: with long and variable lags. But, because bond investors are paid to wait, these lags don’t matter as much to the strategy we call ‘Bondholder Spectatorship’.

What is Bondholder Spectatorship?

Bondholder Spectatorship is a flexible and unprovocative approach of monetizing the successful work of shareholder activists. This is done through well-purchased corporate bonds of companies that are likely to attract, or have already attracted, shareholder engagement.

When a company’s shareholder base becomes sufficiently ‘energized’, the potential for a transformational change emerges. And changes of this magnitude can be a best-case scenario for bondholders.  Just like the sale of a home has implications for the property’s mortgage, the events shareholder activists often seek (spin offs, asset sales, whole-company sale) can often require the early retirement of the company’s bonds. Finding these opportunities requires not only an eye (or ear) for activism candidates, but it also requires an eye for passages in bond contracts that spell a particular commercial outcome related to the targeted event.

No Voice, No Influence, No Problem

For equity investors, these long and variable lags can turn a strong thesis into a weak investment. For bond investors, these lags matter much less. As opposed to burning a hole an investor's pocket, a well-purchased bond in a situation subject to engagement fills the investor's pocket as they wait.

You would think the credit market would be focused on situations like these. They’re not - or at least not enough. But there is a reason for this: these situations are edge cases. They fit an equity investor niche who knows how to spot them - and act. So not only is this investment style a distinct niche, but it is a niche grounded in an entirely different asset class. It is no wonder these situations are so overlooked by bond managers - especially investment grade managers who run highly diversified portfolios. The statistic of fixed income assets managed per investment professional lays bare why these niches aren’t a greater focus: they just don’t move the needle like sector, quality or duration bets do. It is for these reasons that bond market pricing often does not change consistently with the underlying facts.

Know the Situation You Are In

When I look at the mistakes I have made, I am increasingly considering the idea that many of the mistakes I have made were not due to a failure to understand the capital structure or the fundamentals of the credit. I believe the mistakes I have made were predominantly due a lack of situational awareness. This was because the actual signal of distinct situations can be subtle. Even if the facts of play are in obvious view, like pieces on a chessboard, there can be a big difference between seeing a situation’s constituent parts and understanding the actual situation on the board. If the situation could speak, it might quip: "I can explain this to you; I can't understand it for you."

The Right Recipe

The value of a situation is simple. It is a function of two things: 1) the probability of the state-change and 2) given the new state, the change in price of the bond.

When broken down into its parts, situations to focus on become obvious: 1) High imbalances of power in favor of capable shareholders. This drives a meaningful probability of state-change; 2) Obvious potential corporate end-states (ie: a sale instead of a spin, breakup or buyback). This allows potential capital structures, credit metrics and contractual implications to better forecasted; and 3) Discounted trading prices relative to that which would be relevant in the expected end state.

Given this framework, most of the time the most valuable part is the assessment of the probability of the state-change itself. This is because corporate bond markets often have a default setting on outlier corporate actions: zero. This is our opportunity - to capture a "free option". A simple 8-k or few lines of a press release can be a meaningful signal that may indicate a high potential for a change in state. It is exhilarating to find these gems, which are usually buried in less-examined financial disclosure.

Since bond markets are still dominated by humans - and their biases (including linear thinking) this is why we are focused so intently on the signals that can indicate the existence of these free options - a potential non-linear path ahead.

Read Disclaimer
Text Link

In 'Corporate America', owners decide. The relationship between ownership and corporate decision making is fundamental to market-based systems.

Markets in goods and services aren't the only market. We also live in a market of ideas. Just as markets show us which goods and services are deserving of use, on a daily basis financial markets also show us real-time appraisals of entire companies and company leadership.  Most of the time, these appraisals offer varying degrees of satisfaction with the current situation. But sometimes, these appraisals express dissatisfaction that double as a stark plea for new ideas about what can be done at a company. At this point, those shareholders who genuinely care about the value of their investment will often step onto the stage - either in front or behind the curtain. These shareholders are often labeled as “activists”. We pay close attention to situations with ‘energized’ shareholders because these situations make for great corporate bond investment opportunities.

Let me tell you why.

Bondholder Spectatorship

It is the duty, and hopefully the creed, of any board to genuinely receive and incorporate the feedback of its owners. However, in practice, boards rarely meet critical feedback with arms wide open. This is the reason why Shareholder Activism works a lot like monetary policy: with long and variable lags. But, because bond investors are paid to wait, these lags don’t matter as much to the strategy we call ‘Bondholder Spectatorship’.

What is Bondholder Spectatorship?

Bondholder Spectatorship is a flexible and unprovocative approach of monetizing the successful work of shareholder activists. This is done through well-purchased corporate bonds of companies that are likely to attract, or have already attracted, shareholder engagement.

When a company’s shareholder base becomes sufficiently ‘energized’, the potential for a transformational change emerges. And changes of this magnitude can be a best-case scenario for bondholders.  Just like the sale of a home has implications for the property’s mortgage, the events shareholder activists often seek (spin offs, asset sales, whole-company sale) can often require the early retirement of the company’s bonds. Finding these opportunities requires not only an eye (or ear) for activism candidates, but it also requires an eye for passages in bond contracts that spell a particular commercial outcome related to the targeted event.

No Voice, No Influence, No Problem

For equity investors, these long and variable lags can turn a strong thesis into a weak investment. For bond investors, these lags matter much less. As opposed to burning a hole an investor's pocket, a well-purchased bond in a situation subject to engagement fills the investor's pocket as they wait.

You would think the credit market would be focused on situations like these. They’re not - or at least not enough. But there is a reason for this: these situations are edge cases. They fit an equity investor niche who knows how to spot them - and act. So not only is this investment style a distinct niche, but it is a niche grounded in an entirely different asset class. It is no wonder these situations are so overlooked by bond managers - especially investment grade managers who run highly diversified portfolios. The statistic of fixed income assets managed per investment professional lays bare why these niches aren’t a greater focus: they just don’t move the needle like sector, quality or duration bets do. It is for these reasons that bond market pricing often does not change consistently with the underlying facts.

Know the Situation You Are In

When I look at the mistakes I have made, I am increasingly considering the idea that many of the mistakes I have made were not due to a failure to understand the capital structure or the fundamentals of the credit. I believe the mistakes I have made were predominantly due a lack of situational awareness. This was because the actual signal of distinct situations can be subtle. Even if the facts of play are in obvious view, like pieces on a chessboard, there can be a big difference between seeing a situation’s constituent parts and understanding the actual situation on the board. If the situation could speak, it might quip: "I can explain this to you; I can't understand it for you."

The Right Recipe

The value of a situation is simple. It is a function of two things: 1) the probability of the state-change and 2) given the new state, the change in price of the bond.

When broken down into its parts, situations to focus on become obvious: 1) High imbalances of power in favor of capable shareholders. This drives a meaningful probability of state-change; 2) Obvious potential corporate end-states (ie: a sale instead of a spin, breakup or buyback). This allows potential capital structures, credit metrics and contractual implications to better forecasted; and 3) Discounted trading prices relative to that which would be relevant in the expected end state.

Given this framework, most of the time the most valuable part is the assessment of the probability of the state-change itself. This is because corporate bond markets often have a default setting on outlier corporate actions: zero. This is our opportunity - to capture a "free option". A simple 8-k or few lines of a press release can be a meaningful signal that may indicate a high potential for a change in state. It is exhilarating to find these gems, which are usually buried in less-examined financial disclosure.

Since bond markets are still dominated by humans - and their biases (including linear thinking) this is why we are focused so intently on the signals that can indicate the existence of these free options - a potential non-linear path ahead.

Read Disclaimer
Shareholder Activism
Shareholder Activism

In 'Corporate America', owners decide. The relationship between ownership and corporate decision making is fundamental to market-based systems.

Markets in goods and services aren't the only market. We also live in a market of ideas. Just as markets show us which goods and services are deserving of use, on a daily basis financial markets also show us real-time appraisals of entire companies and company leadership.  Most of the time, these appraisals offer varying degrees of satisfaction with the current situation. But sometimes, these appraisals express dissatisfaction that double as a stark plea for new ideas about what can be done at a company. At this point, those shareholders who genuinely care about the value of their investment will often step onto the stage - either in front or behind the curtain. These shareholders are often labeled as “activists”. We pay close attention to situations with ‘energized’ shareholders because these situations make for great corporate bond investment opportunities.

Let me tell you why.

Bondholder Spectatorship

It is the duty, and hopefully the creed, of any board to genuinely receive and incorporate the feedback of its owners. However, in practice, boards rarely meet critical feedback with arms wide open. This is the reason why Shareholder Activism works a lot like monetary policy: with long and variable lags. But, because bond investors are paid to wait, these lags don’t matter as much to the strategy we call ‘Bondholder Spectatorship’.

What is Bondholder Spectatorship?

Bondholder Spectatorship is a flexible and unprovocative approach of monetizing the successful work of shareholder activists. This is done through well-purchased corporate bonds of companies that are likely to attract, or have already attracted, shareholder engagement.

When a company’s shareholder base becomes sufficiently ‘energized’, the potential for a transformational change emerges. And changes of this magnitude can be a best-case scenario for bondholders.  Just like the sale of a home has implications for the property’s mortgage, the events shareholder activists often seek (spin offs, asset sales, whole-company sale) can often require the early retirement of the company’s bonds. Finding these opportunities requires not only an eye (or ear) for activism candidates, but it also requires an eye for passages in bond contracts that spell a particular commercial outcome related to the targeted event.

No Voice, No Influence, No Problem

For equity investors, these long and variable lags can turn a strong thesis into a weak investment. For bond investors, these lags matter much less. As opposed to burning a hole an investor's pocket, a well-purchased bond in a situation subject to engagement fills the investor's pocket as they wait.

You would think the credit market would be focused on situations like these. They’re not - or at least not enough. But there is a reason for this: these situations are edge cases. They fit an equity investor niche who knows how to spot them - and act. So not only is this investment style a distinct niche, but it is a niche grounded in an entirely different asset class. It is no wonder these situations are so overlooked by bond managers - especially investment grade managers who run highly diversified portfolios. The statistic of fixed income assets managed per investment professional lays bare why these niches aren’t a greater focus: they just don’t move the needle like sector, quality or duration bets do. It is for these reasons that bond market pricing often does not change consistently with the underlying facts.

Know the Situation You Are In

When I look at the mistakes I have made, I am increasingly considering the idea that many of the mistakes I have made were not due to a failure to understand the capital structure or the fundamentals of the credit. I believe the mistakes I have made were predominantly due a lack of situational awareness. This was because the actual signal of distinct situations can be subtle. Even if the facts of play are in obvious view, like pieces on a chessboard, there can be a big difference between seeing a situation’s constituent parts and understanding the actual situation on the board. If the situation could speak, it might quip: "I can explain this to you; I can't understand it for you."

The Right Recipe

The value of a situation is simple. It is a function of two things: 1) the probability of the state-change and 2) given the new state, the change in price of the bond.

When broken down into its parts, situations to focus on become obvious: 1) High imbalances of power in favor of capable shareholders. This drives a meaningful probability of state-change; 2) Obvious potential corporate end-states (ie: a sale instead of a spin, breakup or buyback). This allows potential capital structures, credit metrics and contractual implications to better forecasted; and 3) Discounted trading prices relative to that which would be relevant in the expected end state.

Given this framework, most of the time the most valuable part is the assessment of the probability of the state-change itself. This is because corporate bond markets often have a default setting on outlier corporate actions: zero. This is our opportunity - to capture a "free option". A simple 8-k or few lines of a press release can be a meaningful signal that may indicate a high potential for a change in state. It is exhilarating to find these gems, which are usually buried in less-examined financial disclosure.

Since bond markets are still dominated by humans - and their biases (including linear thinking) this is why we are focused so intently on the signals that can indicate the existence of these free options - a potential non-linear path ahead.

Read Disclaimer
Text Link

In 'Corporate America', owners decide. The relationship between ownership and corporate decision making is fundamental to market-based systems.

Markets in goods and services aren't the only market. We also live in a market of ideas. Just as markets show us which goods and services are deserving of use, on a daily basis financial markets also show us real-time appraisals of entire companies and company leadership.  Most of the time, these appraisals offer varying degrees of satisfaction with the current situation. But sometimes, these appraisals express dissatisfaction that double as a stark plea for new ideas about what can be done at a company. At this point, those shareholders who genuinely care about the value of their investment will often step onto the stage - either in front or behind the curtain. These shareholders are often labeled as “activists”. We pay close attention to situations with ‘energized’ shareholders because these situations make for great corporate bond investment opportunities.

Let me tell you why.

Bondholder Spectatorship

It is the duty, and hopefully the creed, of any board to genuinely receive and incorporate the feedback of its owners. However, in practice, boards rarely meet critical feedback with arms wide open. This is the reason why Shareholder Activism works a lot like monetary policy: with long and variable lags. But, because bond investors are paid to wait, these lags don’t matter as much to the strategy we call ‘Bondholder Spectatorship’.

What is Bondholder Spectatorship?

Bondholder Spectatorship is a flexible and unprovocative approach of monetizing the successful work of shareholder activists. This is done through well-purchased corporate bonds of companies that are likely to attract, or have already attracted, shareholder engagement.

When a company’s shareholder base becomes sufficiently ‘energized’, the potential for a transformational change emerges. And changes of this magnitude can be a best-case scenario for bondholders.  Just like the sale of a home has implications for the property’s mortgage, the events shareholder activists often seek (spin offs, asset sales, whole-company sale) can often require the early retirement of the company’s bonds. Finding these opportunities requires not only an eye (or ear) for activism candidates, but it also requires an eye for passages in bond contracts that spell a particular commercial outcome related to the targeted event.

No Voice, No Influence, No Problem

For equity investors, these long and variable lags can turn a strong thesis into a weak investment. For bond investors, these lags matter much less. As opposed to burning a hole an investor's pocket, a well-purchased bond in a situation subject to engagement fills the investor's pocket as they wait.

You would think the credit market would be focused on situations like these. They’re not - or at least not enough. But there is a reason for this: these situations are edge cases. They fit an equity investor niche who knows how to spot them - and act. So not only is this investment style a distinct niche, but it is a niche grounded in an entirely different asset class. It is no wonder these situations are so overlooked by bond managers - especially investment grade managers who run highly diversified portfolios. The statistic of fixed income assets managed per investment professional lays bare why these niches aren’t a greater focus: they just don’t move the needle like sector, quality or duration bets do. It is for these reasons that bond market pricing often does not change consistently with the underlying facts.

Know the Situation You Are In

When I look at the mistakes I have made, I am increasingly considering the idea that many of the mistakes I have made were not due to a failure to understand the capital structure or the fundamentals of the credit. I believe the mistakes I have made were predominantly due a lack of situational awareness. This was because the actual signal of distinct situations can be subtle. Even if the facts of play are in obvious view, like pieces on a chessboard, there can be a big difference between seeing a situation’s constituent parts and understanding the actual situation on the board. If the situation could speak, it might quip: "I can explain this to you; I can't understand it for you."

The Right Recipe

The value of a situation is simple. It is a function of two things: 1) the probability of the state-change and 2) given the new state, the change in price of the bond.

When broken down into its parts, situations to focus on become obvious: 1) High imbalances of power in favor of capable shareholders. This drives a meaningful probability of state-change; 2) Obvious potential corporate end-states (ie: a sale instead of a spin, breakup or buyback). This allows potential capital structures, credit metrics and contractual implications to better forecasted; and 3) Discounted trading prices relative to that which would be relevant in the expected end state.

Given this framework, most of the time the most valuable part is the assessment of the probability of the state-change itself. This is because corporate bond markets often have a default setting on outlier corporate actions: zero. This is our opportunity - to capture a "free option". A simple 8-k or few lines of a press release can be a meaningful signal that may indicate a high potential for a change in state. It is exhilarating to find these gems, which are usually buried in less-examined financial disclosure.

Since bond markets are still dominated by humans - and their biases (including linear thinking) this is why we are focused so intently on the signals that can indicate the existence of these free options - a potential non-linear path ahead.

Read Disclaimer

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