Post by jannikki on Feb 14, 2007 19:51:04 GMT -4
Sarbanes-Oxley Backfires in Unregistered Bond Sales (Update2)
By Mark Pittman
Feb. 14 (Bloomberg) -- Sarbanes-Oxley, the U.S. law designed to stamp out corporate fraud, is prompting more companies to keep secrets in the bond market.
Siemens AG, Australian retailer Woolworths Ltd., Miller Brewing Co. of Milwaukee and at least 100 other companies are selling bonds that aren't registered with the Securities and Exchange Commission instead of debt that requires more disclosure. The securities increased 50 percent in the past two years, five times faster than the rest of the U.S. market, according to data compiled by Lehman Brothers Holdings Inc.
``It's a darker world of the bond market,'' said Matthew Eagan, who helps oversee $97 billion in fixed income, including unregistered bonds, at Loomis Sayles & Co. in Boston. ``It's off the radar.''
The private bond sales are flourishing because companies face almost no penalty for keeping their finances away from the public. The millions of dollars in costs to comply with the Sarbanes-Oxley Act of 2002 can wipe out savings from public debt because investors demand only 11 basis points more in yield to buy unregistered securities, Lehman data show.
Named for former House Financial Services Committee Chairman Michael Oxley, a Republican from Ohio, and former Democratic Senator Paul Sarbanes of Maryland, the law was passed after the collapse of Houston-based Enron Corp. and WorldCom Inc. Enron's fraud wiped out more than 5,000 jobs and $1 billion in retirement savings. Clinton, Mississippi-based WorldCom cost shareholders and bondholders as much as $40 billion.
``Demand for Yield''
Sarbanes-Oxley requires companies to hire external auditors to evaluate their financial reports and the law applies to borrowers outside the U.S. that want to sell securities to the American public.
The rule is consistent with efforts to make the bond market more transparent by requiring traders to report sales to an NASD computer system that distributes prices on the Internet.
Unregistered bonds make the market more opaque because trades aren't reported on the NASD's Trade Reporting and Compliance Engine. They can only trade between institutions.
``Investors, in their demand for yield, are willing to give up some of their documentation or registration requirements,'' said Raj Dhanda, head of debt capital markets at New York-based Morgan Stanley, the fifth-largest underwriter of corporate debt in the U.S. this year. ``We have told plenty of private borrowers that they can raise money pretty easily in today's environment.''
Increasing Market
Unregistered debt is accelerating as the bull market in corporate bonds enters its eighth year. The global default rate ended 2006 at 0.44 percent, the lowest in 25 years, according to Standard & Poor's.
A slowdown in the economy makes these bonds riskier because fewer investors can buy them, Eagan said. ``You better hope that it works out because you need to be prepared to own it,'' he said.
The market value of non-registered bonds has risen 28 percent a year since Dec. 31, 2004, compared with a 5 percent increase for all company bonds, according to the Lehman index. About $303.1 billion of the securities are outstanding.
Lehman's index of non-registered debt yields on average 88 basis points, or 0.88 percentage point, over government debt, 11 basis points more than the spread for the firm's broadest U.S. corporate index. The yield difference between investment-grade corporate bonds and Treasuries has narrowed from 2.41 percentage points on Oct. 10, 2002, the record high, according to Lehman.
Avoiding Disclosure
Miller Brewing sold $1.1 billion of unregistered 5.5 percent notes in August 2003, 13 months after Sarbanes-Oxley was passed and the year before companies were required to comply with the rules.
Selling unregistered bonds ``is clearly more straightforward and less onerous than full registration,'' Nigel Fairbrass, a spokesman for the unit of London-based SABMiller Plc, said in an e-mailed statement.
International companies that used to sell public debt in the U.S. are staying away to avoid Sarbanes-Oxley, said Joseph McLaughlin, co-author of the 1997 book ``Corporate Finance and the Securities Law.'' First-time issuers in the U.S. would spend $1 million to comply with Sarbanes-Oxley, he said.
``Before Sarbanes-Oxley, a foreign issuer might say, `Why should I limit myself to the U.S. private market? I can just register with the SEC with a disclosure document and then I've got access to the public markets,''' said McLaughlin, a partner with international law firm Sidley Austin LLP in New York.
Sellers Disappear
Hutchison Whampoa Ltd., the Hong Kong-based holding company controlled by Li Ka-Shing, has the two biggest issues in the Lehman unregistered index at $3.5 billion and $2 billion.
The company is followed by Munich-based Siemens, the German engineering company with two $1.75 billion issues. Siemens sold $1.75 billion of 5.75 percent 10-year unregistered notes in August to yield 85 basis points more than U.S. government debt of similar maturity.
Hutchison Whampoa in 2003 sold $3.5 billion of 6.5 percent notes due in 2013 that were not registered with the SEC. None of the company's dollar-denominated bonds is registered, Laura Cheung, a company spokeswoman, said in an e-mailed statement.
Siemens sold $1 billion of 8 percent 10-year notes in 1992 that required financial disclosures. Siemens may opt to register its bonds because it is compliant with Sarbanes-Oxley through its American depository receipts on the New York Stock Exchange, said Marcus Desimoni, the head of investor relations for Siemens.
Issuers `Disappeared'
``And those people have disappeared because they figure that the savings of placing bonds in the U.S. public market are more than compensated for by the additional cost and burdens of Sarbanes-Oxley,'' McLaughlin said.
Companies will spend $6 billion this year complying with the rules, according to a study by Boston-based AMR Research released last March. The Business Roundtable, which represents executives from the U.S.'s biggest companies, says 40 percent of its members will spend at least $10 million complying with Sarbanes-Oxley.
Woolworths sold $725 million of bonds in the U.S. in two sales during 2005, the company's first forays in the U.S. corporate debt market. The rest of the company's debt is in Australian dollars. Woolworths spokeswoman Clare Buchanan declined to comment.
`Kicking and Screaming'
Companies were dragged ``kicking and screaming'' into compliance with Sarbanes-Oxley, said Deborah Davidson, director of publications for the Washington-based National Association of Corporate Directors. ``It's been a good thing,'' she said. ``If you're afraid, then there's something wrong.''
By skirting Sarbanes-Oxley, sellers of unregistered bonds disclose information only to owners of their securities.
Sarbanes-Oxley faces growing opposition from political groups and companies that say the rules make U.S. financial markets less competitive. Sarbanes and Oxley didn't return calls, and their staffs declined to comment.
Companies selling unregistered bonds include closely held issuers that have traditionally used private placements to borrow.
Chicago-based Citadel Investment Group LLC, the hedge fund controlled by Kenneth Griffin, sold $500 million of five-year notes in December that weren't registered with the SEC. It was the first bond sale by a hedge fund, pools of capital from wealthy individuals and institutions that allow managers to participate in the gain or loss of the money invested.
The 6.25 percent notes were sold at a yield of 6.34 percent, or 1.90 percentage points more than similar-maturity Treasuries, and yesterday yielded 6.6 percent. Bryan Locke, a spokesman for Citadel, declined to comment.
Cargill Bonds
Cargill Inc., the largest U.S. agricultural company, has at least $8.3 billion in unregistered securities, with two bonds in the Lehman index totaling $500 million. The closely held company, based in Wayzata, Minnesota, only sells debt in private placements or through an SEC exemption known as Rule 144a, spokeswoman Lisa Clemens said.
``We have access to a limited pool of investors because we're not selling registered debt,'' Clemens said in an interview. ``We pay a slightly higher interest rate, and our disclosure goes only to those qualified institutional buyers that purchase the debt.''
The Financial Services Forum, which represents the country's largest banks and insurers, from Citigroup Inc. to Prudential Financial Inc., also blames Sarbanes-Oxley for driving companies away from the U.S. stock market. Initial public offerings in America accounted for 20 percent of the global total last year, down from 35 percent in 2001, according to the group.
Companies are also avoiding U.S. regulators by going private in leveraged buyouts that exceeded $700 billion last year, according to data compiled by Bloomberg.
``If you're a public company, you're paying more for everything,'' said Jonathan Macey, who teaches corporate finance at Yale University Law School in New Haven, Connecticut. ``You're paying three or four times as much for auditing,'' he said. ``You're paying directors' and officers' insurance, just huge amounts.''
To contact the reporter on this story: Mark Pittman in New York at mpittman@bloomberg.net
www.bloomberg.com/apps/news?pid=20601109&sid=aSeBI1BGA33U&refer=exclusive
By Mark Pittman
Feb. 14 (Bloomberg) -- Sarbanes-Oxley, the U.S. law designed to stamp out corporate fraud, is prompting more companies to keep secrets in the bond market.
Siemens AG, Australian retailer Woolworths Ltd., Miller Brewing Co. of Milwaukee and at least 100 other companies are selling bonds that aren't registered with the Securities and Exchange Commission instead of debt that requires more disclosure. The securities increased 50 percent in the past two years, five times faster than the rest of the U.S. market, according to data compiled by Lehman Brothers Holdings Inc.
``It's a darker world of the bond market,'' said Matthew Eagan, who helps oversee $97 billion in fixed income, including unregistered bonds, at Loomis Sayles & Co. in Boston. ``It's off the radar.''
The private bond sales are flourishing because companies face almost no penalty for keeping their finances away from the public. The millions of dollars in costs to comply with the Sarbanes-Oxley Act of 2002 can wipe out savings from public debt because investors demand only 11 basis points more in yield to buy unregistered securities, Lehman data show.
Named for former House Financial Services Committee Chairman Michael Oxley, a Republican from Ohio, and former Democratic Senator Paul Sarbanes of Maryland, the law was passed after the collapse of Houston-based Enron Corp. and WorldCom Inc. Enron's fraud wiped out more than 5,000 jobs and $1 billion in retirement savings. Clinton, Mississippi-based WorldCom cost shareholders and bondholders as much as $40 billion.
``Demand for Yield''
Sarbanes-Oxley requires companies to hire external auditors to evaluate their financial reports and the law applies to borrowers outside the U.S. that want to sell securities to the American public.
The rule is consistent with efforts to make the bond market more transparent by requiring traders to report sales to an NASD computer system that distributes prices on the Internet.
Unregistered bonds make the market more opaque because trades aren't reported on the NASD's Trade Reporting and Compliance Engine. They can only trade between institutions.
``Investors, in their demand for yield, are willing to give up some of their documentation or registration requirements,'' said Raj Dhanda, head of debt capital markets at New York-based Morgan Stanley, the fifth-largest underwriter of corporate debt in the U.S. this year. ``We have told plenty of private borrowers that they can raise money pretty easily in today's environment.''
Increasing Market
Unregistered debt is accelerating as the bull market in corporate bonds enters its eighth year. The global default rate ended 2006 at 0.44 percent, the lowest in 25 years, according to Standard & Poor's.
A slowdown in the economy makes these bonds riskier because fewer investors can buy them, Eagan said. ``You better hope that it works out because you need to be prepared to own it,'' he said.
The market value of non-registered bonds has risen 28 percent a year since Dec. 31, 2004, compared with a 5 percent increase for all company bonds, according to the Lehman index. About $303.1 billion of the securities are outstanding.
Lehman's index of non-registered debt yields on average 88 basis points, or 0.88 percentage point, over government debt, 11 basis points more than the spread for the firm's broadest U.S. corporate index. The yield difference between investment-grade corporate bonds and Treasuries has narrowed from 2.41 percentage points on Oct. 10, 2002, the record high, according to Lehman.
Avoiding Disclosure
Miller Brewing sold $1.1 billion of unregistered 5.5 percent notes in August 2003, 13 months after Sarbanes-Oxley was passed and the year before companies were required to comply with the rules.
Selling unregistered bonds ``is clearly more straightforward and less onerous than full registration,'' Nigel Fairbrass, a spokesman for the unit of London-based SABMiller Plc, said in an e-mailed statement.
International companies that used to sell public debt in the U.S. are staying away to avoid Sarbanes-Oxley, said Joseph McLaughlin, co-author of the 1997 book ``Corporate Finance and the Securities Law.'' First-time issuers in the U.S. would spend $1 million to comply with Sarbanes-Oxley, he said.
``Before Sarbanes-Oxley, a foreign issuer might say, `Why should I limit myself to the U.S. private market? I can just register with the SEC with a disclosure document and then I've got access to the public markets,''' said McLaughlin, a partner with international law firm Sidley Austin LLP in New York.
Sellers Disappear
Hutchison Whampoa Ltd., the Hong Kong-based holding company controlled by Li Ka-Shing, has the two biggest issues in the Lehman unregistered index at $3.5 billion and $2 billion.
The company is followed by Munich-based Siemens, the German engineering company with two $1.75 billion issues. Siemens sold $1.75 billion of 5.75 percent 10-year unregistered notes in August to yield 85 basis points more than U.S. government debt of similar maturity.
Hutchison Whampoa in 2003 sold $3.5 billion of 6.5 percent notes due in 2013 that were not registered with the SEC. None of the company's dollar-denominated bonds is registered, Laura Cheung, a company spokeswoman, said in an e-mailed statement.
Siemens sold $1 billion of 8 percent 10-year notes in 1992 that required financial disclosures. Siemens may opt to register its bonds because it is compliant with Sarbanes-Oxley through its American depository receipts on the New York Stock Exchange, said Marcus Desimoni, the head of investor relations for Siemens.
Issuers `Disappeared'
``And those people have disappeared because they figure that the savings of placing bonds in the U.S. public market are more than compensated for by the additional cost and burdens of Sarbanes-Oxley,'' McLaughlin said.
Companies will spend $6 billion this year complying with the rules, according to a study by Boston-based AMR Research released last March. The Business Roundtable, which represents executives from the U.S.'s biggest companies, says 40 percent of its members will spend at least $10 million complying with Sarbanes-Oxley.
Woolworths sold $725 million of bonds in the U.S. in two sales during 2005, the company's first forays in the U.S. corporate debt market. The rest of the company's debt is in Australian dollars. Woolworths spokeswoman Clare Buchanan declined to comment.
`Kicking and Screaming'
Companies were dragged ``kicking and screaming'' into compliance with Sarbanes-Oxley, said Deborah Davidson, director of publications for the Washington-based National Association of Corporate Directors. ``It's been a good thing,'' she said. ``If you're afraid, then there's something wrong.''
By skirting Sarbanes-Oxley, sellers of unregistered bonds disclose information only to owners of their securities.
Sarbanes-Oxley faces growing opposition from political groups and companies that say the rules make U.S. financial markets less competitive. Sarbanes and Oxley didn't return calls, and their staffs declined to comment.
Companies selling unregistered bonds include closely held issuers that have traditionally used private placements to borrow.
Chicago-based Citadel Investment Group LLC, the hedge fund controlled by Kenneth Griffin, sold $500 million of five-year notes in December that weren't registered with the SEC. It was the first bond sale by a hedge fund, pools of capital from wealthy individuals and institutions that allow managers to participate in the gain or loss of the money invested.
The 6.25 percent notes were sold at a yield of 6.34 percent, or 1.90 percentage points more than similar-maturity Treasuries, and yesterday yielded 6.6 percent. Bryan Locke, a spokesman for Citadel, declined to comment.
Cargill Bonds
Cargill Inc., the largest U.S. agricultural company, has at least $8.3 billion in unregistered securities, with two bonds in the Lehman index totaling $500 million. The closely held company, based in Wayzata, Minnesota, only sells debt in private placements or through an SEC exemption known as Rule 144a, spokeswoman Lisa Clemens said.
``We have access to a limited pool of investors because we're not selling registered debt,'' Clemens said in an interview. ``We pay a slightly higher interest rate, and our disclosure goes only to those qualified institutional buyers that purchase the debt.''
The Financial Services Forum, which represents the country's largest banks and insurers, from Citigroup Inc. to Prudential Financial Inc., also blames Sarbanes-Oxley for driving companies away from the U.S. stock market. Initial public offerings in America accounted for 20 percent of the global total last year, down from 35 percent in 2001, according to the group.
Companies are also avoiding U.S. regulators by going private in leveraged buyouts that exceeded $700 billion last year, according to data compiled by Bloomberg.
``If you're a public company, you're paying more for everything,'' said Jonathan Macey, who teaches corporate finance at Yale University Law School in New Haven, Connecticut. ``You're paying three or four times as much for auditing,'' he said. ``You're paying directors' and officers' insurance, just huge amounts.''
To contact the reporter on this story: Mark Pittman in New York at mpittman@bloomberg.net
www.bloomberg.com/apps/news?pid=20601109&sid=aSeBI1BGA33U&refer=exclusive