Allen Webb is puzzled and a little bit miffed.
A fixed-income analyst for the Retirement Systems of Alabama in Montgomery, Mr. Webb said back in the summer that he was looking to invest a sliver of the $24 billion fund in European corporate bonds.
But, at the end of October, he still was waiting to pull the trigger. "Some European paper being issued is shut out to U.S. investors," said Mr. Webb, who's no neophyte at investing overseas. Along with $10.3 billion in domestic fixed income, he and Julie Barranco, assistant director of fixed income, manage the fund's European government bond portfolio, which has fluctuated between $185 million and $325 million this year.
The problem for U.S. investors like Mr. Webb is that European buyers often get first crack at the bonds. The Securities and Exchange Commission require U.S. investors to wait more than a month before buying into some of the deals, many of which have been attractively priced.
European corporations should love to have U.S. pension funds subscribe to their offerings, Mr. Webb said.
Not so, others respond, pointing to the SEC's 40-day "seasoning period" as the culprit. To make a foreign bond compliant with SEC regulations, companies would have to pay extra fees and open up their books to Washington regulators, which they're often proving reluctant to do. Registered U.S. investors such as pension funds and their money managers are free to buy the paper after the bond is fully subscribed or sold and the waiting period has elapsed.
The rule, written in the dark days of the Depression, was to protect U.S. investors from being bilked. Now, some say, the rule works to protect buyers in Europe from U.S. competition.
Buying European corporates would have been a first for the Alabama Retirement System, whose officials were thinking about making the allocation to diversify the portfolio and look for some more yield. Mr. Webb -- like plenty of others -- believed the corporate bond market would explode in 1999 with the advent of the euro.
No doubt the market has boomed, with E235 billion in issues through June of this year vs. E140 billion during the first six months of 1998, according to Capital DATA Ltd. in New York
"The boom's happening, but not for U.S. investors," said Mr. Webb.
European investors are "getting the benefit" of the seasoning period, said Michael Maquet, a director with Merrill Lynch & Co. Inc. in New York.
Only 28% of the corporate bonds issued this year were geared to U.S. investors and stamped 144A compliant, according Lehman Brothers International Europe in London.
"Bonds can be issued in a global format, but that means complete reporting to the SEC," Mr. Maquet said.
Plus, demand from European investors is more than enough to soak up the tide of issues, many say. And other insiders point to the tax benefit European owners of the bonds receive. The bonds are typically "non-bearer" and issued with less legal paperwork than the 144A issues, so their ownership cannot be easily traced.
U.S. investors and fund managers point to one deal in particular, July's E6.25 billion issue by Tecnost SpA, to illustrate their frustration with the market. Tecnost, the holding company controlled by Olivetti SpA that Olivetti used to finance its hostile takeover of Telecom Italia SpA, was off limits to U.S. domiciled investors. The deal was "one of the cheapest investment-grade telecoms in Europe," said Chris Wilson, vice president and portfolio manager with Alliance Capital Ltd.
"Our U.S. domiciled clients had to wait" the 40-day period for Tecnost to become seasoned, said Mr. Wilson, who directly manages $1.6 billion in global bonds, the bulk of which is for European clients. He's part of a team that runs $7 billion in global bonds for Alliance in London.
And the waiting period costs. "When Tecnost seasoned, it tightened by 10 basis points" because of demand from U.S. money managers, he said. "There is no trick (for) getting around this. There's no trick (for) getting it into U.S. accounts."
The waiting for bonds to season has made an impact on the burgeoning market, but only in such specific instances, he noted.
Mr. Wilson said the seasoning rule blocked him from buying about a dozen issues this year for U.S. clients when they first came to market. Alliance's U.S. clients' portfolios have "lost maybe 25 to 30 basis points this year" because of the forced delay. That hurts, but it's not enough to cost them a client, he said. He substitutes U.S., Canadian or Australian paper for the European bonds he cannot buy.
Impact will lessen
Over the next few years, the seasoning rule will have less of an effect on U.S. investors, he predicted. "As the market matures, we expect this will be less common," Mr. Wilson said. Buying European corporates is not "a problem if you have an offshore fund. But if you're a state pension board, that's a problem."
Not all brokers and managers see the SEC's enforced waiting period as a problem for U.S. investors. This year, the market has gained depth and liquidity, said Louise Purtle, euro credit product manager with Deutsche Bank Securities Inc. in New York. She does, however, keep a close eye on the dates each bond comes to market. She has a seasoning calendar that tracks when the deals are likely to become available to U.S. investors.
Ms. Purtle, for one, is pleased with the market's growth. One sign is the increase in size of a typical bond issue, she said. A E1 billion issue was common at the beginning of the year, where now a E4.5 billion issue is coming to the market regularly, she added.
Another difficulty for some pension funds and money managers, she speculated, might be the type of bonds on the market. "Europe is dominated by a couple of types of players," she said, listing telecommunications, finance, auto and tobacco companies as key issuers.
Not a complete shutout
Another problem is that investors such as Alabama Retirement's Mr. Webb are looking for pure European plays. Corporate issues in euros by U.S.-based corporations such as Ford Motor Co., Dearborn, Mich., just don't give the pension fund the yield -- or the exposure to European companies -- it's looking for, he said.
But some European companies looking for U.S. investors are tailoring their issues to SEC rules, said Mr. Maquet at Merrill Lynch, pointing to a recent issue by Germany's Dresdner Bank AG as an example.
U.S. pension funds haven't been completely shut out of the market. The $11 billion San Francisco City & County Employees' Retirement System, for example, has exposure through Oaktree Capital Management, which runs about $300 million in high-yield bonds for the fund. Of that, 5% is invested in European junk bonds, said Dick Piket, senior investment officer, fixed income at the fund.
But, it's far more common for European companies offering less than investment-grade bonds to comply with the SEC regulations, sources said. And junk bonds are less-than-plentiful in Europe. More than 70% of European corporate bonds are rated AA or higher, according to Lehman Brothers in London.
And, like any market, it's subject to global forces. Credit spreads have been tighter in Europe than in the United States this year, Ms. Zimmerman said. "People will take a 90-basis-point higher yield" by investing in U.S. corporate paper.