It's no secret that bondholders usually get the short end of the stick when it comes to things like corporate takeovers or restructurings. Unlike stock prices that often skyrocket even at the hint of a merger, corporate paper usually suffers as bondholders worry about a company being saddled with additional debt once a deal is completed. And unlike stockholders who have final say over such a deal, bondholders are relegated to a passive, non-voting role. A group of investors, though, is working to change that through the recently formed Institutional Bondholders' Rights Association. The fledgling group, believed to be the first of its kind, has two goals: to help institutional investors respond promptly to specific situations threatening the value of debt investments; and to develop basic means for protecting the interests of institutional investors, association president Richard S. Swingle explained in a recent interview. ``Widespread corporate restructuring _ including mergers and acquisitions, management buyouts and bankruptcy reorganizations _ has underscored the need for an organization that will help safeguard the interests of institutional bondholders,'' Swingle said. ``Recently, it has become typical for a corporation to finance a restructuring by drastically increasing its debt load. Often the result is a reduction in the credit quality of existing corporate debt held by institutions,'' he said. Eight companies have joined the association since its inception earlier this month, among them: Metropolitan Life Insurance Co., Prudential Life Insurance Co. of America and Loomis, Sayles & Co., all holders of billions of dollars in corporate debt. The association, looking for more strength in numbers, hopes to have at least 25 members in a year and up to 100 in the next three to four years. Swingle, who is also a vice president at T. Rowe Price Associates Inc., said that as specific situations arise the association will assist institutional investors in taking the appropriate action. For example, he said, the group may develop a set of provisions to insert in corporate debt agreements that would guarantee institutional investor rights. Such provisions would assure that no corporate transaction could benefit shareholders at the expense of bondholders. In addition, Swingle said, the association might form ad hoc bondholder groups to negotiate terms or defeat an asset sale, or work with a corporation's management to preserve existing debt value in a reorganization. ``By helping institutions respond cooperatively to specific restructuring situations _ and by building explicit protection for institutions into corporate debt agreements _ we hope to guarantee that rights of institutional investors are afforded greater consideration when a corporation alters its financial structure,'' Swingle said.
