More go 'off the the radar' to avoid Sarbanes-Oxley
By MARK PITTMAN
Bloomberg News
Sarbanes-Oxley, the U.S. law designed to stamp out corporate fraud, is prompting more companies to keep secrets in the bond market.
Siemens, 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.
"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."
Almost no penalty
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, R-Ohio, and former Democratic Sen. Paul Sarbanes of Maryland, the law was passed after the collapse of Houston-based Enron Corp. and WorldCom. Enron's fraud wiped out more than 5,000 jobs and $1 billion in retirement savings.
Clinton, Miss.-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 Web.
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."
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 nonregistered 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. More than $300 billion of the securities are outstanding.
Lehman's index of nonregistered 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.
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.
'Less onerous'
Selling unregistered bonds "is clearly more straightforward and less onerous than full registration," Nigel Fairbrass, a spokesman for the unit of London-based SABMiller, 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 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. A spokesman for Siemens, Andreas Schwab, declined immediate comment.
"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.
'Kicking and screaming'
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.' biggest companies, says 40 percent of its members will spend at least $10 million complying with Sarbanes-Oxley.
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."
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