The Sons of Gwalia ruling has the potential to elevate shareholders to creditor status when a company defaults, meaning debt investors will be faced with greater uncertainty when it comes to reclaiming funds, according to Deutsche Asset Management senior credit analyst Stuart Gray.
When gold mining company Sons of Gwalia collapsed in 2004, it set a precedent that purchasers of shares could be given extra rights if the company they invested in engaged in misleading conduct.
Gray suggested the impact on investors of this decision could be increased risk if a default occurs.
“You have the chance that a certain proportion of the shareholders will be elevated to creditor status, so there will be more mouths to feed,” Gray explained.
“There is a chance that what you expect to recover might be less because there are more people lining up for what might be left in the event of a default.”
To ensure debt investors receive some certainty, Gray said the market would prefer current legislation for this area be changed.
“The Government has referred it to the Corporate and Market Advisory Committee to look at whether some changes to legislation should be made — if changes to legislation are made, then debt investors get some certainty back again,” Gray said.
“If the legislation doesn’t change, we may just continue to operate similar to the UK, which has similar legislation — it will mean debt investors in riskier companies in the high yield space may be requesting tighter covenants and security, they may also want to change the structure of how the debt is issued so it is coming from the operating company instead of the listed holding company.”
