The increasing number of large leveraged buyouts or LBOs is making many investment-grade debt investors nervous, calling out the US government to institute more protection be given them in light of current developments. Many of these investors have been wary of purchasing these high-grade bond issues as there were no structural protections included in these financial instruments.

One such case occurred last January 30, when investors declined to participate in a US$400 million ten year bond offer from A2/A Air Products and Chemicals for lack of changes done to the control language of the bond. A similar observation was made on Emerson Electric's US$500 million ten year trade bond issue.

The investors are requiring change of control language to gain protection against private equity funds gaining control through debt funded buyouts. While the buyouts are good for equity prices, it has been a bane for bond purchasers as the leverage is increased through the current practice and credit ratings are pulled down. With change of control provisions, buyers can sell the bonds back to the issuer at a price slightly above par when the company is acquired. This clamor is expected to increase in the next few months until government action is undertaken.