Bond Issues Flashcards
What is a Bond?
A negotiable debt instrument representing a chose in action.
Lecture Notes.
What are the Chief Commercial Differences between a Bond and a Loan?
- Privacy: Loans are private transactions, unlike Bonds, making them better for confidential objectives.°
- Anonymity: Bondholders are often anonymous to the Borrower, unlike with Loans.°°
- Transferability: Bonds are significantly more exchangeable than Loans.°°°
- Flexibility: Loans are more customizable than Bonds, offering multiple currencies or revolving structures that Bonds cannot.
- Legal Status: Certain types of firms are disallowed from publicly issuing Bonds, whereas no such restriction exists for Loans.°°°°
- Cost of Capital: Due the diffusion of risk among more investors, Bonds are safer than Loans, and therefore, less costly for Borrowers.
- Terms and Conditions: Loan provisions (particularly R&Ws, EODs, and Covenants) are usually more favorable to Creditors than Bond provisions.°°°°°
I define ‘Investors’ as Propsective Bondholders.
P. 538.
° Bear in mind the exception of Private Placements.
°° Bear in mind the exception of Funded Participations.
°°° This is despite the various Methods of Transfer available to Lenders.
°°°° §755 – Companies Act (CA) 2006; §75(3) – Financial Services and Markets Act (FSMA) 2000.
°°°°° Bond provisions are usually looser because of the form factor’s inherent issues with collective action.
What are the Chief Commercial Differences between a Bond and a Share Issuance?
- Security: Bonds may be secured, whereas shares are not.
- Creditor Priority: Bonds rank ahead of Shares in insolvency.
- Repayment: Bonds must be repayed, while Shares do not (winding up and capital reduction notwithstanding).
- Interest vs. Dividends: Interest repayment is mandatory, whereas dividends distribution is optional.
- Issuing at a Discount: Bonds may be issued at a discount, whereas a Shares cannot be issued below their par value.
P. 542.
Who are the Parties Involved in a Bond Issuance?
- Issuer.
- Bondholders.
- Manager(s).
- Underwriter(s).
- Lead Manager.
- Lead Underwriter.
- Fiscal Agent.
- Paying Agent.
- Bond Trustee(s).
- Security Trustee(s).
- Centralized Security Depository.
This list is comprehensive, not exhaustive.
Lecture Notes.
Hereafter, the term ‘Syndicate of Managers’ will be used to refer to both the Lead Manager and all other Managers.
What are the Documents Involved in a Bond Issuance?
- Indenture.
- Mandate(s).
- Legal Opinions.
- Escrow Agreement.
- Underwriting Agreement(s).
- Prospectus / Offering Circular.
- Credit Rating Agency (CRA) Reports.
- Bond Trust Deed / Fiscal Agency Agreement / Paying Agency Agreement.
This list is comprehensive, not exhaustive.
Lecture Notes.
What are the Various Stages of a Bond Issuance?
- The Mandate: The Issuer hires the Lead Manager (among other parties) to arrange the Issuance, who will create the Prospectus.
- Due Diligence: The various parties exchange data to inform their decision-making.
- Launch: If it is a Public Offering, the Lead Manager announces the Issuance to the markets, or otherwise invites investors to subscribe.
- Listing: If it is a Public Offering, the Lead Manager follows the relevant procedures to obtain permission to list.
- Signing: The Subscription Agreement (SA) and Agreement Among Managers (AAM) are executed.
- Closing: The Issuance comes into effect, the Issuer receives the proceeds, and the Bondholders receive their securities.
P. 557.
Repeated direct reference is made to the Lead Manager, but other parties are involved to varying degrees throuhgout the stages.
For the Secondary Purchaser of a Bond, what is its Chief Concern?
Obtaining good title and treatment as the unencumbered owner.
Really, this applies to all trades, but is especially improtant here.
P. 543.
What is the Difference between a Standalone and a Programmed Issuance?
A standalone is a singular instance of selling Bonds, whereas a Programme is a series of instances.
P. 556.
What are the Advantages and Disadvantages of Standalone and Programmed Issuances?
Standalone Issuances are:
* More customizable because they need not accommodate future iteraitons;
* More costly due to their smaller scale but similar transaction costs;
* Less liquid because there are fewer securities; and
* Less diversified because there are fewer types of securities.
The exact opposite applies to Programmed Issuances.
Lecture Notes.
What is the Difference between a Private Placement and a Public Offering?
A Private Placement distributes securities to a limited number of investors, whereas a Public Offering distributes them to the investing public.
P. 556.
What are the Advantages and Disadvantages of Private Placements and Public Offerings?
Private Placements are:
* Less regulatorily involved due to their private nature;
* More customizable for the same reason;
* Catered toward a specialist class of investors, which should increase efficiency;
* Less liquid due to the small investor base;
* Smaller in quantum for the same reason;
* Less visible to capital markets; and
* More costly due to the specialized demographic and lower liquidity.
The exact opposite applies to Public Offerings.
Lecture Notes.
Public Offerings may also be more tax-friendly.
What are the Advantages and Disadvantages of Listing a Bond Issuance on an Exchange?
Advantages:
* Greater liquidity, visibility, and lower cost of capital due to exposure to a deeper pool of investors.
* Greater reputation, due to the act of listing itself and association with the Exchange.
Disadvantages:
* Greater transaction costs, due to listing costs and increased regulatory compliance.
* Greater exposure to market volatility.
* Loss of control over the pricing and distribution of bonds.
Lecture Notes.
Who Arranges the Issuance?
The Lead Manager, who coordinates with the Managers and other members of the Selling Group to perform this function.
Lecture Notes.
What is the Selling Group?
The collective responsible for marketing and selling Bonds to investors, usually comprised of (Lead) Managers and (Lead) Underwriters.
Lecture Notes.
What governs the Issuer’s relationship with the Lead Manager and Selling Group?
Its Mandate with each respective party.
P. 556.
What will the Mandates collectively address?
- How the Issuance will be priced.
- The Issuance’s target demograhpic
- The Prospectus, what it will contain, and how it will be legally treated.
- The scope of the counterpartys’ rights and obligations (incl. other T&Cs).
- Whether the Issuance will:
- Be listed.
- Be underwritten and to what extent.
- Use a Bond Trustee or a Fiscal Agent.
- Be secured, indemnified, or guaranteed and to what extent.
This list is general, not comprehensive.
Lecture Notes.
What is the Prospectus?
Otherwise known as an ‘Offering Circular’.
A document for Investors that provides detailed legal and financial information regarding the Issuance.
Lecture Notes.
An Offering Circular, or Offering Memorandum, is effectively a Prospectus used in a Private Placement.
What is the Commercial Purpose of the Prospectus?
- Facilitate due diligence.
- Comply with regulatory requirements.°
- Establish the Issuer and Issuance’s credibility.
- Generate Investor interest and market the Issuance.
Lecture Notes.
Is it Compulsory to create a Prospectus?
Yes. Offering a security to the public or listing a security on a regulated exchange requires a Prospectus.
Exceptions nothwithstanding
Lecture Notes.
Art. 3 – EC Prospectus Regulation (ECPR) 2017; LR 4.2 – UK Listing Rules.
What constitues an Offer of Securities to the Public?
- A message, delivered in any format;
- That provides enough detail about the terms and conditions of a security;
- To allow the recipient to make an informed decision on whether to purchase.
Art. 2(1)(d) – ECPR 2017.
When is an Issuance exempt from having to create a Prospectus?
When it is offered:
* Solely to Qualified Investors.
* By governments or local authorities.
* To fewer than 150 persons per Member State other than Qualified Investors.
* With a minimum denomination of at least €100,000.
* While already trading on a regulated EU market.
* In a continuous or repeated manner where the total consideration per credit institution is less than €75m p/a.
See Art. 1(4) – ECPR 2017.
Should Investors assume the Prospectus contains all Relevant Information regarding the Issuer or Issuance?
No. It should not be taken as containing, “everything that anyone might think relevant.”
Accordingly, claiming misrepresentation will prove quite difficult.
Raiffeisen v RBS [2010] EWHC 1392 (Comm) at [92]-[93].
In Principle, what Information must a Prospectus contain?
All information necessary for an Investor to evaluate the Issuer’s financial condition, the Issuance’s terms, and its purpose and impact.
Art. 6(1) – ECPR 2017.
How must the Prospectus be written?
In an easily analysable, concise and comprehensible way.
Art. 6(2) – ECPR 2017.
Must the Prospectus be presented in a single document?
No, in which case, it must be divided into a:
* Registration document;
* Securities note; and
* Summary.
Art. 6(3) – ECPR 2017.
This is important for Programmed Issuances, as it allows the Issuer to draft a Base Prospectus (see Art. 8) that it may amend with time, rather than create a new Prospectus with every instance.
Regarding the Prospectus, what is the Regulator’s role?
It must approve the Prospectus before it may be published.
The relevant Regulator is the Financial Conduct Authority (FCA).
Art. 7 (among others) – ECPR 2017.
Who must accept Responsibility for the Information contained in the Prospectus?
- Those involved in the Issuance who control what information the Prospectus contains.
- These persons must be clearly identified by name, function, and registered office; and
- They must declare that, to the best of their knowledge, the information presented is true and no material omissions are made.
Art. 11 (1) – ECPR 2017.
The Issuer, and to a lesser degree the Lead Manager, are most susceptible to claims of misstatement or misrepresentation under §90 & Sch. 10 – FSMA 2000.
What is Stabilization?
The process of preserving a security’s price near its offering price, usually following an intentional over-allotment.
This takes place at, or near, the time the Issuance closes.
P. 569.
This is permitted by Art. 5 – EU Market Abuse Regulation (MAR) (2014) and §137Q – FSMA 2000.
What is the Commercial Purpose of Stablization?
- Decrease price volatility.
- Decrease market volatility.
- Maintain investor confidence.
- Reduce Underwriters’ risk of price-related losses.
- Increase the Issuance’s probability and appearance of success.
Lecture Notes.
Who is usually Responsible for Stablization?
The Lead Manager, in its discretion, as outlined under the SA and AAM.
The Lead Underwriter, Underwriters, and Managers may also be involved.
P. 569.
