SGS 6 - Bonds Flashcards
What are the advantages of issuing bonds?
Greater number of investors accessed Greater financing achieved Lower individual denominations than loans Lower interest payments (as tradable) Tradable Flexibility of currency Flexibility of terms Less onerous terms (as can't be enforced due to investor base)
Disadvantages of issuing bonds:
- Credit rating (only good credit ratings)
- Increased publicity (bad for reputation)
- Higher transaction costs (document/lawyers/time)
- Slower
- No real relationship with investors
- More regulation
- More disclosure requirements
- Not secured
Parties to a bond issue
- Issuer
- Lead manager
- Co-lead manager
- Fiscal agent/trustee + paying agent
What is the fiscal agents role?
- Agent of issuer
- Payment of interest and principal to bond holders
- Acts as principal paying agent
- Performs administrative functions.
- No duty of care to bond holder
What is the trustee’s role?
- Represents interests of bond holder
- Calls bondholder meetings
- CAn act on bondholders behalf
- Administrative power
- Owes duty to bondholders
- If trustee used separate paying agent required
What are the advantages of having a trustee for the issuer?
- Easier to deal with a group of bondholders when represented by a trustee as can act on their behalf
- Makes bond more marketable so a higher price is achieved for the bond
ADvantages of having a trustee for the bondholder:
- Trustee performs all administrative functions for bondholders
- If the bond has complex terms then trustee can adequately represent the bondholder
- Bondholders can sue through the trustee
- Trustee can enforce subordination terms
- Trustees can hold security on behalf of trustees
- Trustee can protect small bondholder’s interests
Disadvantages of having a trustee:
- More expensive
- A paying agent is required
Why have a fiscal agent?
- Cheaper
- Obviates need for paying agent
- Simpler
- No duty of care to bondholders
- Disadvantages are reverse of advantages
What is the subscription agreement?
- A document which records the terms on which the manager and co-manager will subscribe for the bonds.
Includes: pricing, representations, warranties, indemnity in favour of subscribers for breach of undertaking.
What is the fiscal agency agreement?
This document deals with the detailed mechanics for payments of
principal and interest under the bonds, as well as administrative matters
such as calling bondholders’ meetings.
The fiscal agent is responsible for this role, so it is essentially setting out how the fiscal agent will pay the bonds.
What is the trust deed?
- A document setting out the powers of the trustee
- This document will include the issuer’s covenant to pay which is held on trust for the bondholders, and which the trustee uses to enforce bond.
Offering document
Marketing document for the bonds, created by the manager.
Paying agency agreement
Details mechanism by which paying agent will pay the bondholders
ICMA agreement amongst managers
Managers agree how to ‘share out’ their join and several liability, and in what proportion.
Documents how many bonds are subscribed for by each manager
