SGS 6 (Bonds)

Question 1

3 similarities between bonds and loans?

Answer 1

Both have mandate process (Arranger - loan, Lead manager - bonds)

Interest rates determined through risk profile

Both have similar clauses (events of default / negative pledges).

Question 2

3 differences between bonds and syndicated loans?

Answer 2

Bonds always underwritten

Bond clauses less onerous (companies issuing bonds often investment grade, investors all over the worlds difficult to trace and obtain waivers)

Bonds more tradeable (on debt capital market, loans only on secondary markets).

Question 3

Why can a larger sum be raised in a bond issue?

Answer 3

Wider investment base (institutional investors). Less risk (each investor tends to have a smaller proportion of overall debt) & therefore more sources from which to raise funds.

Question 4

Why are set up costs for loans lower?

Party no?

Answer 4

Loans have very little regulation to comply with. Fewer documents and fewer parties so set-up costs are lower.

Loan parties are only B and syndicate banks

Question 5

Which method is more suitable to acquisition finance and why?

Answer 5

Syndicated loans, listed bond has too much publicity.

Involvement of fewer parties in loan helps maintain confidentiality.

Question 6

Which method could potentially benefit from lower interest rates?

Answer 6

Bonds as interest rates are usually fixed. Low fixed rate likely to make it cheaper over length of term than the cost of a loan.

Risk of non-payment is spread amongst more investors, and bonds are more readily tradable than loans meaning investors can dispose of their risk more easily.

Question 7

How does the investor base differ?

Answer 7

Bonds can access institutional investors, high net worth individuals (issued in minimum denominations which are smaller than the smallest participation in a syndicated loan, meaning those wishing to invest smaller amounts can do so more easily.)

Borrowers for loans are generally limited to banks.

Question 8

Bond periods of time?

Answer 8

Institutional investors often commit a large sum over a long period of time for steady long-term growth and to balance portfolio.

Loan may be quicker as no regulatory (listing procedure), bonds listed so must comply.

Question 9

What is one benefit of a syndicated loan as compared to a bond?

Answer 9

Less regulation and therefore can be completed within a much quicker timescale.

Question 10

What is the equivalent of an arranger for a bond issue and outline their role?

Answer 10

Lead manager (investment bank)

Subscribes for some bonds
advises issuer on raising finance
markets bond issue to other investors
puts together syndicate.

Question 11

What is a fiscal agent?

Answer 11

link between the issuer and the bondholders, appointed by issuer.

administrative tasks when required during the life of the bond (publishing notices to bondholders, depository for issuer’s financial info, maintaining records relating to issue)

can also act as paying agent

Question 12

What is the role of the trustee? By whom are they appointed?

Answer 12

By issuer but represents interests of bondholders.

not involved in payment mechanics 
administrative powers (depository for issuer’s financial info, calls bondholder meetings, call an event of default on behalf of bondholders.)

Question 13

What is a PPA and when is one required?

Answer 13

Principal paying agent (responsible for coordinating overall payment of principal + interest)

Agent of issuer and required if trustee structure used

Note paying agents are required for each jurisdiction in which payments to bondholders is to be made.

Question 14

What is a clearing system?

Answer 14

Accounts are held by players in capital markets and they electronically record transactions in bonds and collect interest and other payments on behalf of bondholders, assist in transferability of bonds.

Question 15

When is a trustee structure absolutely required?

Answer 15

bond is secured (trustee holds security on behalf of bondholders from time to time.)

Convertible bonds or those with complex financial covenants.

Subordination

Question 16

How is a trustee structure advantageous to an issuer?

Answer 16

Bonds more marketable as bondholders know they have someone who owes them a fiduciary duty (can also charge lower interest rate)

Easier to change terms (negotiate with a single representative)

Prevents multiplicity of actions.

Question 17

Trustee advantages for bondholder?

Answer 17

Rely on professional entity if an EoD occurs / expert on insolvency.

Greater investigative powers as compared to FA.

If issuer does not pay full amount of interest, trustee will ensure it is paid to bondholders pro rata.

Question 18

Why do most issuers prefer using a fiscal agent?

Answer 18

Cheaper as:

Agreement less negotiated the trust deed.

No PPA required

Fiscal Agent recognised in more jurisdictions than trustee (no separate counsel required)

Trustee needs own set of lawyers / charges higher fees/

Less documentation.

Question 19

What are the main documents required for a trustee structure?
Who are the parties to such documents?

Answer 19

Subscription agreement (issuer, lead manager, co-managers)

ICMA Agreement among managers (managers)

Trust Deed (issuer and trustee)

Paying Agency Agreement (issuer, PPA and trustee)

Question 20

What is the subscription agreement?

Answer 20

o records the basis on which the issuer will sell the bonds and the lead manager and co-managers will buy them.

e.g. pricing of issues, reps, warranties and indemnity.

Question 21

What is the ICMA Agreement Among Managers and why is it required?

Answer 21

Under subscription agreement obligations to subscribe will be joint and several.

This records number of bonds each manager has committed to taking.

Question 22

What is contained within the trust deed?

Answer 22

Trustees holds benefit of issuer’s covenant to pay on trust for bondholders, permitting payments through paying agent.

T’s powers and duties.

Question 23

What is contained within the paying agency agreement?

Answer 23

Mechanism by which payments made to bondholders on behalf of issuer.

Question 24

FA requires subscription agreement and ICMA, what other two documents differ from trustee structure?

Answer 24

Deed of covenant: enables bondholder to enforce bonds directly against the issuer by creating direct contractual relationship (needed as bonds held in common depository therefore title would technically best in depositary)

Fiscal Agency Agreement: duties of fiscal agent

Question 25

What is a common depository?

Answer 25

holds bond on behalf of clearing system.

Question 26

Why is a credit rating agency a party in the bond structure?

Answer 26

analyses credit risk of the issuer which is a primary indicator of risk for investors.

Smaller risk of default leads to a high credit rating.

Question 27

What is the relationship between credit risk and interest on bonds?

Answer 27

Investors compare rating to the interest rate.

Low credit rated bond less marketable (as certain financial institutions cannot hold certain rated bonds) but conversely the high risk will generate high interest returns.