Bond Issue

Managing Issue

Bonds are issued in much the same way as a public issue of shares. A lead manager will prepare a prospectus, strike the price, and arrange for placement. Generally, an investment bank will advise. Larger issuers may issue their bonds in outside their home jurisdiction.

An investment or merchant bank may act as lead manager to the issue.  There may be several lead managers in larger cases.  The issuer maintains the records  and arranges and manages the issue.

In the syndicating bank, the lead manager advises on the strategy and selects other key participants, including the fiscal trustee, lawyers, listing agents and other service providers. Roadshows may be held to publicise the issue.

Initial Process

The management of the issue involves ascertainment of interest, maintenance of the market, making allotments and stabilization, preparation of documentation, coordination of completion.

Bond issue timelines are relatively short. In the prelaunch phase, the nature of the prelaunch period will depend on the nature of the issue and other circumstances.  In some cases, prelaunch period maybe less than a day while in others it may be several weeks.

A circular often is often prepared with descriptions of the security, the financial statements.  The terms of issue are defined by the issue documentation including a trust deed if applicable.  The offering circular may be the preliminary form as a teaser for prospective interest. The pricing must be determined with reference to existing market conditions and comparable issues.

If a bond is wholly private and is not to be marketed to the public or traded on an investment market, then no prospectus is required. If it is a wholly private issue some form of quasi prospectus or offering circular would be required as a commercial matter to inform the investors of the profile of the company, nature of the securities offered, financial information, commercial purpose and risks generally.

A subscription agreement and management agreement is circulated by the lead managers  Invitations are made for potential investors and  demand is assessed.  If there is  sufficient interest, there may be request for  further funds or the closing period may be closed early.

Initial Steps

The issuer mandates  an investment  bank to act in relation to the transaction. It will agree to buy up securities, which are not subscribed for, when offered. The investment bank identifies the markets in which the  bonds may be issued.

Legal advisers will advise the issuer.  Opinion may be required from the law to ensure compliance with the local law.

A pathfinder prospectus may used to gauge interest on the part of investors. The arrangements with the investment bankers may allow them to terminate their obligations  if they are unable to find a market or market conditions change.

The lead manager runs the book which includes ascertaining and recording demand, maintaining a market for the bonds, making the allotments and stabilizing the bond .

An agreement may be  entered between managers identifying obligations in relation to the issue. It would specify the obligations of each under the subscription agreement.

The lead manager prepares and negotiates the legal documentation. It coordinates design and completion and ensures the requisite steps are put in place and completed.

Trustee or Fiscal Agency

Bond issues are usually undertaken by trust deeds or a fiscal agency agreement. The more common option is for a fiscal agent who does not owe duties to the bondholders.

The trustee is generally a specialist professional trustee corporation.  It acts as a fiduciary on behalf of the lenders and monitors the duties of the parties under the trust deed.

A fiscal agent has a contract relationship.  It does not owe duties to the bondholder.  It performs functions of the principal including paying bondholders, administrative duties, maintenance of records, convening of meetings.  It will typically be a financial institution.

A trustee provides greater flexibility as it may agree modifications and waive breaches.  It may convene meetings of bondholders to deal with significant issues. The trustee may represent the bondholder’s interest in broad terms.

A trustee is more commonly appointed when the nature of the issue requires it.  This may arise where the rights are convertible, are secured,  are subordinated or contain ongoing obligations that need to be monitored.  The trustee monitors the obligations and in the case of collateral holds it for the benefit of the bondholders.

Where a trustee stands appointed, the issuer will also appoint a principal paying agent.  There may be paying agents for other jurisdictions such as United States or other financial centres where the listing takes place . Within the EU, tax will not generally be deductible under the EU Savings Directive.

Holding & Stabilisation

Most Euro bonds are held under clearing system. Carestream and EuroCare are the principal systems. The clearing systems provide custody, collect payment and facilitate transfers of bond. Each customer has a cash and security account.

Stabilization is a process by which the lead manager maintains the price of an issue at an appropriate level within a certain period. This is a relatively narrow range around the issue price.

Stabilization is used to maintain a price at an appropriate level at issue to keep it   within certain margins. This may arise if the issue is over or under subscribed/allotted. The lead manager takes losses or profits on the stabilization.  The permission to stabilise is set out in the prospectus documentation.

Depositories

Paying agents represent the issuers and not the bondholder.  They receive funds and make payment.  They record the issues.  They may replace paper bonds and coupons.  They publish various notices.

Bonds are delivered to the depository and the securing account of the customer is credited by the system that the bonds acquired.  On disposal, the reverse occurs.

Systems may provide bond lending facilities.  There are provisions for bridges or transfers between the various systems.  Trading is generally cleared through the clearing systems.

Clearing systems have appointed major banks in major financial centres to act as depositories for securities.  The depositories hold the bonds and may take physical delivery of it.  Generally the bond will remain with the depository.  The depository may also provide other services such as payment agent.

ICMA

The International Capital Markets Association was formed as a result of the merger of the International Securities Market Association and International Primary Markets Association.  It represents the investment banking industry.  It seeks to develop efficient international capital markets.

It makes recommendations in relation to standards of good practice.  It provides for disclosure requirements.  It has developed standard documentation in the interest of efficiency.  It maintains  a code of conduct.

It has role in dealing with regulatory and governmental authorities to ensure the financial system and regulation operates efficiently and effectively.  It trains participants in market practice and technique.

Credit Agencies

Credit rating agencies give opinions on the creditworthiness of issuers and other parties who underwrite or undertake obligations in respect of the issue.  Their objective is to give an opinion on credit risk and to rate accordingly.  In principle, independent rating agencies should be independent and objective.  Their process and methods should be explicit and disclosed.

In practice the rating agencies have been severely criticized subsequent to the 2008 financial crisis. They are now subject to EU regulation.

The principal credit rating agencies  are Standard & Poor’s and Moody’s.  Their rating are divided into A, B and C (and D) although their methodology and categorization differs.

In each the highest rating is AAA.  AA and single A are strong but subject to adverse economic changes.  BBB is adequate, Historically AAA, AA, A and BBB ratings were investment grades.  BB and lower are speculative sometimes referred to as junk bonds typically high yielding but higher risk carrying.

C on Standard & Poor’s refers to vulnerable, credit status where C on Moody’s refers to poor to actual default.  Actual default on Standard & Poor’s refers to D.

Rating agencies may maintain ongoing reviews in relation to bonds once issued.  They will review changes in capital structure, economic developments, major issues reflecting the issuer.

Securities Laws

Securities laws restrict the sale of securities. They usually apply to the domestic jurisdiction.

In the European Union, the prospectus will generally be required for the issue of security.  It must be approved by the competent authority. There are limited categories of exemption defined by European prospectus legislation.

The US places sales restrictions on worldwide.  Some bonds are subject to  restrictions in accordance with US security requirements.  Restrictions apply until the US requirements conditions, have been satisfied.

In the US, a registration must be filed with the SEC prior to sale or offer for sale of securities.  If there is any significant US market interest, steps must be taken to ensure the provision is not breached.  There are provisions for offshore transactions complying with selling restrictions as published by the SEC Regulation S.

Pricing & Issue

The pricing is likely to be finalized before signing on the basis of demand and supply   A subscription agreement, manager’s agreement and offering circular is finalized and submitted for registration by the relevant authority.

After signing, the circular is filed with the authorities and sent to the purchasers of share.  Shares are issued and payments must be made through the clearing system. A depository bank is nominated, and the manager opens an account with the common depository to which payments are made.

The conditions precedent  pursuant to the subscription agreement must be fulfilled.  Agreements such as the fiduciary agency agreement, trust deed must be executed or released from escrow.  The net subscription monies are transferred to the issuer.

On completion bonds are issued against payment of the subscription money. Deliveries of the bonds to the common depository may be  made against receipt of funds and subscribers through the clearing system.

Listing

Instruments may be listed on the Stock Exchange to improve marketability. The Stock Exchange’s listing rules apply to ongoing admission for listing.  Admission to listing requires filing an approval of various key documents.

If the bonds are listed on an exchange, a listing agent is required. The agent advises on matters in relation to the listing.

The listing agent is required under listing rules of the relevant stock market, if listed.  The agent advises on listing issues and deals with the process of procuring registration of the relevant listing authority/stock exchange.