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LPC Law Notes Debt Finance Notes

Bonds Notes

Updated Bonds Notes

Debt Finance Notes

Debt Finance

Approximately 80 pages

A collection of the best LPC Debt Finance notes the director of Oxbridge Notes (an Oxford law graduate) could find after combing through dozens of LPC samples from outstanding students with the highest results in England and carefully evaluating each on accuracy, formatting, logical structure, spelling/grammar, conciseness and "wow-factor". In short these are what we believe to be the strongest set of Debt Finance notes available in the UK this year. This collection of notes is fully updated for ...

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BONDS

  • A bond is a security that is issued in connection with a borrowing arrangement. The borrower (issuer) sells a bond certificate to a lender (investor/bondholder) for a specified amount of cash.

  • The certificate states that a loan has been made for the principal amount/par value. The borrower has to pay interest (coupon) annually or semi-annually over the life of the bond, and when the bond matures, the issuer must pay back the par value to whoever holds the bond at that time.

  • E.g. “The Boots Company PLC 300,000,000 5.5% Bonds due 2019”

    • Aggregate amount: 300,000,000

    • Coupon: 5.5%

    • Maturity: 2019

  • Focus on ‘eurobond’ - a bond targeted at the international market:

    • A bond denominated in a eurocurrency other than that of the country of issue [UK company issues a US Dollar bond]

    • A bond denominated in the currency of its country of issues but sold to international investors [UK company issues Sterling bond to Japanese investors]

  • NB: A eurocurrency is a currency held outside of its country of origin.

Comparing a syndicated loan and a bond issue

OBJECTIVE SYNDICATED LOAN OR BOND ISSUE? WHY?
Raise a large sum of money Bond issue Wider investment base (institutional investors). Less risk means lower interest rates as well.
Minimise initial costs in setting up finance Syndicated loan Very little regulation to comply with, along with much fewer documentation and parties. Hence, costs are significantly lower than a bond issue (if bonds are listed, ongoing regulatory compliance can be expensive).
Limit the number of parties to the deal Syndicated loan Many more parties in a bond issue (see below)
Preserve confidentiality Syndicated loan Publicity and disclosure requirements for listed bonds may make it an unsuitable method of finance [e.g. for acquisitions].
Ensure easy tradability Bond issue

Although both syndicated loans and bond issues can be traded on a secondary market, the secondary market for bond issues is significantly larger.

No formalities to be satisfied for legal transfer of a bearer bond. In the case of a registered bond, transferee’s name must be registered in the register of bondholders.

Note: Bond issues are not usually listed to use the exchange as a marketplace. Most of the trading will take place away from the exchange (OTC trading). Listing demonstrates, however, that the bond issue has satisfied the requirements of the exchange. This makes the bonds more marketable.
Benefit from current low interest rates Bond issue Interest rate for bonds is usually fixed, whereas for loans it tends to be floating (LIBOR + Margin). Securing a low fixed rate now is likely to make a bond cheaper over the length of the term than a loan.
Access as wide an investor base as possible Bond issue Institutional investors and high net worth individuals may invest in a bond issue. Under a syndicated loan, the borrower’s options are usually limited to banks.
To borrow a sum to be repaid in 25 years’ time Bond issue Banks will rarely commit large sums over a long period of time.
Get access to funds as soon as possible Syndicated loan A syndicated loan can start and complete in a few days, whereas regulatory compliance for a (listed) bond can significantly lengthen the timetable.
Flexibility in terms and conditions Bond issue

Choice of currency/type of investor

Less onerous covenants (bond issues tend to be by investment grade companies, and would not be workable to have very restrictive covenants).

Size and maturity of debt can be more varied than in most commercial loans

Factors to assess risk/fix the price of a bond issue

  1. Identity of the issuer (investment grade or well-known companies will mean lower interest)

  2. Issuer’s sector of activity (high-risk?)

  3. Maturity date (the longer the loan, the higher the risk and the higher the interest)

  4. Extra features (secured, guaranteed or equity-linked [convertible] bonds may allow issuer to pay a lower interest rate)

  5. Prevailing market conditions and interest rates

  6. Credit rating obtained from credit rating agencies (both on the bond and the issuer – crucial factor for issuer)

  • The market price of a bond will change according to the above factors, but the issuer will continue to make the same interest payments and the redemption amount will not change. However, these factors are all relevant when the issuer initially prices the bond.

Parties to a bond issue

PARTY ROLE
Issuer and guarantor Issuer issues securities and will sometimes be backed by a guarantor.
Lead manager (usually an investment bank)

a) Assesses market risk and advises the issuer on the structure, timing and target market

b) Manages the entire issue procedure (‘building the book’, negotiating the documentation, carrying out the due diligence, and organizing the roadshow, etc)

c) Form the syndicate (the group of banks who buy the bonds from the issuer in the primary market and resell them in the secondary market, and who underwrite the issue)

d) Liaise with the listing authority (UKLA)

Commercially, the lead manager takes responsibility for the success or failure of the issue. It stands to gain large fees and prestige from its position. There may be co-managers.
Fiscal agent or trustee

Most issues are administered by a fiscal agent (the cheapest method). Its main responsibilities are to administer the payment of interest and principal to the bondholders and will also act as the principal paying agent. It also has some administrative functions (e.g. publishing notices to the bondholders, acting as depositary for the issuer’s financial information and maintaining records relating to the issue).

However, a trustee is required when a secured bond is being issued, and may be useful when bonds are convertible or include complex financial covenants [reassuring for bondholders], or to enforce the subordination terms and direct the payments pursuant to it [where there is a subordination agreement]. Its main responsibility is to ensure that...

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