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LPC Law Notes Debt Finance Notes

Introduction To Bonds Notes

Updated Introduction To 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 f...

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The following is a more accessible plain text extract of the PDF sample above, taken from our Debt Finance Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

Introduction to Bonds

  • Eurobond market

  • Bond = debt security, "IOU" for a specific term, repayable on the maturity date.

  • Borrower = issuer issues (sells) bond certificate to; lender = investor/bondholder for consideration - occasionally there will be a guarantor for the issuer

    • Made at par value/principal amount stated on bond certificate

    • Issuer pays interest (the coupon) annually or semi-annually

    • On maturity, borrower pays back par value to investor holding the bond.

      • Can have bonds with no specified maturity date.

  • Depending on the length of time to maturity, a bond will appear on the issuer’s balance sheet under Non-current liabilities. If due within one year = current liabilities.

  • Marketability: highly-marketable = very liquid market.

  • Generally unsecured, particularly eurobonds (investors rely on pari passu ranking (order of payment on insolvency) and negative pledge undertakings for protection)

  • Issuer normally undertakes that all payments will be free of withholding tax (gross-up + redemption provisions if withholding tax becomes payable)

    • Quoted eurobond exemption = no withholding tax

Advantages of bond finance Disadvantages of bond finance

  1. Greater number of investors & not limited to banks

    • Large and diverse pool of funds

    • Minimum denomination of bonds smaller than minimum syndicate loan participation - increases number of potential investors.

    • Better if large financing needs

  1. Lower financing costs

    • Risk spread across investors

    • Lower risk = lower interest

    • Capital costs do not apply & bonds treated slightly more favourably for capital adequacy

    • Bonds are readily tradeable

  2. More flexibility

    • Choice of currency/investor

    • Less onerous covenants

    • Flexibility of terms = more varied (longer periods, fixed rates)

  1. Credit rating

    • Need a good credit rating

  2. More publicity

    • Far more disclosure (not appropriate in acquisitions)

  3. More regulation

    • Esp. listed eurobonds

  4. Higher initial transaction costs

    • More parties, more documents and regulatory requirements

  5. Timing: longer to put in place

    • More parties, documents and regs.

    • NB. Significant time savings if bond issued under a programme.

  6. Relationship with investors

    • Unlikely to maintain relationship - cf. loans. Waivers may be more difficult to get.

  • Domestic market: bonds denominated in local currency (dominant issuer = national government)

  • Euro(international market: eurocurrency = currency held outside country of origin. Either denominated in foreign currency or sold to foreign investors.

  • Foreign bonds: bond denominated in a local currency and sold to local investors but issued by a foreign company.

  • Primary capital market = newly issued bonds sold by issuer to first investors (usually the purchasers will be the underwriting banks)

  • Secondary capital market = first investors sell the bond on.

Types of Bonds

  • Interest rates (more options than for syndicated loans):

    1. Fixed rate bonds (most common) - % of nominal value

    2. Floating rate notes: base rate (e.g. LIBOR) + margin --> vary according to base rate

    3. Variable rate bonds: will vary according to a pre-determined schedule

    4. Zero-coupon bonds: to be attractive bonds must be issued at a deep discount, then the investor gets a return once the nominal value is paid back.

  • Equity-linked

    1. Convertible bonds: investor has option/obligation to hand bond back to issuer for shares (conversion ration & other terms set out in bond docs)

Advantages of convertible bonds Disadvantages of convertible bonds

For issuer:

  • Attractive to investors = accept lower return = less interest

  • Reduce debt by replacing bonds with shares = better gearing ratio

For investor:

  • Can participate in profits of company

  • In the meantime, guaranteed interest + priority over shareholders

For issuer:

  • More complex to put in place = higher costs

  • Trustee fees & legal fees = further transaction costs & more time consuming

  • Shareholder resolution needed = time consuming

For investor:

  • Interest generally lower

  • Investor may lose out if company not doing well

  1. Exchangeable bonds: right to exchange into shares of a company other than the issuer.

  2. Bonds with warrants: warrant gives holder right to call for delivery of shares pf issuer against payment of a set price (warrant can be separated from the bond)

  • Government/corporate:

    • Generally considered lower risk (until financial crisis)

  • Notes:

    • Bonds = debt securities with fixed rate of interest (term of 3 years+)

    • Notes = securities with floating rate of interest/fixed rate but short maturity (below 3 years)

  • Medium Term Note ('MTN') programmes:

    • Common for large companies who want to issue bonds frequently and quickly

    • Enter into agreement with banks to manage a series of future bond issues up to maximum aggregate amount

      • Master offering document (base prospectus)

      • Final terms for each specific bind

    • Stand alone bond issues are less common in practice.

    • Programme = costly to set up initially but has long term benefits of speed and cost effectiveness.

  • Commercial paper:

    • Short term debt certificates (less than 12 months) --> cheaper than MTN

    • Not listed, less regulation

    • Tend to be issued at a discount rather than bearing interest.

  • Plain vanilla bonds:

    • Bonds with no added features + fixed interest rates

Form of Bond

  • Bearer: transferable by delivery (to whoever is in possession) (common in Europe)

  • Registered: transferrable by registration with issuer (common in US)

  • Global: certificate representing the total amount of bonds issued in a single issue (transactions in smaller values are done electronically)

    • Permanent/temporary

  • Definitive: paper certificate form (few in issue)

Transfer

  • Transferability = ease (bearer easier than registered)

  • Negotiability = equity's darling can take good title

  • ...

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