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Debt Securities Notes

LPC Law Notes > Finance and Capital Markets Notes

This is an extract of our Debt Securities document, which we sell as part of our Finance and Capital Markets Notes collection written by the top tier of Cambridge And Oxilp And College Of Law students.

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

Also, see WS (9) note Bond Prospectus v Facilities Agreement for

BDF - WS8 -DEBT SECURITIES WHAT IS A CAPITAL MARKET? p.199Investment Capital refers to the amount of capital available from financial institutions, pension funds & investment funds (& a few high-net-worth individuals) which want to buy securities, either to hold as an investment or to trade.'Size' of a market refers to amount of funds available from participants and the tradeability of the securities issued.An "Illiquid" market means that the participants are unwilling to buy new or trade in issued securities

DIFFERNECES BETWEEN DEBT SECURITIES & LOAN FACILITIES ISSUE EVIDENCING DEBT OBLIGATION TYPES OF LENDER RISK FOR LENDER EXPENSE FOR LENDER LIQUID MARKET AMOUNT LENT TERM LENGTH PUBLICITY

UNDERTAKIN GS, EVENTS OF DEFAULT &
Ts & Cs

DEBT SECURITIES

LOAN FACILITY

Borrower (AKA Issuer) issues a docs ('debt securities', 'instruments' or 'bonds') evidencing debt obligation in return for the PS it receives from lenders Lender (i.e. investors who "lend" by purchasing securities) = Institutions &
individuals More investors willing to lend = less risk =
lower interest rates, more funds available Less Expensive = no Regulatory capital costs Geared towards quick selling on liquid market ... more buyers ... lower yields ... lower costs for issuer Usually investor invests smaller participations due to extensive market. Certain debt securities significantly longer term (e.g. 30-year Gilt-edged securities (government bonds) Involves publicity due to open trading
? Less onerous and restrictive (no Facilities Agreement)No specific relationship bank monitoring compliance with financial covenantsTrustee will have basic role overseeing standard undertakings

of

The Facilities Agreement is evidence for debt obligation Lenders = Banks

Fewer lenders (banks) willing to lend
= more risk = high interest rates, less funds available More Expensive = Regulatory capital costs Limited market for selling ... less buyers ... higher yields ... higher costs for borrower Usually lender invests larger participations due to smaller market. Usually Shorter terms Can remain confidential?

More onerous and restrictive Specific relationship monitoring compliance financial covenants

bank with

DEBT AND EQUITY SECURITIES'Securities' defined as 'instruments in which a borrower (an 'issuer') acknowledges a debt or an investment.Can be equity securities (shares) or debt securities (bonds)

DIFFERNECES BETWEEN DEBT SECURITIES & EQUITY SECURITIES p.203 ISSUE

DEBT SECURITIES

EQUITY SECURITIES

(i.e. ordinary

shares)

RETURN ON INVESTMENT

Investment has maturity date ... issuer must redeem security by repaying investor. Can be easily traded before maturity to realise investment

BDF - WS 8 - Debt Securities

Non-returnable investment - can only realise capital through selling shares/winding up of Co

1 RIGHT TO RECEIVE RETURN ON INVESTMENT

Right to receive regular return on investment (an interest payment or 'coupon'), or investment may be issued at a 'discount' to its face value on redemption at maturity

INVESTORS PRIORITY ON INSOLVENCY

Commonly unsecured & rank behind all secured and preferred creditors & pari passu with all other unsecured creditors (but ahead of equity investors (i.e. shareholders)) Doesn't take equity or have any rights over the issuer other than basic rights to call an event of default if coupon or principal are not paid or undertakings are breached (EXCEPTION =
Equity linked securities where original debt obligation may be exchanged for equity - see p4)

TAKING EQUITY IN ISSUER?

Face of the bond will include a simple statement to pay principal (& interest if relevant) on a certain date. Signed by a least 1 officer of the issue (usually part of security printing) Not valid until instrument is 'authenticated' by paying agent.

Investor will Rank behind all other creditors of the Co (ie, those owed 'debts') in the event of winding up

An investor will take Equity (a share) in the issuer and will usually have power to vote at SH meetings (but depends on the type of share)

BASIC DEATURES OF A BEARER BOND T&Cs COUPONSIf bond bears interest, coupons

A PROMISE TO PAYThe investor has No absolute right to receive return over its investment (dividend)Printed on reverse of bond together with the addresses of the relevant paying agents??
will be printed on right-hand side of a bearer bondMust be torn off &
surrendered to paying agents to claim interest payment as it falls due The coupon isprobably a bearer doc itself. Name & address of paying agents printed on reverse side of each coupon.

TALONS Max # of coupons which can be attached to a eurobond is 27 (under ICMA rules). If bond carries +27 interest payment dates (e.g., a bond paying semi-annual interest with a maturity of 14 yrs), final coupon (at top left of coupon sheet next to bond) will be known as a 'talon'. Talon can be exchanged for a further sheet of coupons in relation to remaining interest payments once all coupons on 1st sheet have been claimed.

COMPARING REGISTERED AND BEARER BONDS TITLE CLAIMS &
DEFENCES OF AN ISSUER PRIORITIES ANONYMITY TRASNFER

REGISTERED BONDS

BEARER BONDS

Purchaser will not obtain good title if seller stole bond certificate & was able to obtain a transfer in register Purchaser, in principle (although this may be varied under contract), is subject to rights issuer might have against transferor, such as set-off.

Bona fide purchaser for value w/out notice (of defects in title) can obtain better title than seller

Purchaser only take bond free of competing interests of which he had no actual or constructive notice Issuer knows identity of registered holder, although true beneficial ownership may lie behind a nomineeRequires execution of instrument of transfer, & filing of instrument & original bond certificate with issuer/his agent for that purpose (whoever maintains reg. of BHs), & amendments to register.

Purchaser usually take bond free of any equities (i.e., 3rd party claims), e.g. a person for whom bond was held on trust

BDF - WS 8 - Debt Securities

Always sold free from any claim the issuer might have against previous holder

Can be held anonymously as issuer won't know at any time who owns bond?

Transferred by delivery. Vulnerable to theft if they transferred by physical delivery, ... usually traded through clearing systems effected by book entries

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