See Practice note, Credit ratings for more detailed information on ratings and a table of the grades assigned by each agency. Appointment of parties The issuer appoints the relevant parties for the transaction. For detailed information on the role and function of each party to a bond issue, see Practice note, Bond issues: parties. These include:. The issuer and lead manager instruct lawyers to draft the documents usually the lead manager's lawyers , comment on the drafts and prepare the legal opinions.
Lead manager and managers. A financial institution usually arranges the entire transaction, including the sale of the bonds, legal documentation and settlement procedures. This is the lead manager. It then contacts other financial institutions called managers to form a syndicate that agrees to buy the bonds to sell to investors.
Paying agents. Paying agents are financial institutions that act as the agents of the issuer in making payments of interest and principal to the bondholders throughout the life of the bonds.
Trustee or fiscal agent. A bond issue usually has either a trustee or a fiscal agent. There is never both a trustee and a fiscal agent. A fiscal agent acts for the issuer as a principal paying agent while a trustee acts on behalf of the bondholders as an intermediary between them and the issuer. See Practice note, Bond issues: parties for more on fiscal agents and trustees. Specialist financial printers may need to be instructed to print the prospectus and, if applicable, the definitive bonds.
The issuer's and, if applicable, guarantor's auditors need to be informed of the bond issue and provide comfort letters to the managers at signing and closing.
Other parties may also need to be appointed depending on the type of bond issue. For example:. For registered bonds only. A financial institution that maintains a register of the names and addresses of registered bond owners and any change in ownership when bonds are sold. Transfer agent. A financial institution that maintains a record of the names and addresses of registered bond owners and any change in ownership when bonds are sold. Calculation agent. A financial institution that makes certain calculations under a debt security usually only required to calculate floating rates of interest on a floating rate note or in a complex transactions involving derivatives.
Listing agent. For bonds listed on a stock exchange. The listing agent advises the issuer on the procedure for listing and submits the documents for listing to the relevant stock exchange.
Rating agent. Process agent. Only required where the issuer is a non-UK issuer. An agent appointed by the issuer to receive any legal documents that are served on the issuer in legal proceedings in the UK. Role of the lawyers During the pre-launch period, the issuer and the lead manager contact their respective lawyers about the proposed issue.
If the issuer is non-UK domiciled, or if any aspects of the issue or any of the transaction documents are governed other than by English law, lawyers in the relevant jurisdictions should also be appointed. Documents The lead manager's lawyers are often instructed by the lead manager sending them a draft of the invitation telex see Invitation telex below to be reviewed before it is sent to the managers.
Alternatively, the lead manager's lawyers may be asked to draft the invitation telex, if the issuer is a first-time issuer or if there are unusual terms to be included. The lead manager's lawyers normally prepare the main legal documents for the issue. The lawyers start to prepare the documents as soon as they are notified of the proposed issue, based on the information in the invitation telex.
They then circulate first drafts to the issuer and other parties' lawyers for comments. The terms of the issue are negotiated over the following weeks and further drafts produced until all documents have been agreed, which must be before signing. The documents that are prepared are:. Fiscal agency agreement and deed of covenant. Trust deed and paying agency agreement. There is never both a fiscal agency agreement and trust deed for more information, see Practice note, Bond issues: parties.
See Practice note, Bond issues: documents for a description of the purpose and content of each of these documents. Due diligence The lawyers for both the issuer and the lead manager carry out a due diligence exercise on the issuer. The issuer's lawyers need to do this as they give a legal opinion on the capacity of the issuer to issue the bonds. The lead manager's lawyers need to do the due diligence as the lead manager will be selling the bonds and will want to know whether the issuer is creditworthy, and any other risks associated with the issuer.
The due diligence exercise involves carrying out a number of searches including at:. Companies House, to obtain the issuer's certificate of incorporation, articles of association and a copy of entries in the charges register.
The Central Registry of Winding Up Petitions to check whether the issuer or guarantor is about to go insolvent.
For more information on the searches that should be performed before giving a legal opinion, see Checklist, Company searches to be carried out before issuing a legal opinion. Stage 2: launch This stage of a bond issue involves the issuer announcing its intention to issue its bonds. Unless the issuer intends to sell the bonds to a specific investor, it will need to find investors to buy the bonds when they are issued.
This is a key stage for the parties' lawyers because this is when drafts of the documents are sent to the parties, the terms and conditions are negotiated, and revised documents are produced. Launch date The day of launch is the day the lead manager publicly announces the issue, which then appears on the electronic screen pages that are used to trade securities in the capital markets.
Invitation telex On or just after launch, the lead manager sends an invitation telex containing the proposed terms of the bond issue to the prospective managers, who review it and decide whether to join the syndicate and act as managers.
Sometimes, if the managers and lead manager have previously underwritten similar issues together, the lead manager may just send a term sheet instead of an invitation telex see Practice note, Bond issues: documents for more information on term sheets. The invitation telex usually includes the following:. Proposed terms of the bond issue. Selling restrictions. Any relevant selling restrictions that apply to the issue.
The fees of the managers. Agreement among managers. Which version of the two industry-standard agreements among managers is to be used. The prospective managers then decide whether they want to join the syndicate of banks and underwrite the issue. If they join the syndicate, the sales desks at the manager banks start seeking investors by telephoning their contacts or conducting roadshows meetings with investors and selling the bonds to them this is called pre-selling the bonds.
Informing clearing systems and listing authority If, as is usual, the bonds are to be cleared and settled through a clearing system, the lead manager contacts the relevant clearing system with the details of the bond issue and the arrangements for closing see Closing parties for more information. The lead manager then sends the draft prospectus, usually by e-mail, to the relevant "reader" appointed by the UKLA. For more information on listing bonds in London, see Practice note, Listing debt securities in London , in particular the section on procedures for listing.
If the bonds are to be listed abroad, the rules of the relevant listing authority need to be followed and, if necessary, a local listing agent may need to be appointed to liaise with the listing authority and stock exchange.
Negotiating the terms of the issue The lead manager's lawyers send the documents to the relevant parties. Terms of the issue are negotiated between the parties, and further drafts are produced of the documents until all documents have been agreed. Stage 3: issue - signing and closing Issue of the bonds is usually between one and three weeks after launch.
On issue, the legal documents are signed by the relevant parties, the issuer delivers the bonds to the bondholders and the bondholders pay the issuer. This stage is divided into:. The subscription agreement is signed and prospectus approved by the listing authority. Other documents are signed, the bonds are signed authenticated and, if applicable, effectuated and delivered to the bondholders and payment is transferred to the issuer.
Before signing The following steps should be completed prior to the signing meeting:. The signing and closing memorandum should be prepared and distributed to all parties. The subscription agreement should be finalised and in a form ready to be signed on the signing date.
This, and the agreement among managers are the only agreements signed on the signing date. The other documents are dated and signed on the closing date. The forms of the legal opinions from the relevant lawyers must be agreed. The first comfort letter should be signed by the auditors and the form of the second comfort letter should be agreed. There is an ICMA industry standard form comfort letter that is used in bond issues see Practice note, Bond issues: documents: Auditor's comfort letter.
Board minutes of the issuer and of the guarantor, if the issue is guaranteed should have been prepared following the board meeting where the resolutions authorising the issue were passed. Any powers of attorney of the issuer, lead manager or managers if they are not signing individually should be prepared. The process agent's letter should be prepared by the process agent.
It needs to be signed by the process agent and the issuer at signing, but the process agent usually signs it before the signing as it is not usually present at the signing itself. To attract investors, a privately held company often pays a higher interest rate than bonds issued by a publicly traded corporation. The higher the interest rate, the more cash you must spend to honor the obligation.
Your business must make interest payments until the bondholder sells the bond or it reaches maturity. You must repay the bond principal you received when the bond was first issued when it reaches maturity or if the bondholder sells it before maturity.
One way to ensure you have the money available is to establish a sinking fund, which is the business assets you set aside and invest to earn the money to repay the principal. If you do not have a sinking fund, you will have to repay the principal directly from your business income or assets. Bonds are classified as long-term liabilities. When they are sold at their face value, or par value, the full amount you receive is recorded in your ledger as a debit to cash and a credit to bonds payable.
When an interest payment is due, the event is recorded as a debit to interest expense and a credit to cash. The interest from municipal bonds generally is exempt from federal income tax and also may be exempt from state and local taxes for residents in the states where the bond is issued.
Credit risk. The issuer may fail to timely make interest or principal payments and thus default on its bonds. Interest rate risk. If bonds are held to maturity the investor will receive the face value, plus interest.
If sold before maturity, the bond may be worth more or less than the face value. Rising interest rates will make newly issued bonds more appealing to investors because the newer bonds will have a higher rate of interest than older ones. To sell an older bond with a lower interest rate, you might have to sell it at a discount.
Inflation risk. Inflation is a general upward movement in prices. Inflation reduces purchasing power, which is a risk for investors receiving a fixed rate of interest.
Liquidity risk. Call risk. The possibility that a bond issuer retires a bond before its maturity date, something an issuer might do if interest rates decline, much like a homeowner might refinance a mortgage to benefit from lower interest rates.
Corporate bonds are securities and, if publicly offered, must be registered with the SEC. Be wary of any person who attempts to sell non-registered bonds. Most municipal securities issued after July 3, are required to file annual financial information, operating data, and notices of certain events with the Municipal Securities Rulemaking Board MSRB. This information is available free of charge online at www. If the municipal bond is not filed with MSRB, this could be a red flag. Test your knowledge on common investing terms and strategies and current investing topics.
Learn about investing risks in certain companies that provide exposure to China-based businesses. Are you prepared for your financial future?
0コメント