Download Banking and Finance Bond issues by Registered Providers

Expertise ––––– March 2013
Banking and Finance
Bond issues by Registered Providers
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Raising finance in the capital
markets
If you have a substantial borrowing or
refinancing requirement (£100,000,000 plus)
you may well be considering a bond issue.
Published by
Trowers & Hamlins
Trowers & Hamlins LLP
3 Bunhill Row
London
EC1Y 8YZ
t +44 (0)20 7423 8000
f +44 (0)20 7423 8001
www.trowers.com
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Trowers & Hamlins LLP has
taken all reasonable
precautions to ensure that
information contained in this
document is accurate but
stresses that the content is
not intended to be legally
comprehensive.
Trowers & Hamlins LLP
recommends that no action
be taken on matters covered
in this document without
taking full legal advice.
Rather than borrowing from a small number of banks
under a facility agreement, a bond issue involves
issuing bonds (essentially IOUs promising to repay the
face amount plus interest) which are listed on the
London Stock Exchange or another recognised
exchange and are held by investors such as insurance
companies and pension funds.
What are the pros and cons of a bond issue?
Pros
The most obvious benefit is that you can raise a large
amount of new long-term borrowing (20 years or more)
at competitive rates at a time when long-term funds are
rarely available from the traditional funders to the
sector.
Bond investors are not keen on constantly monitoring
compliance with covenants or processing requests for
consent. For this reason, bond issue documents
normally include fewer covenants than typical in a bank
loan agreement with fewer intrusive restrictions on the
running of your business. There will probably be just
one or two financial covenants, typically an asset cover
and, possibly, an interest cover covenant. Other
covenants are likely to include a negative pledge in
relation to the secured assets, together with provision of
annual accounts and a compliance certificate. The
undertakings will not normally include prohibitions on
other borrowings by the RP or on participating in
mergers or group restructuring, such as amalgamation.
Similarly, bonds are usually subject to only a limited
number of events of default which cover the usual
areas: non payment, insolvency and breaches of
obligations or representations. Grace periods are
generally longer, perhaps as long as 60 days in the
case of a breach of some obligations and the bond
trustee will usually be required to certify that the event is
materially adverse to the interests of bondholders
before any action can be taken.
Cons
The disadvantage of bonds is that if you are in danger
of breaching a covenant or if you do need to obtain a
consent or waiver, this will probably need to come from
a resolution of bondholders voting at a meeting. For
important matters requiring an extraordinary resolution,
a majority of 75% will be required. Where a consent or
waiver is needed, there will be a more formal procedure
and the lead times will be longer than where you are
negotiating with banks.
Another apparent disadvantage is that the terms for
prepayment of bonds are generally linked to what is
known as the "Spens formula" and can be prohibitively
expensive. However, while this was a problem in some
of the older bond issues, documentation for recent
issues normally allows the RP itself to purchase bonds
in the market and bonds so acquired will be cancelled
automatically. This means the RP can, in effect, prepay
at the market value of the bonds.
Process
The process of issuing bonds is unfamiliar to RPs new
to the capital markets and some aspects, including the
jargon surrounding bond issues, can be intimidating.
Most bonds are rated by one or more of the rating
agencies and meeting the rating agency's requirements
can seem very demanding, particularly if you have no
previous experience.
The key to meeting these challenges successfully is
choosing a bank or banks to act as "lead managers" of
the issue. The lead managers' role will be to guide you
through the process, including discussions with the
rating agencies. They will also take a leading role in
marketing the bonds to potential investors.
In deciding who to appoint as lead managers it is also
important that you feel comfortable about the team that
you will be working with and are confident that they will
give you the support you need.
Banking and Finance
Your legal advisers will also have a major role to play in
guiding you through the legal documentation so it is
important to select a law firm which can demonstrate
experience of advising RPs on bond issues.
Documentation
The documents required for a bond issue differ from the
standard bank loan agreement and fixed charge.
Most bonds in our sector are issued through a group
treasury vehicle which on-lends proceeds to one or
more RPs in the group. The documentation in such
cases will include a bond loan agreement which is in a
form familiar to those used to borrowing from banks but,
as noted above, light on covenants.
The formal document which is used to market the bonds
is the Offering Circular or Prospectus with detailed rules
as to the information contained in it. The sections which
you will be most concerned with are those which set out
the terms and conditions of the bonds, the description of
the Issuer and its business and the risk factors relevant
to potential investors deciding whether to buy bonds.
The bond will be created by a Trust Deed under which a
trustee will be appointed to act on behalf the
bondholders. The Trustee will be responsible for
receiving financial information and formal
communications and monitoring compliance with the
Issuer's obligations. If a meeting of bondholders is ever
required, it will be the Trustee who will be responsible
for calling this. The Trustee will also usually hold the
security for the bonds although sometimes a separate
security trustee may be used. It is usually possible to
use an existing security trust to hold the security for a
bond issue.
Expertise March 2013
managers and bookrunners together will agree to
underwrite the issue for which they will charge a
commission. The obligations of the lead managers and
bookrunners to purchase the bonds on issue will be
contained in a Subscription Agreement.
The issuer will need to appoint a Paying Agent to
distribute payments to bondholders on each interest
payment date and on any redemption of bonds. There
will be a Paying Agency Agreement setting out the
obligations of the paying agent.
Unless sufficient properties can be charged as security
immediately on the issue of the bonds, the bond
proceeds will need to be held in a blocked account or
invested in permitted investments such as gilts until
sufficient properties are available to be charged. If a
charged account is used, there will need to be an
Account Agreement with the bank holding the blocked
account. If the proceeds are to be invested in permitted
investments, a Custodian will need to be appointed
under a Custodian Agreement who will hold the
permitted investments on trust for the bondholders.
The key to a successful bond issue is planning ahead.
As a rough guide it will take about three months from
the appointment of the lead managers, although
preparing your fixed charge security may well take
significantly longer.
How can we help
Trowers & Hamlins regularly advises RPs, housing
investment vehicles and others on the debt capital
markets. We have by far the largest and most
experienced team of lawyers in the field and the
strength in depth to deliver demanding transactions
against challenging timescales.
Our experience is extensive and includes the following:
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Source: iStockphoto
The lead managers will often involve other banks known
as "bookrunners" to assist in the marketing and the lead
acting for The Housing Finance Corporation
(THFC) on every capital markets issue undertaken
by them since inception in 1987;
acting for a range of housing investment vehicles;
acting for RP issuers, either by the RP itself or
through a group treasury vehicle ;
listing of bonds on The London Stock Exchange
and other recognised exchanges; and
advising on the sale of notes by means of private
placement both in the US and the UK.
We also offer a Manchester-based banking and finance
practice which is fully integrated with our London team.
Banking and Finance
Expertise March 2013
Our recent track record for 2012/13
We have recently acted for:
Hastoe Housing
Association
Debut bond issue of £100,000,000
March 2012
Sovereign Housing
Group
Second bond issue of £250,000,000
May 2012
Saxon Weald
Debut bond issue of £225,000,000 - the first LSVT for many years to
entirely refinance its bank loans through the bond markets
May 2012
East Thames Group
Debut bond issue of £250,000,000
June 2012
Midland Heart
Debut bond issue of £150,000,000
September 2012
Sentinel Housing
Association
Debut private placement of £75,000,000
November 2012
The Housing Finance
Corporation
Three issues totalling £388,600,000
January, April and
September 2012
GB Social Housing
Inaugural £88,900,000 issue under its £2 billion note programme
February 2013
March 2013 © Trowers & Hamlins
For more information please contact
Adrian Carter
Partner - Head of Section
t +44 (0)20 7423 8301
e [email protected]
Sarah Gooden
Partner
t +44 (0)20 7423 8334
e [email protected]
Neil Waller
Partner
t +44 (0)161 838 2032
e [email protected]
Banking and Finance
Expertise March 2013
Glossary of terms
Bond
Bearer or registered security (usually interest-bearing) under the terms of which an issuer
contracts to pay holder a fixed principal amount on a stated future date and usually a series of
interest payments during its life; more generally a long term debt instrument.
Book
On launch, list of investors is compiled by the lead managers based on bids received stating the
amount each investor wishes to invest and at what price. From this list, bonds are allocated to
achieve an optimum price for the issuer and final list is referred to as the book.
Carry cost
The cost of financing positions; the rate of interest earned from the securities held, less the cost
of funds borrowed to purchase them. When the interest earned is greater than the cost of funds
there is positive carry; when the cost of funds is greater than the interest earned there is
negative carry.
Closing date
Date on which proceeds are paid to the issuer by the lead manager and the securities are
delivered to the lead manager by the issuer.
Issue
The term bond technically refers to an individual denomination. The bonds in total make up the
bond issue.
Issue date
The date from which the accrued interest on a bond issue commences, not always the same as
the payment date.
Issue price
The percentage of principal value at which the price of a new issue of securities is fixed. The
price may be fixed either at par, at a discount from par or at a premium over par.
Issuer
Any borrower raising funds through the sale of notes, bonds or other securities.
Launch or
launch date
Start of the process of a bond issue when the lead arranger will go to the market to build a book
of investors; following a successful launch the lead manager will look to price the issue based
on the bids received. Settlement will occur a few days later.
Lead manager
Lead manager is responsible for the co-ordination, distribution and documentation of a primary
market issue. It runs the book and is responsible for the selection of co-managers, for working
out the terms, for selecting underwriters and for appointing the selling group.
Margin (or
spread)
In bond markets, the difference between the bid and offered price.
Offering
circular
A document issued to the market setting out the key features of a bond issue for investors to
help them to decide whether to invest and how to price their offer. Its contents are regulated by
the listing authorities. Also described as a Prospectus.
Payment date
The date on which members of a bond issue management group pay the lead manager for their
allotments.
Rating
A letter grade signifying investment quality. Chief rating agencies are Moody's, Standard &
Poor's and Fitch Ratings.
Roadshow
Mandated lead arrangers visit key potential investors, with representatives from the bond issuer,
to show case a proposed bond.
Running the
book
To have primary responsibility for the documentation, syndication, distribution, payment and
delivery in respect of a primary market issue of securities.
Settlement
Point at which funds flow from the investor to the issuer; usually occurs couple of days post
launch and pricing.
Signing
Date on which the subscription agreement and agreement among managers are signed and the
offering circular is dated.
Underwriting
Agreeing to purchase unsold bonds from a new issue or to provide specified amounts of a loan,
so that the borrower is guaranteed the full proceeds.