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Expertise ––––– March 2013 Banking and Finance Bond issues by Registered Providers ——— Pioneering ———— Bahrain ———— Construction ———— Public sector ———— Energy ———— Real estate ———— London ———— Tax ———— IT ———— Dubai ———— Manchester —— onnecting ———— Knowledge ———— Pragmatic ———— Malaysia ———— Exeter ———— Thought leadership ———— Housing ———— Agile ———— Creative ———— Connecting ———— Priva Local government ———— Manchester ———— Environment ———— Focused ———— Islamic finance ———— Projects ———— Abu Dhabi ———— Corporate finance ———— Passionate ———— — Employment ———— Regulation ———— Procurement ———— Expertise ———— Specialist ———— Planning ———— Investment ———— Committed ———— Delivery ———— IT ———— Gov —— IP ———— Corporate ———— Infrastructure ———— Cairo ———— Development ———— Private wealth ———— Oman ———— Governance ———— Birmingham ———— Corporate finance — — Dynamic ———— Pensions ———— Dispute resolution ———— Insight ———— Banking and finance ———— Arbitration ———— Diverse ———— Regeneration ———— Care ———— Communic 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 Trowers & Hamlins LLP is a limited liability partnership registered in England and Wales with registered number OC337852 whose registered office is at 3 Bunhill Row, London EC1Y 8YZ. Trowers & Hamlins LLP is authorised and regulated by the Solicitors Regulation Authority. The word "partner" is used to refer to a member of Trowers & Hamlins LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Trowers & Hamlins LLP's affiliated undertakings. A list of the members of Trowers & Hamlins LLP together with those non-members who are designated as partners is open to inspection at the registered office. 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: 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.