Introduction

Bond issuance by UK firms has in the past concentrated on the largest corporates. Most other UK firms have historically relied predominantly on banks to meet their borrowing needs. However, 2009 witnessed a surge in corporate bond issuance, a trend which has continued in the current year. A key driver of this trend is a shift by traditional users of the bank loan market to the bond market, mainly as part of a refinancing strategy. A reduction to the availability of traditional bank credit, post crisis, and the “wall of corporate debt” - estimated to be some £159.9 billion between 2010 and 2012 - which corporates will need to refinance, means that corporates will need to utilise a wider variety of funding techniques to access the capital they require. Clients are increasingly considering accessing the Eurobond market, and in the past few months we have advised on a number of bond issues for debut issuers, including:

  • £200,000,000 5.375 per cent Guaranteed Bonds due 2017 by The Go-Ahead Group plc, a leading UK public transport group, listed on the London Stock Exchange.
  • US$80,000,000 3.5 per cent Unsecured Convertible Bonds due 2015 by BlackRock Latin American Investment Trust plc, listed on the London Stock Exchange.

Companies are also increasingly accessing the wider retail investor market for the first time and we have recently acted in respect of the following issue:

  • £25,200,000 7.00 per cent Guaranteed Bonds due 2020 by Provident Financial plc, one of the UK's leading suppliers of personal credit products to the non-standard lending market, only the second bond issue specifically targeted at retail investors and listed on the London Stock Exchange's new electronic order book for retail bonds (ORB).

There is continuing demand from more regular bond market issuers and in the past few months we have advised on the following:

  • US$380,000,000 4.00 per cent Guaranteed Convertible Bonds due 2015 by Petropavlovsk plc, a mining and exploration group focused on gold and iron, listed on the London Stock Exchange.
  • £129,711,000 9.000 per cent Guaranteed Notes due 2016 by F&C Asset Management plc, a leading asset management house, listed on the London Stock Exchange.
  • €30,000,000,000 Euro Medium Term Note Programme by Bayerische Motoren Werke Aktiengesellschaft, listed on the Luxembourg Stock Exchange.
  • €833,300,000 4.40 per cent Exchangeable Bonds due 2014 by Hungarian State Holding Company exchangeable into ordinary shares of Gedeon Richter plc, a European pharmaceutical group, listed on the Luxembourg Stock Exchange.

Advantages and disadvantages of a bond issue

  • Advantages: Large pool of investors, comparatively cheap funding, raises profile of issuer, minimal covenants allowing maximum flexibility for future business and financing arrangements, quick and simple.
  • Disadvantages: Anonymous investors, disclosure to investors.

What are the key commercial considerations?

We believe that the key issues for a corporate treasurer to consider before embarking on a bond issue are as follows:

  • Pricing: A bond issue will usually involve several weeks of preparation followed by a “launch” when the intention of the borrower to access the bond market will become public. You will need to be comfortable that the investment bank(s) advising on the proposed issue can deliver the requisite funding amount at the appropriate coupon.
  • Negative pledge: The bond terms will typically include a negative pledge, which will restrict the borrower’s ability to obtain other funding by restricting the giving of security. Investment grade borrowers should only be restricted by a “eurobond negative pledge” which restricts borrowers from giving security for other bond financings but not for secured loan financings, whilst noninvestment grade borrowers are likely to be required to provide an “all moneys negative pledge” restricting the provision of security for both bonds and loans. In any case, the borrower should ensure that appropriate exemptions are negotiated into the negative pledge to ensure that it is able to carry out its future funding plans.
  • Other covenants: In some cases, covenants similar to those appearing in the loan market such as those relating to EBITDA/debt, mergers and disposals, and distributions would be required. As in loans, the borrower will need to ensure that the covenants are appropriate for its future activities.
  • Events of default: Events of default are usually “looser” in comparison to loans to take account of the fact that bondholders are an anonymous group of investors with no prior relationship with the borrower. The provisions will need to be negotiated to ensure that they are appropriate for the borrower.
  • Early repayment: The borrower may be required to repay the funding following a takeover of the borrower, often at a premium. Discussions will need to take place to ensure appropriate checks on repayment are provided, for example, repayment would only occur if there is a rating downgrade following a change of control.

What is needed to obtain funding?

In order to obtain funding, the following will need to be considered:

  • Due diligence: The borrower will be required to explain its business, this consists of:
  • Business due diligence: Senior management time will be required to answer questions on the business based on a prepared questionnaire from the investment bank(s) managing the issue.
  • Financial due diligence: The auditors will need to interview management and review management accounts so as to prepare a comfort letter.
  • Financial statements: Timing of release of the accounts will need to be co-ordinated with the issue of bonds since investors will be expecting to invest on the basis of recent accounts.
  • Ratings: A rating from a major rating agency will help in the marketing of the bonds and the review process will need to be factored into the timetable.
  • Listing: The bonds will usually be listed on the London stock exchange or other established stock exchanges.
  • Corporate approvals: Bond issues will need to be approved by the boards of the issuer and any guarantors. Notice periods and borrowing restrictions contained in the articles and association for convening meetings should be checked.
  • Roadshow: The investment bank(s) arranging the bond issue will arrange meetings between the borrower and potential investors. These are likely to be in London and Edinburgh, but may be further afield.

What documents are required?

The following are the documents typically required for a bond issue.

  • Engagement letters with the investment bank(s) and the advisers.
  • Roadshow presentation which will be used by the management to describe the business to potential investors on the roadshow.
  • Prospectus containing descriptive information about the issuer and any guarantors.
  • Terms and conditions of the bonds.
  • Trust deed appointing the trustee for the bond issue. The trustee acts as the representative of the holders of the bonds so that, for example, if there is an event of default it is the trustee rather than any individual bondholder who is initially responsible for requiring repayment on the bonds.
  • Paying agency agreement under which the borrower appoints the paying agents for making payments and other administrative matters in relation to the bonds.
  • Subscription agreement which contains the agreement with the investment bank(s) to subscribe the bonds, and the borrower provides representations and indemnities in connection with the bonds.
  • Signing and closing agenda which provides administrative matters in relation to the signing and closing process.
  • Legal opinion relating to legal validity of the various contracts.
  • Comfort letter under which the auditors provide negative assurance on no adverse change to certain line items as compared to the latest published accounts.