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High-yield debt securities versus bank loans
Discuss the major differences between high-yield debt securities and bank loans in your jurisdiction. What are some of the critical advantages and disadvantages?
Although the commercial terms of a high-yield bond issue will differ from deal to deal, high-yield bonds have certain advantages for issuers over loan financing. Longer maturities (eg, between seven and 12 years) allow the issuer more flexibility to conduct its business. In the case of non-investment grade bonds, covenants are usually less onerous than bank loans and, unlike bank covenant packages, have ‘incurrence’ covenants and few, if any, financial maintenance covenants. There also are usually limited events of default. Investment grade high-yield bonds will generally have no covenant protection.
High-yield bond covenants typically include the concept of ‘restricted’ and ‘unrestricted’ subsidiaries (as opposed to ‘material’ subsidiaries in bank covenants). This allows the issuer group to designate certain companies as ‘unrestricted companies’ that will not be bound by the high-yield covenants.
The main disadvantages of high-yield debt from an issuer perspective are the higher interest costs compared with other forms of debt financing, higher initial transaction costs (in large part owing to the need for due diligence and detailed disclosure in bond offering documents and rating agency costs), less flexibility to obtain bondholder consent or make amendments, and public disclosure requirements in the case of listed debt securities. High-yield bond issues are also highly dependent on prevailing market conditions.
Are you seeing increased regulation regarding either high-yield debt securities or bank loans in your jurisdiction?
There have been a number of ongoing market and regulatory developments in respect of the European securities markets. Further integration of the European securities markets (much of which will result from the European Commission’s Capital Markets Union Action Plan) will lead to greater levels of consistency in transparency, reporting and information disclosure in respect of issuers whose debt securities (including high-yield bonds) are traded on regulated markets.
Most high-yield bond transactions are structured as private placements and are usually listed on unregulated markets, such as the Global Exchange Market (the exchange-regulated market of the Irish Stock Exchange plc trading as Euronext Dublin), so they do not typically fall within the scope of the European prospectus and transparency regimes applicable to ‘regulated markets’.
The EU Market Abuse Regulation now covers issuers of debt securities listed on unregulated markets across the European Union, including the Global Exchange Market. This regime prohibits insider dealing, market manipulation (attempted or actual) and the unlawful disclosure of inside information, and imposes obligations in respect of the disclosure of inside information, putting insider lists in place and reporting transactions by managers.
Lending to corporates is generally not a regulated activity in Ireland; however, banks licensed in other EU member states may be required to use their passport to carry on a lending activity in Ireland that would otherwise be unregulated.
In addition, as many lenders in the Irish market are regulated for other reasons (ie, by virtue of taking deposits or conducting insurance or intermediary business), those lenders may be subject to increased regulation under the Central Bank of Ireland’s (the Central Bank) codes of conduct and regulations, although these generally only apply in the case of loans to consumers, micro, small and medium enterprises and individuals.
The Credit Reporting Act 2013 provided for the establishment of a central credit register (CRR) for credit agreements originated in Ireland, which is maintained by the Central Bank since it became operational towards the end of June 2017. The CRR holds information about credit applications, credit agreements and the parties to those agreements. The CRA obliges credit providers, which it refers to as ‘credit information providers’ (CIPs), to report certain personal and credit information about borrowers and qualifying credit applications and credit agreements to the Central Bank.
As part of the CRR set-up, CIPs are also required to report information about existing loans. Reporting began in respect of consumer loans on 30 June 2017, and in respect of business loans from 31 March 2018. The credit reporting obligations will apply to more than 500 lenders, including banks, asset finance houses and the National Asset Management Agency.
Borrowers and lenders alike can request a credit report that will show the borrower’s credit accounts across all lenders, including its repayment history, whether there are any overdue payments and a record of enquiries made by lenders.
Current market activity
Describe the current market activity and trends in your jurisdiction relating to high-yield debt securities financings.
Irish companies in various industry sectors (eg, transport, telecommunications, media and entertainment, utilities and energy, real estate, and banking and finance) may be involved in European and US high-yield bond transactions; often as borrowers and guarantors, and occasionally as high-yield bond issuers.
Irish resident special purpose vehicles (SPVs), known as ‘section 110 companies’, are used as high-yield bond issuers in certain European high-yield transactions, often to avoid covenant breaches or local law restrictions on guarantees of securities. Section 110 companies are named as such because section 110 of the Taxes Consolidation Act 1997 provides for special tax treatment for ‘qualifying companies’.
Favourable tax laws allow these structures to be, in most cases, tax neutral (with no annual minimum profit or ‘spread’ required at the SPV level) and a ‘quoted eurobond’ exemption, together with numerous double taxation treaties, allows interest on securities to be paid gross. A minimal share capital requirement makes incorporating an Irish SPV an easy process.
European high-yield bonds are typically marketed as private placements to attract US investor interest as well as participation from European investors. Such transactions are usually led through London or the US and traditionally use New York law or English law governed documents. We are not aware of any transactions where high-yield bonds have been governed by Irish law.
High-yield debt securities may be listed for tax reasons or otherwise if there is a public offering. Ireland is a leading jurisdiction for listing high-yield bonds, which are mostly listed on the exchange-regulated Global Exchange Market.
Securities listed on the Global Exchange Market are considered to be ‘quoted on a recognised stock exchange’ to take advantage of the ‘quoted eurobond’ withholding tax exemption.
Most secured and unsecured high-yield bonds are backed by guarantees from certain ‘restricted subsidiaries’ within the issuer group.
Whereas lenders in loan financings would tend to be traditional banks and other financial institutions, investors in high-yield bonds would typically be institutional investors (including investment banks, insurance companies, pension funds, hedge funds, investment managers and mutual funds) looking for higher rates of return.
Identify the main participants in a high-yield debt financing in your jurisdiction and outline their roles and fees.
One or more investment banks will be mandated by the issuer to arrange and negotiate the terms of the bond offering with potential investors. In private placements, investment banks will usually act as ‘initial purchasers’ of the bonds and will then on-sell the bonds to investors. In public offers, the investment banks will act as underwriters of the issue. The arrangers will usually receive a commission or fee for agreeing to buy or underwrite the bonds.
A bank or trust company is usually appointed to act as trustee on behalf of bondholders under the terms set out in a bond indenture for US-style bond issues or in a trust deed for European offerings made under English law.
Typically, two rating agencies will be appointed to assign credit ratings to the high-yield bonds, which provide investors with an assessment of the credit risk attaching to the issuer or the bonds. Rating agencies will usually charge an initial fee based on the size of the issue and ongoing fees for maintenance of the rating.
Paying agents will be appointed to act as the administrative agents of the issuer, and will make payments of interest and principal to bondholders.
In the case of secured bonds, a security trustee will be appointed to hold the security on trust for the benefit of secured bondholders and other secured creditors. The rights and duties of the security trustee will usually be set out in the security agreement, facility agreement or intercreditor agreement, which will also include provisions dealing with how the proceeds of enforcement are to be applied.
Where high-yield debt securities are offered to the public or listed, a listing agent will be appointed to advise the issuer on the procedure for listing the bonds and will submit the documents for approval and listing.
The fees payable for these roles will vary and are typically documented in separate fee agreements between the parties.
Describe any new trends as they relate to the covenant package, structure, regulatory review or other aspects of high-yield debt securities.
Multi-tranche collateral structures with multiple series of fixed or floating rate bonds denominated in different currencies and with different maturities are now common. This is particularly the case in leveraged acquisition finance deals, where acquisitions are funded by both senior secured bonds and unsecured high-yield bonds and a revolving credit facility is also required by the group. These funding structures generally involve a parent company setting up a subsidiary to acquire the target group.
The subsidiary is usually the borrower under the revolving credit facility as well as the issuer of the senior secured notes or senior unsecured high-yield bonds. The high-yield bonds are then issued by the parent company to bondholders.
In these cases, the revolving credit facility is often structured to rank ‘super senior’ to the senior secured bonds or senior unsecured high-yield bonds, with a first ranking security over the collateral package. Senior secured bonds often have similar terms in respect of interest rate, collateral and priority of payment when compared with senior secured loans, with some minor differences in economic terms, and coupons can be fixed or floating rate with a margin above LIBOR.
There are also new hybrid structures where senior secured loans and senior secured bonds are structured to rank pari passu but ahead of unsecured high-yield debt. In these hybrid structures, first ranking security would often be shared between the senior secured lenders and senior secured bondholders but with the priority of payments, enforcement rights and ranking as between senior lenders and bondholders set out in the relevant intercreditor agreement.
How are high-yield debt securities issued in your jurisdiction? Are there particular precedents or models that companies and investors tend to review prior to issuing the securities?
European high-yield bonds are traditionally issued under an indenture governed by New York law made between the issuer and the bond trustee (who acts as trustee on behalf of the bondholders), although an English law trust deed may be used if the investors are primarily English or European. The bond indenture will set out the commercial terms of the bonds, including the maturity, coupon, events of default, representations, warranties and covenants.
The form of bond indenture will differ from deal to deal but will initially contain many common boilerplate provisions. The ‘Description of the Notes’ section of the preliminary offering memorandum that is marketed to investors usually contains a detailed summary of the proposed terms of bonds, which tends to be heavily negotiated during the marketing process.
The Loan Market Association has standard forms of ‘super senior’ credit facility agreements and intercreditor agreements, which are governed by English law, for use in high-yield bond structures. Security documents are generally governed by the law of the jurisdiction where the assets are located, so are subject to local law requirements.
Maturity and call structure
What is the typical maturity and call structure of a high-yield debt security? Are high-yield securities frequently issued with original issue discount? Describe any yield protection provisions typically included in the high-yield debt securities documentation.
High-yield bonds may be issued at par or, in some cases, with an original issue discount (ie, a discount to the par value), with a fixed or floating rate coupon and typically have maturities of between seven and 10 years, although bonds may be issued with shorter or longer maturities (eg, up to 12 years).
A number of yield protection features may be included in a high-yield bond transaction. Bonds may be issued with ‘bullet’ maturities (ie, where there is no mandatory redemption prior to maturity), although it is more common to see a non-call period negotiated as a term of the bonds. In these cases, the issuer is restricted from redeeming the bonds during a specified non-call period, which is often halfway through the term of the bonds. At the end of the non-call period, the issuer will usually have the right to redeem some or all of the bonds together with accrued and unpaid interest plus a ‘make-whole’ premium on specified call dates.
Often the make-whole premium on the first call date is par plus 50 per cent of the coupon and reduces rateably in each subsequent year. Shorter call periods may be negotiated but with a higher make-whole premium in the region of up to 75 per cent of the coupon being payable.
Certain other features allow bondholders to accelerate repayment of bonds at a defined price due to certain events. The most common example is the change-of-control put offer, which allows bondholders to require that the issuer purchase their bonds usually at 101 per cent plus accrued interest upon the occurrence of a specified change of control. It would also be common for the issuer to be required to offer to purchase bonds usually at 100 per cent plus accrued interest with the proceeds of certain asset sales that are not used to retire debt or reinvest in the business.
Equity clawbacks also apply in some cases to allow the issuer the option to redeem up to 35 per cent or 40 per cent of the outstanding bonds at par, plus accrued interest from the proceeds of an equity offering.
How are high-yield debt securities offerings launched, priced and closed? How are coupons determined? Do you typically see fixed or floating rates?
Most high-yield debt offerings are marketed as private placements by the mandated investment banks that act as arrangers of the offering.
Prior to launch, a preliminary offering memorandum is prepared by the issuer and the arrangers, which will outline the proposed terms of the bond offering and typically includes an executive summary, investment considerations, risk factors, an industry overview, a description of the issuer and its business, an overview of the transaction and rationale, sources and uses of funding, and may include key financials and tax considerations.
Although the commercial terms of the bonds will not have been finalised yet, the preliminary offering memorandum will include a ‘Description of the Notes’ section containing a detailed summary of the proposed terms of the indenture and the bonds. The summary terms are often heavily negotiated during marketing and prior to launch of the bond offering to investors, more so than the indenture. The list of terms and conditions of the bonds may also be detailed in a preliminary term sheet describing the structure, collateral, covenants and other terms of the credit (covenants usually are negotiated in detail after the arranger receives investor feedback).
On launch, the transaction is announced and roadshows and meetings with investors take place. The finalised ‘preliminary’ offering memorandum and other marketing documents are considered by investors along with any due diligence. The terms of a typical purchase agreement or subscription agreement are also agreed between the advisers for the issuer and the arrangers.
At the conclusion of the roadshow, pricing will occur, at which time the final terms of the offering are agreed, including the type, structure and size of the issue, coupon and maturity. The final offering memorandum including pricing is finalised. The purchase agreement or subscription agreement is also signed between the issuer and the arrangers in their capacity as initial purchasers or underwriters.
A decision as to whether to pay a fixed or floating rate coupon is determined by the issuer and the arrangers, based on the issuer’s requirements as well as reflecting the commercial terms on which investors are willing to invest in the transaction. Pricing invariably depends on a number of factors, including the creditworthiness of the issuer, industry considerations, financial profile, deal structure (ie, whether the bonds are secured or unsecured) and prevailing market conditions.
Once the deal has priced, closing will typically take place within five business days. At this stage, various transaction documents (eg, indenture, security documents, facility agreement, intercreditor agreement and agency agreements) are signed. Closing and settlement of the bonds then takes place.
Describe the main covenants restricting the operation of the debtor’s business in a typical high-yield debt securities transaction. Have you been seeing a convergence of covenants between the high-yield and bank markets?
Non-investment grade high-yield bonds will often have a ‘standard’ covenant package, which typically restricts the ability of the issuer and certain ‘restricted subsidiaries’ to:
- incur or guarantee indebtedness;
- pay dividends on or redeem capital stock, and make certain investments;
- make certain other restricted payments;
- create or permit to exist certain liens;
- sell, lease or transfer certain assets;
- enter into certain transactions with affiliates;
- merge or consolidate with other entities; and
- impair the security interests for the benefit of the holders of the bonds.
Numerous exemptions and qualifications to the ‘standard’ covenant package are often either customarily included or are specifically negotiated by the issuer according to its particular needs. Notwithstanding, the overall intent of the covenant package is to protect bondholders by ensuring that the issuer and its ‘restricted subsidiaries’ do not undertake any acts that are detrimental to their ability to repay their bonds and interest payments thereon, while allowing the issuer group the operational flexibility it needs to conduct its business.
High-yield bond covenants are looser than those on bank loans, providing the issuer more operating flexibility and enabling the issuer to conduct its business within agreed parameters.
Are you seeing any tightening of covenants or are you seeing investor protections being eroded? Are terms of covenants often changed between the launch and pricing of an offering?
The terms of the bond covenants are negotiated by the initial purchasers and the issuer’s advisers prior to launch and pricing tends to reflect the extent of the covenant package, among other things. Often, covenants will be renegotiated during the marketing process following investor feedback, the scope of which may depend on the quality of the issuer as well as industry and market conditions.
For example, ‘permitted liens’ are often highly negotiated exceptions to the limitations on indebtedness; as are ‘permitted indebtedness’ provisions that permit high-yield issuers to incur certain types and amounts of indebtedness.
Limitation of certain ‘restricted payments’, such as dividends or distributions, are usually important from a bondholder perspective to ensure that cash and assets are contained and protected and not used in ways that may be detrimental to bondholders or the issuer’s creditworthiness.
Are there particular covenants that are looser or tighter, based on a particular industry sector?
In some cases, strong demand for yield in a low interest rate environment, particularly for large, established issuers, could result in more issuer-friendly terms and looser debt covenants. As noted above, specific exemptions from and qualifications to the ‘standard’ covenant package are usually heavily negotiated on a deal-by-deal basis, according to the particular needs and requirements of the issuer, and these may include industry considerations.
Change of control
Do changes of control, asset sales or similar typically trigger any prepayment requirements?
Prepayment requirements may be triggered on the occurrence of certain events constituting a change of control, where bondholders have the right to require the issuer to repurchase some or all of their bonds usually at 101 per cent of the principal amount of the bonds, plus any accrued and unpaid interest up to the repurchase date.
In the case of certain asset sales by the issuer or its restricted subsidiaries, the issuer may be required to use the net sale proceeds to make an offer to purchase the bonds at an offer price in cash in an amount usually equal to 100 per cent of the principal amount of the bonds, plus any accrued and unpaid interest up to the repurchase date.
Do you see the inclusion of ‘double trigger’ change of control provisions tied to a ratings downgrade?
Generally, we would see ‘single trigger’ change of control provisions, where the put right or event of default is triggered by the mere occurrence of a change of control, more than ‘double trigger’ provisions requiring the occurrence of the change of control and a ratings downgrade.
Is there the concept of a ‘crossover’ covenant package in your jurisdiction for issuers who are on the verge of being investment grade? And if so, what are some of the key covenant differences?
As the covenant packages for high-yield bonds tend to be standard covenants with negotiated exclusions and exemptions, it is possible that ‘crossover’ provisions may be agreed on certain deals. An example would be covenant suspension, which provides that certain covenants will be suspended during periods when the bonds are rated investment grade by the relevant rating agencies and no default or event of default has occurred and is continuing.
The types of covenants that are suspended may include restrictions on the issuer’s ability to pay dividends, to incur debt and to enter into certain other transactions. Suspension of these covenants allows the issuer to engage in certain actions that would not have been permitted while these covenants were in force.
Generally, any such action that is taken while these covenants are suspended will be permitted to remain in place even if the bonds are subsequently downgraded below investment grade and the covenants are reinstated.
Describe the disclosure requirements applicable to high-yield debt securities financings. Is there a particular regulatory body that reviews or approves such disclosure requirements?
High-yield bond issuers will need to make detailed disclosure in their offering documents to enable investors to make an informed assessment of the financial status and prospects of the issuer and any guarantor and the rights attaching to the securities in which they are investing.
If high-yield debt securities are offered to the public or listed on an EU-regulated market, the issuer will be required to publish a prospectus that complies with the minimum disclosure requirements of the Prospectus Directive.
If high-yield bonds are listed on the Global Exchange Market, listing particulars must be approved by the Irish Stock Exchange plc trading as Euronext Dublin. The listing conditions and the disclosure requirements of the Global Exchange Market in respect of listing particulars are broadly similar to those of the regulated market. Some issuers choose to list on the Global Exchange Market to avail of ‘non-publication requests’, which means that the approved listing particulars are not available on the Irish Stock Exchange website.
The Global Exchange Market has special high-yield disclosure rules where securities are issued by an issuer within a group structure and the securities are guaranteed by one or more subsidiary guarantors, in which case audited consolidated financial information may be included in the offering memorandum. Additional disclosures may be required where audited consolidated financial statements of the issuer’s group include guarantor and non-guarantor companies alike, where a non-guarantor company represents over 25 per cent of either earnings before interest, tax, depreciation or amortisation (EBITDA) or net assets, or where an individual subsidiary guarantor accounts for over 20 per cent of either EBITDA or net assets.
The listing rules of the Global Market Exchange impose ongoing disclosure obligations on issuers once their securities are admitted to trading.
There are disclosure requirements under the market abuse regime that include an obligation on an issuer to disclose without delay ‘inside information’ and notify the Central Bank in the event that any decision is made to delay such disclosure (such delay only being permissible in limited circumstances). Furthermore, persons discharging managerial responsibility (PDMRs) within an issuer and persons closely associated with such PDMRs must notify the issuer and the Central Bank of transactions in debt or equity securities conducted on their own account. The time limit for notifying the issuer and the Central Bank is three business days after the transaction, and the issuer must publish the details within the same timeframe.
The new regime also introduced an annual threshold of €5,000 so that PDMRs do not have to make any notification until this has been reached. While competent authorities can increase this threshold to €20,000 (but must notify the European Securities and Markets Authority and justify it by reference to market conditions), Ireland has not done so.
If an Irish SPV established as bond issuer qualifies as a financial vehicle corporation under Regulation (EU) 1075/2013 of the European Central Bank (the FVC Regulation), it is required by the FVC Regulation to inform the Central Bank of its existence within one week from the date on which it has taken up business. Thereafter, the SPV is required to submit data on its assets and liabilities to the Central Bank on a quarterly basis by the 15th day following the end of the quarter to which the data relates.
Use of proceeds
Are there any limitations on the use of proceeds from an issuance of high-yield securities by an issuer?
If the proceeds of a bond offering are used for refinancing existing indebtedness or acquisition financing, consideration may need to be given to the restrictions on financial assistance, as discussed below. Otherwise, there are typically no Irish restrictions on an issuer using the proceeds of a high-yield bond issue.
Restrictions on investment
On what grounds, if any, could an investor be precluded from investing in high-yield securities?
Generally, investors in high-yield bonds are institutional investors. There are no specific Irish laws that prohibit such an investor from investing in high-yield bonds, although US and European securities laws (or other applicable laws) and jurisdictional tax issues may be relevant in determining whether an investor is able to invest in a high-yield bond structure on a private placement basis and in a tax-efficient manner.
Are there any particular closing mechanics in your jurisdiction that an issuer of high-yield debt securities should be aware of?
The closing of a high-yield bond transaction for an Irish company is not particularly cumbersome. Typically, the board of directors of the company will have held board meetings to approve the transaction prior to closing. Any validation procedures relating to financial assistance and any necessary shareholder approvals will also have been obtained and completed in advance of closing. There are also no particular execution formalities for Irish companies that require notarisation and legalisation of documents, although in some cases certain documents may need to be executed as deeds.
Guarantees and security
Outline how guarantees among companies in a group typically operate in a high-yield deal in your jurisdiction. Are there limitations on guarantees?
High-yield bonds are usually guaranteed by the main holding company and certain operating companies in the issuer group that are regarded as restricted subsidiaries.
To the extent that an Irish operating company is a restricted subsidiary, it can guarantee the obligations of another group company, but the guarantee must be for its corporate interests and within its objectives (corporate purposes), unless it is a private company limited by shares that has full and unlimited capacity. It is usually easy to find corporate benefit for a parent where the guarantee is downstream. Where the guarantee is upstream or cross-stream, the corporate benefit may be less obvious. It is generally accepted that due consideration can be given to the benefit the company receives as a member of the group. If the board of directors can show clear reasons why the guarantee is in the company’s best interests, the risk of the guarantee being set aside is probably remote.
As discussed below, there is a broad prohibition on an Irish company providing financial assistance (including giving guarantees or other security) for the purpose of an acquisition made, or to be made, by any person of any shares in the company, or where the company is a subsidiary, in its holding company. There is a validation procedure provided that certain conditions are met. Guarantees given for the benefit of directors and persons connected with directors are usually invalid, although there is also a validation procedure available. Regard must also be had to unfair preference considerations and to ensure that the guarantee is not, in fact, a contract of insurance, which may require authorisation.
A guarantee must be in writing and signed by the guarantor. Guarantees otherwise have the other usual requirements for the creation of an Irish law contract and must be given for consideration unless the guarantee is executed as a deed.
What is the typical collateral package for high-yield debt securities in your jurisdiction?
In secured high-yield bond transactions, bondholders will usually receive the benefit of security over all of the material assets of the issuer and the main operating companies. Subject to any agreed security principles, this would usually include security over group company shares, bank accounts and receivables.
Typically, an Irish company will create a mortgage, charge or assignment over any or all of its assets, including present and future goods and movable goods. This usually includes the creation of a floating charge over all of a company’s assets. A single debenture can be used to take a fixed and floating charge or an assignment by way of security. An assignment requires notice to be given in order to perfect a legal assignment, failing which there will only be an assignment in equity.
Where an Irish SPV bond issuer is used, the net proceeds of the bond offering are typically loaned to the main holding company, which, along with its main operating companies, provides security or guarantees to the issuer in respect of this borrowing. In secured bond deals, the Irish issuer will typically grant security by way of assignment of the issuer’s rights under the various transaction documents, including the loan, as well as the bank accounts and receivables of the issuer.
In the case of acquisition financing, any security and guarantees given by the target group may be subject to escrow arrangements and will usually only become effective once the acquisition has been completed. The restrictions on providing financial assistance, as discussed below, will usually need to be considered in such cases.
Are there any limitations on security that can be granted to secure high-yield securities in your jurisdiction? Are there any limitations on types of assets that can be pledged as collateral? Are there any limitations on which entities can provide security?
A charge by deed is the only method of creating a legal mortgage over registered and unregistered land in Ireland. It is not possible to create a legal charge over future-acquired land. In the event that a chargor acquires land in the future, a separate charge document should be entered into at that time.
A legal mortgage or equitable charge can be created by a company or by an individual over shares. A legal mortgage (which is rarely, if ever, used) will transfer title to the shares to the security agent, which will then be registered in the company’s register of members. With an equitable charge, the chargor remains the registered shareholder, but must hand over original share certificates, signed but undated share transfer forms (with the name of the transferee left blank for use on enforcement) and a dividend mandate.
Fixed and floating security can be created over bank accounts and the deposits held therein. If fixed security is to be taken, the charge document should preclude the chargor from dealing with the account and the account must be controlled by the security agent. The security is taken by way of charge where the beneficiary is the bank with which the account is held and usually by way of assignment where the beneficiary is not the bank with which the account is held. It is also possible to create a lien over a bank account.
A security interest over contractual rights (including rights under insurance policies) is generally created by way of a security assignment and can be created by way of a fixed or floating charge where the rights are receivables. In the absence of control over the proceeds of the receivables, a charge over receivables will be floating in nature only and rank behind preferential creditors and fixed charge holders.
The usual forms of security over intellectual property include a mortgage or a fixed charge over patents, copyright (non-software), registered designs and goodwill, a floating charge, together with an arrangement for the source code to be deposited in escrow, over copyright (software) and a charge over trademarks. Know-how and confidential information are generally not regarded as suitable assets for a security package.
As stock-in-trade or inventory is generally revolving, security is typically created over such assets by way of floating charge. In the case of tangible assets such as ships, aircraft and machinery, fixed security may be created over a ship by a company and must be created by way of a statutory ship mortgage in accordance with the Mercantile Marine Act 1955; a mortgage or a fixed charge can be created over aircraft by corporate bodies; and security over machinery may be taken by way of security assignment, fixed charge or floating charge.
Section 82 of the Companies Act 2014 (the Companies Act) prohibits the provision by a company, directly or indirectly, whether by means of a loan, guarantee, security or otherwise, of any financial assistance for the purpose of an acquisition (by purchase, subscription, exchange or otherwise) of shares in that company or in its holding company, subject to certain exceptions and the availability of the summary approval procedure (a validation or whitewash process) in certain cases.
Section 239 of the Companies Act prohibits the provision of security or guarantees by a company in respect of loans, quasi-loans or credit transactions made in favour of a director of the company, a director of the company’s holding company or a person connected with such a director. A summary approval procedure can be used to validate or whitewash such transactions and there is an intra-group exemption at section 243, together with a number of other exceptions.
Describe the typical collateral structure in your jurisdiction. For example, is it common to see crossing lien deals between high-yield debt securities and bank agreements?
Traditionally, high-yield bonds issued by sub-investment grade borrowers were unsecured. In the event of a default or liquidation of the issuer, bondholders ranked behind all secured lenders and were entitled to be paid out of the remaining liquidation proceeds after all secured lenders had been paid in full.
As noted above, senior secured bond structures have become more common, particularly in leveraged acquisition financing transactions. In these structures, the parent company will usually grant common security in favour of the super senior lenders, senior secured bondholders and unsecured high-yield bondholders over its assets and undertaking, shares in the issuer and rights in any intra-group loans.
In addition, the super senior lenders and senior secured bondholders may also receive additional common security in respect of the issuer and ‘restricted subsidiaries’, which the unsecured high-yield bondholders will not, although it is often the case that the high-yield bondholders will receive guarantees from the group. The rights of the parties are typically regulated by an intercreditor agreement which also contains all the security trustee provisions.
Who typically bears the costs of legal expenses related to security interests?
The issuer will typically pay these fees from the proceeds of the bond issue.
How are security interests recorded? Is there a public register?
Most charges created by an Irish company must be registered at the Companies Registration Office within 21 days of creation. Failure to do so would result in charges being void against any liquidator and any creditors of the company. This applies to any charge created by an Irish company, whether governed by Irish law or the law of another jurisdiction and whether the assets are situate in Ireland or elsewhere.
Since the introduction of the Companies Act, it is no longer necessary to make a filing for security over shares, bank accounts, bonds, debt instruments and certain other assets that are the subject matter of the security. There is a nominal registration fee. In some cases, the security will also need to be registered in an asset register (eg, for real property, aircraft, ships, intellectual property).
How are security interests typically enforced in the high-yield context?
A security trustee or agent is typically appointed as representative of the secured creditors, and is granted the relevant security interest to hold for the benefit of the secured creditors. In the event of default, the security agent will enforce the security interest on behalf of secured creditors.
If a liquidator has been appointed to an Irish company, subject to certain exceptions, sale proceeds from the secured assets are generally applied (subject to certain exceptions) as follows:
- towards discharge of the liquidator’s costs and those of any receiver;
- to fixed charge holders in respect of those assets over which they hold fixed charges;
- to preferential creditors (the Irish Revenue Commissioners for one year of tax arrears, employee wages and certain other employee claims, and local authorities for rates);
- to floating charge holders (the ranking of a floating charge will not change even if the floating charge has crystallised);
- to unsecured creditors;
- to contractually subordinated creditors; and
- to shareholders.
Outside of insolvency, an Irish security document will usually give the security agent the right, on default, to appoint a receiver over the secured assets. The receiver will take control of those assets and deal with them under powers deriving from the charge. The security document or intercreditor agreement will generally set out the order in which the proceeds of realising the secured assets are to be applied.
The security agent may also exercise its right (subject to that right being properly formulated in the security document) to take possession over the secured assets rather than appointing a receiver; this will result in the security agent having a liability to strictly account to the chargor for amounts received while the security agent is in possession.
Where the security agent has a charge over a deposit account held with it, it may (instead of appointing a receiver) simply opt to exercise a right of bilateral set-off, subject to this being properly provided for in the underlying documentation.
If an examiner has been appointed to the company by the court under the Companies Act (examinership is a form of rescue procedure for a company that may be capable of continuing as a going concern), that examiner’s remuneration and costs are paid from the company’s business revenues or from the proceeds of the realisation of the company’s assets before payments to any other secured or unsecured creditors. If the examiner borrows and certifies that such borrowing is necessary for the survival of the company, those lenders will rank behind fixed charge holders, but ahead of floating charge holders.
If an examiner believes that a company can continue as a going concern, the proposals that he or she formulates for a ‘scheme of arrangement’ may involve a writedown of secured and unsecured debts (in whole or in part).
If security has been granted by an Irish company over bank deposits, section 1002 of the Taxes Consolidation Act 1997 should be considered. This gives the Irish Revenue Commissioners the power to require certain persons (such as a bank) holding a financial asset (such as a deposit) of a taxpayer that has defaulted in its tax payment obligations to pay that financial asset over to the Irish Revenue Commissioners in (part) discharge of the taxpayer’s debt.
The Irish courts have not yet considered whether, if such a deposit has been charged, it ceases to be an asset of the taxpayer, thereby falling outside section 1002.
There may be certain restrictions on enforcing security over certain assets or certain transactions that are entered into by a company within a certain period prior to its insolvency.
Debt seniority and intercreditor arrangements
Ranking of high-yield debt
How does high-yield debt rank in relation to other creditor interests?
Traditionally, high-yield bonds were issued on an unsecured basis and were subordinated to senior secured loans and mezzanine debt. In multi-tranche or hybrid collateral structures, a typical intercreditor agreement will rank amounts owed by the issuer and its subsidiaries as follows:
- first, liabilities under the ‘super senior’ revolving credit facility agreement and liabilities under the senior secured notes pari passu;
- second, liabilities to senior unsecured bondholders; and
- third, subordinated liabilities (eg, intra-group liabilities, liabilities to the parent company and amounts owed to the vendor or investors).
The intercreditor agreement often provides that any common security secures the debt owing to the super senior lenders and the senior secured bondholders pari passu as ‘priority creditors’ and in priority to debt owing to high-yield bondholders. In other cases, the revolving credit facility may be structured to rank ‘super senior’ to the senior secured bonds or senior unsecured high-yield bonds, with a first lien over the collateral package.
Subject to certain exceptions, high-yield bondholders are not usually permitted to receive any payments of capitalised interest or principal on their bonds unless this is permitted by the senior secured bond documents and the ‘super senior’ revolving credit facility agreement (which will typically include certain restrictions on repayment of debt to the parent company and restrictive covenants relating to financial indebtedness).
Regulation of voting and control
Describe how intercreditor arrangements entered into by companies in your jurisdiction typically regulate voting and control between holders of high-yield debt securities and bank lenders?
Often a Loan Market Association-style intercreditor agreement is entered into under English law to determine the priority of enforcement rights and ranking as between bondholders and senior lenders.
High-yield bondholders are usually restricted from taking any action against members of the issuer group or enforcing any common security, except in very limited situations. This typically means that bondholders can declare liabilities due and payable (but not take further action) and can only take enforcement action if an event of default has occurred and is continuing under the bond indenture and a standstill period has expired.
High-yield bondholders are usually permitted to issue instructions to the security agent in relation to the common security if any priority creditors have not done so or have told the security agent to cease enforcement. This usually only applies if the high-yield bondholders are permitted to take enforcement action, although their instructions can often be superseded by instructions from the super senior lenders or senior secured bondholders.
The security agent will normally be required to follow the instructions of the senior secured bondholders subject to a limited number of exceptions in which it must follow the instructions of the super senior lenders.
Offsetting of interest payments
May issuers set off interest payments on their securities against their tax liability? Are there any special considerations for the high-yield market?
With a section 110 issuer, a high-yield bond transaction is structured to ensure that the issuer obtains a tax deduction for interest payments. Where the interest is profit-dependent interest, there are some additional considerations to ensure a tax deduction is available; typically, however, these are overcome to ensure a deduction, thereby minimising tax leakage in Ireland.
For a non-section 110 issuer, an interest payment must be incurred wholly and exclusively for the purposes of the issuer’s trade in order for the issuer to obtain a tax deduction. Furthermore, an analysis may be required as to whether the interest is dependent on the results of the issuer’s business or represents more than a reasonable commercial rate of return to determine whether a tax deduction is available.
These considerations are relevant for all debt issuances in Ireland and are not specific to the high-yield market.
Is it common for issuers to obtain a tax ruling from the competent authority in your jurisdiction in connection with the issuance of high-yield bonds?
No. Typically, no tax rulings are required from the Irish Revenue Commissioners for a high-yield bond issuance.
Update and trends
Update and trends
Updates and trends
At the end of March 2018, the Irish Stock Exchange plc joined Euronext’s federal model and now operates under the trading name Euronext Dublin, with Ireland becoming one of the six core countries of Euronext. All processes and timelines for listing securities on the Irish Stock Exchange’s markets remain the same. The changes mostly impact branding, and the application and approval statements now refer to Euronext Dublin. The name of the Irish Stock Exchange plc will be formally changed to Euronext Dublin once regulatory approval has been obtained.