Navigating the capital markets: part 3

Comment12 Jun 2018Beth Collett

In the third instalment in her series on issuing bonds, Addleshaw Goddard’s Beth Collett takes us from the appointment of parties to a bond through to its close

Beth Collett

Beth Collett: “For a London-listed issue, closing must take place at least two days after signing”

As more and more associations look to the public capital markets to meet their funding requirements, we explain the key stages from the decision to publicly issue listed bonds to closing.

Appointment of parties
A public-listed bond issue will involve multiple parties, each of which will need to be selected and appointed by or on behalf of the issuer.

These will include:
• Managers: banks whose role it is to advise on the terms of the bonds and the offering process. Usually two to three banks will be selected
• Lawyers: legal counsel will need to be appointed for the issuer (and any other group obligors), the managers and the trustee to give both capital markets and property advice. Usually manager and trustee advice will be provided by different partners within the same law firm
• Trustee: for secured issues the bond trustee role is typically performed by the same entity as the security trustee
• Agents: for typical sector issues, this will include a paying agent, an account bank and a custodian
• Valuers: a valuation report in respect of the properties which are to be secured for the bonds is required to be included as part of the offering document

In addition, an issuer will need to instruct its auditors to provide audit comfort to the managers.

This will be in the form of a market standard comfort letter confirming specific financial information in the offering document, together with assurance that there has been no significant change since the date of the latest audited accounts that is not otherwise disclosed.

Documentation
Once the lawyers are appointed, the documentation process can begin in earnest. Managers’ counsel typically hold the pen on all transaction documentation, other than the sections of the offering document which are issuer-specific, ie the description of the issuer and risk factors relating to it and the sector.

This will be prepared by the issuer’s counsel with its input. In addition, the issuer’s counsel will be responsible for preparing the necessary approvals and (if required) establishment of any finance subsidiary. Managers’ counsel will also manage the listing process, though there will be certain registrations that the issuer itself will need to effect upon their advice.

Due diligence
In parallel with the preparation of the offering document and the transaction documents, the issuer’s counsel will be preparing and agreeing the certificates of title and other due diligence requirements in respect of the properties which are to form the security for the bonds.

Launch
Once the documentation is in the form agreed between the various parties referred to above and the listing authorities, and the managers are otherwise satisfied with the due diligence (which will be confirmed by means of a due diligence call during which appropriate officers of the issuer will answer a pre-agreed list of questions), the transaction can be launched.

‘Launch’ is essentially the announcement of the proposed issue followed by booking-up meetings with investors.

Roadshow
The investor roadshow usually takes place in the week following launch and will consist of a number of one-on-one meetings with larger investors and an investor lunch. In each, the issuer will be expected to give a presentation and answer questions with respect to its business (which will include past performance, any current concerns and future plans) and the bonds to be issued.

Pricing
After the roadshow the managers will gather feedback for indicative pricing and, if comfortable with market conditions, will arrange for pricing to take place. Pricing of the bonds is a combination of the issue price (ie the percentage of the principal amount of the bonds that investors will pay) and the coupon or interest rate, which together will reflect the yield fixed during pricing.

This yield on the bonds will be the sum of the yield on the most appropriate UK government gilt as at pricing and a margin which will be determined by investors’ bidding.

Signing
Following pricing, the documentation can be finalised. ‘Signing’ refers to the date on which the subscription agreement is signed. At this point the managers are committing to subscribe for the bonds, subject to satisfaction of certain conditions precedent. Approval and publication of the offering document also takes place at signing, and the auditors will deliver their first comfort letter to the managers.

Closing
For a London-listed bond issue, closing must take place at least two days following signing. It is at the point that all conditions precedent must be in place (including signing and release of all transaction documents, delivery of a second auditor’s comfort letter and delivery of legal opinions) and instructions are given to release the bonds and the issue proceeds.

As the bonds are to be issued into accounts in electronic clearing systems against receipt of the issue proceeds, instructions are expected to be given by mid-morning (well in advance of the clearing system cut-off times) with proceeds received and bonds issued by early afternoon.

The listing of the bonds then becomes effective on the following business day.

Beth Collett is a partner in the banking team at Addleshaw Goddard