In the second in a series of articles, Addleshaw Goddard’s Beth Collett gives a masterclass on launching a bond
By failing to prepare, you are preparing to fail, as the saying goes. That may be a bit extreme in the context of a public bond issue – there is always the option of muddling through in a reactionary manner – however, preparation certainly makes for a much smoother and more efficient process.
In this article, we look at a number of practical steps that prospective issuers should consider before approaching the public bond markets.
The expectation in the public bond markets is that the issuer and the bonds will be rated by an independent ratings agency – typically Moody’s, S&P and/or Fitch. Some investors may (for internal policy or external reasons) be restricted from acquiring bonds unless they are rated or have a particular rating, and others may simply rely on the fact that an independent assessment has been carried out to reduce their own internal due diligence.
For ‘corporate credit’ (as opposed to structured finance), the bond rating will simply mirror the issuer rating. An issuer rating is assigned on the basis of an analysis by the relevant ratings agency of the issuer’s overall creditworthiness, as assessed by reference to the ratings agency’s own rating methodology.
This will require the disclosure of certain financial and other information, discussions with the ratings agency and a presentation about the issuer. Preparation for this and discussions with the ratings agencies should begin well in advance of a potential bond issue. It is usual to have this in place prior to appointing managers or instructing lawyers.
Ratings can be given on a public or private basis. However, where this is obtained as part of a bond issuance, a public rating will be required so that this can be disclosed to investors in the offering document and investor presentation.
It should also be noted that, where an issuer has a rating at the relevant time, the prospectus rules of the UK Listing Authority require this to be disclosed. Therefore, while some issuers may wish to obtain more than one rating, they cannot do so and then cherry-pick only the best one for disclosure. Having a rating withdrawn can also take some time, so this should be considered in advance.
Who will be the issuer?
Own-name issues in the social housing sector are, broadly, either direct or indirect issues and associations should consider which is appropriate for their business.
A direct issue is an issue of bonds directly by an operating entity. This is the simplest approach to issuance, but it may not be the most appropriate. In particular:
An indirect issue is an issue of bonds via a finance subsidiary, the proceeds of which will be on-lent to one or more operating entities in the group. This may be more appropriate where one of the above restrictions/limitations applies.
However, where it is to be a newly established subsidiary, consideration will need to be given to whether this would require the consent of existing lenders (it is not uncommon to see general restrictions on the establishment of subsidiaries in existing financing documents).
Appointment of managers
Typically two to three managers will be appointed following a pitching process. The managers perform a number of roles with respect to a public bond issue, including advising on the terms of the bonds and the offering documentation, announcing the issue and arranging the investor roadshow, coordinating the pricing process, underwriting and billing and delivery.
An issuer should therefore consider what criteria are relevant to it in choosing the right managers (experience in the sector, pricing, existing relationships, etc).
Portfolio of security
In terms of timing, once the lawyers are appointed, the due diligence process in respect of the underlying security is the key driver. It is therefore advisable to get preparations for this under way as early as possible. In particular, identifying the relevant portfolio to be charged and ensuring that it has all necessary documentation/information to provide to its lawyers.
From the appointment of managers/lawyers (which, as mentioned above, is expected to begin after the rating process has concluded), a public listed bond issue will typically take around two to three months. In addition to factoring in the overall timing, consideration also needs to be given to when the bond markets are ‘open’. To access to widest possible investor base, it is advisable to issue only when the right people will be at their desks! This generally precludes launching a bond issue from mid/late July until the end of August and from the week prior to Christmas until the start of January.
In addition, extra time should be built in to allow flexibility around the launch/issue date in case there are any unexpected market developments and/or other competing issues coming to the market at the same time.
Beth Collett is a partner in the banking team at Addleshaw Goddard