BKF 2: Debt Capital Markets and Bonds

Debt Capital Markets and Bonds

• A bond is an instrument that constitutes or evidences a debt
• It is a contract where the issuer promises to repay the principal amount borrowed from bondholders at a specific time in the future, along with an investment return.
• The return for a bondholder is typically in the form of interest on specified payment dates.
• Debt securities offer broader investor base because investors may sell bonds to another willing investor on the bond market, investors don't need to wait until maturity date to recoup
• Secondary trading is very limited outside of distress situation

Bond Issuance Considerations

• Issuers must consider multiple reasons for undertaking a bond issuance
• Key question is why borrow through debt capital markets versus direct bank/syndicate loans
• Primary reasons include more flexible interest rate options compared to syndicated loans which usually only have floating rates.
• Debt securities are frequently issued without security or collateral because investors are willing to invest on an unsecured basis.
  • Example: A tech startup issues unsecured bonds to fund expansion, attracting investors who believe in the company's growth potential despite the lack of collateral.
• Bonds generally have fewer covenants, or restrictions, imposed on the issuer compared to syndicated loans, which have more stringent covenants.
• Financial information disclosure is typically limited to what is publicly available, whereas syndicated loans require more due diligence and information disclosure from the borrower.
• Bonds can be domestic, issued to domestic investors in their currency, or international, including Eurobonds issued in a currency other than the issuing country's.
• A Singapore company issues a Eurobond in Singapore if it issues a bond in USD, likely to be issued in other jurisdictions as well.
• A Europe based company issues a euro bond in Singapore in SGD
• Advantages of issuing bonds on the international debt capital markets over a domestic basis include access to a larger pool of investors, and larger supply of funds
• Advantages of seeking funding because funding the business is lower
• The advantages of international debt market do come with the cost of more regulatory and compliance issues and complexity
  • Successfully raising funds on international debt markets generally leads to advantages outweighing the disadvantages
  • A borrower will need to assess if it can comply with the more stringent level of covenants of debt securities

Bond Offering Structures

• Two main types of bond offerings exist:
  • Standalone bond issuance which is a single issuance
  • Medium Term Note (MTM) programs which are uncommitted facilities set up between an issuer and a panel of banks/investment banks
• MTN programs allow issuers to issue and investment banks to purchase/place securities from time to time based on general terms already agreed upon in the program.
  • The agreement should specifically state the terms, maturity and interest rate.
  • Terms of the security are subject to change once the security has sold and subscribed by investors.

Medium Term Note (MTM) programs

• Utilize a set of documentation applicable for multiple issuances. Advantages of MTM programs include:
  • The ability to react quickly to funding opportunities.
  • Reduced management time as the program framework is in place.
  • Flexibility to issue different types of transactions, such as floating or fixed rate notes.
  • Consistency of terms across all funding instruments.
• The agreements covering events of default and other key commercial terms are incorporated into the program framework
• MTM programs are more costly to establish
• Weighing the advantages and disadvantages will help to decide between a standalone issuance vs a MTM program
• If an issuer has complex terms, a vanilla program framework may not be suitable and a standalone issuance may be preferable

Bond Market Categories

• Wholesale bond markets offer bonds with larger denominations to specified investors
  • They are usually traded over the counter after issuance.
• Retail bond markets offer bonds with smaller denominations to all investors and are traded on exchanges, similar to equity instruments.

Key Participants in a Bond Transaction

• The key participants in a bond transaction include:
  • The issuer who issues the bonds.
  • Bondholders who subscribe for the bonds and receive interest payments.
  • Investment banks acting as managers, advising on structuring and marketing the bond.
  • Paying agents who handle administrative functions, such as paying interest to bondholders.
  • Trustees and fiscal agents.
    • Debt capital markets are how bond transactions take place and includes intermediaries.
  • Investment banks help to market and may also be required to underwrite the bond
• The trustee structure protects bondholders
• Fiscal agency structure is the same except the trustee is removed and the agent is named as the fiscal agent
• The most important entity that issuer appoints are the investment banks that act as the managers on the transaction.

Trustee and Fiscal Agents

• Trustee structure is used where there are a large number of bondholders
• A trustee is appointed to represent bondholders and interacts between the issuer and the bondholders,
• the trustee is not the agent of the issuer
• A trustee, as opposed to an agent of the bondholders, and is duty bound to act in their interest, and is an important point of contact for the issuer. Trustees in rare circumstances exercise discretion for accountability and liability.

Fiscal agency structure key features

• There is no agent or trustee acting for the bondholders
• Each bondholder must monitor compliance with the bond documents
• Take any enforcement action against the issuer directly on the occurrence of an event of default
• A fiscal agent includes the agent of the issuers and not the bondholders
• They have limited discretion and must seek instructions on every issue

Essential steps in issuing a bond

• Involve the prospectus or offering circular for all offers of debt securities
• It is an offense to sell debt securities without one
• There are legal exemptions to offer securities, particularly with debt securities and office of debt securities
• The main documents required on an unsecured bond issuance bond

Prospectus Exemptions

• Exempt investors are either institutional or accredited investors
  • An individual with net personal assets of Singapore, 2 million can be a creditor investor
• Requires a prospectus

Retail Issuances exemptions

• May be invoked by issuers already listed on the stock exchange
• An information memorandum describes the securities being offered and the business and affairs of the issuer
• Information must contain information that is publicly available
• This offers an information overview that can be less comprehensive than its prospectus
• A list is required for a bond and an initial public offering

Bond issuing restrictions and selling

• Must follow restrictions on certain accredited investors
• Requires issuers to comply with the securities and futures act
  • This is the main legislation that governs Singapore
• Issuers should also obtain certain undertakings from such controlling shareholders (Rules 704(31) and 728, SGX-ST Listing Manual).

Debt securities for Singapore listed entity

• Debt securities must comply with best practice guidelines, and a Blackout period per the SGX-ST Listing Manual, Rule 1207(19)
• Listed entity must announce if any information concerning its subsidiaries in attempts to create a false market SGX-ST Listing Manual, Rule 703(1)
• Obtain undertakings with shareholding interests of any controlling shareholder Rules / 704(31)

Main exemptions for debt issuances

• S274 offers debt securities to institutional investors
• S275 to accredited investors S275 (1)
• The offer must have no advertisements offering, following the securities and futures

Required steps in Offering Capital markets

• Offering must ensure that product for each person is known
• A prospectus is required to include requirements under the the Securities and Futures

Bond Seasoning framework

• The issuer must meet three tests
  • size
  • listing
  • credit
• A credit test with criteria for the issuer to consider that meet standards

Syndicate loans main points

• Borrower has considerations for any syndicated loan that they are looking into

The borrower agent functions

• Helps prepare draft or arranges
  • This includes reviewing, or sharing
• Involve with loan security

Joint or solo arrangement

• An arranger functions in managing syndicate and negotiator
• Sole arranges is a lender that secures mandate
• Arranging should have consideration for what the the arranger is doing

Books/coordinator tasks

• Task to sell loan or make syndicate or contact likely participants
• Book runner contacts and deal any courier from syrncidate etc
• Must mandate a clear market clause

Arrangement lender responsibility

• When doing a best effort will commit certain amounts and promise lender will provide commitments
• If the under bookrun fails in range funds, the lender doesn't receive funds

Loan clauses

• No front rolling clause prohibits or restricts
• Committe letter of market clause should include provisions borrower is a function of a lending

Drawdown functions

• Agency is responsible to consider and handle functions
• Is the borrowers point of receiving the funds

Trust or other agents

• Agent should notify lenders or defaulters
• If actions take time
• Agent ensure collectively and bargains
• Typically action on lenders / agreement on syndicate

Security process

• Ensures lenders and make distributions from enforcement
• Lender assigns other security is done

Loan types

• Secured and guaranteed advantages for lenders
• Secured and guaranteed disadvantages for borrowers
• Unsecured is a more borrower function