BKF 2 - Debt Capital Markets PDF

00:00 Hi everyone, welcome to another session on as part of your Part B course. Today we\'re going to cover debt capital markets and we\'ll run through these in a couple of slides. Broadly we\'re going to cover three aspects, one in relation to the bonds in general and bond markets, two 00:29 We\...

00:00 Hi everyone, welcome to another session on as part of your Part B course. Today we\'re going to cover debt capital markets and we\'ll run through these in a couple of slides. Broadly we\'re going to cover three aspects, one in relation to the bonds in general and bond markets, two 00:29 We\'ll take you through very quickly the structure of a bond transaction. And three, we\'re going to run through what we\'ll consider in terms of the prospectus and prospectus exemptions offering regime in Singapore. 00:49 So firstly, what is a bond? Very briefly, it is an instrument constituting or evidencing a debt. It is contract where the issuer promises to repay the principal amount that\'s borrowed from a bondholder or bondholders at a certain specified time in the future. And the return, the investment return, 01:17 for a bondholder would be in the form of interest on specified interest payment dates. 01:27 Now, the reasons why an issuer would undertake a bond issuance, I think it\'s multiple. Because I think fundamentally the question would be, if a bond is similar to a loan, why would a company seek to borrow using the debt capital markets rather than going direct to a bank or to a syndicate of banks for a loan? Firstly. 01:55 Raising money on the bond markets will give a company greater access to a broader investor base. A syndicated loan, as you\'re aware, is only provided by banks. On the other hand, investors in debt securities would also include institutional investors such as pension funds, large companies and insurance companies as examples. Debt securities also offer a broader investor base. 02:25 as investors may sell the bonds on the bond market to another willing investor. What this means is that the investor does not need to wait until the maturity date of the loan, equivalent of the loan, the bond, to be repaid, but may recoup all or part of his principal by selling his bonds on the bond market. While loan agreements may allow banks to transfer their interest to other banks. 02:54 In practice really there\'s very little secondary training except in time of a distress depth situation. 03:06 The second advantage is that the terms and conditions of bonds generally contain fewer covenants by the issuer than in a syndicated loan. 03:18 Syndicated loans usually have many more stringent covenants imposed on borrowers, for example, information covenants and covenants not to make substantial changes to the borrower\'s business. In contrast, a bond, in particular investment-grade bond, usually contains weak covenants such as negative pledge. So you can see the attractiveness from an issuance perspective. 03:47 Thirdly, debt securities usually have more flexible interest rate options for a borrower, as debt securities can be fixed rate, floating rate, zero coupon, and in instances where they may be convertible or reference other type of payment streams. 04:17 Fourthly, debt securities are frequently issued on an unsecured basis. Because in theory, it is, of course, possible to issue debt securities on a secured basis. The reason why they\'re frequently unsecured, particularly in the investment grid space, is that investors are willing to invest in debt securities without actually requiring collateral, without actually requiring security on assets of issuer. 04:46 Whereas I think in practice, you see loans are more often issued on a secured basis. 04:59 And then fifthly, in a debt securities issue, information about an issuer is usually limited to just information that\'s publicly available. So for example, financial statements of the issuer rather than detailed management accounts, which are generally of a private nature. In a syndicated loan transaction, the lending banks generally conduct very thorough due diligence in relation to the company. 05:28 in order to identify any risks of the borrower defaulting in its repayments. All this means really is that an issuer, from a borrower\'s perspective, generally has to disclose much more information to a lender in a syndicated loan transaction than for a borrower issuer. 05:51 Now, just moving on perhaps to explain more about differences in bond markets generally. Bonds can either be domestic bonds or international or sometimes we term them as Euro bonds. Domestic bond is a bond issued to domestic investors in their domestic currency. 06:20 company issuing Singapore denominated bonds to Singapore-based investors. You know, in this ugly matrix, we regard them as issuing a domestic bond. 06:36 On the other hand, a euro bond, and I\'ll come to what that term means shortly, is a bond denominated in currency other than that of the country or countries in which they are sold. Now, the terminology euro bond is slightly misleading, as it seems to indicate that there is a European nexus when we talk of euro bonds, but that\'s not actually the case. It is shorthand. 07:05 or its market to refer to any type of bonds as denominated in a currency other than that of the country or countries in which they are sold, as I indicated. So a Singapore company can issue a euro bond in Singapore if it is issuing a bond in USD. In such a case, as you would expect, the bond is also likely to be issued 07:34 be still not just in Singapore but in other jurisdictions as well. 07:41 Now this points really to what we term the internationalization of the capital markets, which has occurred over the past two to three decades. By this, we mean that investors across the globe are able to invest in products in other countries. Internationally traded euro bonds are part of the international capital markets. And through sophisticated communication systems, 08:08 the buying and trading of securities such as bonds invariably take place across borders. So you could be a bond trader sitting in Singapore, but you would still be able to buy bonds and trade in bonds outside of Singapore in places such as Hong Kong, the US, or the UK. Major financial centers, as you may be aware, include Hong Kong, Singapore, Tokyo, London, 08:38 and new york. 08:44 The question that you might ask is why would a company seek to issue bonds on the international debt capital markets rather than issue bonds on a pure domestic basis? Now from an issuers perspective, it gives them access to a much larger pool of investors than just the investors they would have in their own home countries. 09:11 a larger supply of funds. And you can raise more money through the international debt capital markets by accessing this larger pool of investors. This, in some ways, will mean that there would be a reduced cost of funds, which suggests that the price for borrowing money, the interest that the issuer would pay on the bonds would then be typically lower than what they would 09:41 pay on loan transactions. And from the issues perspective, or an issues perspective, that\'s obviously preferable because there are costs of funding, because funding the business is lower. 09:57 We\'ve spoken about the advantages, but the advantages do come with a cost. The issue of bonds on the international debt markets, where the bonds are to be offered on multiple exchanges or jurisdictions, will mean much more regulatory and compliance issues and complexity, rather than having to just satisfy the requirements of a single jurisdiction. 10:26 to successfully raise funds on the international debt markets generally find that the advantages will outweigh the disadvantages. 10:41 In terms of the structure of a bond offering, I just want to introduce very quickly and discuss two broad buckets, one of which is a standalone bond office and in the context of offers made under programs such as medium term note programs, MTM programs in short. A standalone issuance will be a single issuance. 11:11 by an issuer of bonds with specified terms, maturity, and interest rate. And these will maybe fixed or vary. It will be set out in the offering document. And it does not change once that\'s been offered and sold or subscribed by investors. A medium term note program is essentially an uncommitted facility, which is set up amongst an issuer and a panel 11:40 banks, investment banks, which have been appointed by the issuer, under which it is agreed that the issuer may issue and the investment banks may purchase or place or procure subscribers for securities from time to time on the general terms already agreed and set out in the MTM program. Now, the detailed terms relating 12:07 to any issue of securities. And by detailed terms, I do mean the commercial aspects, commercial terms, such as maturity, interest rate, and like relating to debt issuance will only be agreed at the point of time of the particular issue of securities. 12:31 So from an issuance perspective, between a standalone issuance and a medium term node program, 12:41 The medium term node program will use a set of documentation for multiple subsequent issuances. And so there will be advantages for an issuer electing to set up a program rather than pursuing a standalone bond issuance at each time. The advantages of a MTM program include the following, such as the ability to react quickly, 13:11 for too cheap funding opportunities, reduce management time because the program framework is really in place. The flexibility to use a single set of documentation to issue different types of transactions, floating fixed road notes and the like. And then generally to also have a consistency of terms across all its funding instruments. 13:39 So whether it\'s fix the floating, events of default, and commercial agreements will all be set in place as part of the program framework. Now, of course, on the other hand, an issuer should also weigh the advantages of the MTM program versus its disadvantages. In some ways, it is always more costly to set up a program. So 14:08 In deciding whether to set up a program, the issuer needs to decide if it is cost effective on the basis that you may actually do multiple bond issuances over the year. Otherwise, it may be better off issuing bonds to a standalone issuance. Where there are unusual or complex terms itself, if the issuer proposes to issue 14:37 securities with these type of complex or unusual terms, then it may be that a program framework is not suitable because the changes required to be made to a what we\'ve termed a vanilla program framework is likely to be protracted and it would be so numerous that perhaps a standalone issue would be preferable from their perspective. 15:10 Finally, I think it\'s worth just touching on the difference in wholesale and retail bond markets. We\'ve talked about the structure of issuances. We\'ve talked about the reason why issuers would like to seek funding through the bond markets, but there are two broad categories of markets that you should be aware of. Firstly, the wholesale bond market. It is a market 15:39 where issuers are really offering bonds or wholesale bonds to specify investors in larger denominations, right? Whereas the retail bond market will be bonds which are offered to all investors, including retail mom and pops on the street. The wholesale bonds are typically of higher denomination and they usually traded over the counter after issuance, right? Whereas retail bonds 16:08 would be of a much smaller denomination. And typically you expect that they would be traded on exchange for which those retail bonds are listed. And the latter will be similar to what you expect from an equity instrument, shares and like which are traded on exchange. 16:35 Then perhaps now we move on to the structure of a bond transaction. 16:42 Firstly, we\'ll look at two of the key participants in a bond transaction. The most obvious participant is the issuer. It is the entity that issues the bonds. Bond holders subscribe for the bond. They pay the initial bond proceeds and the money that\'s subscribing the bonds will be paid over to the issuer. And in return for that, the issuer pays some interest on an ongoing basis. 17:12 And eventually, to the extent that these are data instruments, eventually, the issuer will pay the bondholders that principle on the bonds at maturity. 17:23 Now, it is probably important to bear in mind that this transaction between the issuer and the bondholder is not a direct transaction that takes place directly between the issuer and the bondholders, since this is done through the debt capital markets and there are a number of intermediaries involved in this transaction. I will look at these intermediaries one by one. 17:47 The most important entity that issuer appoints are the investment banks that act as the managers on the transaction. These entities provide advice to issuer the transaction, for example, on the structuring of the bond, what type of bond is likely to be well received by potential investors, what the covenants should be like, what kind of coupon that issuer expects to have to pay to attract investors to the bond offering, and where the bonds should be marketed. 18:17 The managers also help with the actual marketing of the process of the bond. They go to investors and market the bonds. They try to generate interest for the bonds so that more potential investors and more bondholders would eventually subscribe for the bonds. 18:35 In certain situations, the manager may also be required to underwrite the bond. It will enter into a subscription agreement, in some cases an underwriting agreement, with the issuer where they would agree to purchase the bonds themselves if the prospective investor fails to honour their commitment to make payments for the bond. 19:01 Next, we have the paying agents. 19:05 Paying agents are the agents of the issuer that help with administrative function of paying the bondholders the interest payments on the interest payment dates. The issuer pays agent and the agent passes on the money to the clearing systems and clearing systems pay the bondholders the interest payments on a regular basis. 19:27 Now, other important intermediaries are trustees and fiscal agents. Here, it is important for me to take a little detail to talk about two alternative structures that can be adopted in a bond issue. One is a trustee structure, and the other is a fiscal agency structure. And now, which structure of the two to adopt is often a question on every bond issue. 19:58 The diagram on this slide shows a typical trustee structure. 20:04 So fiscal agency structure is essentially the same, except that the trustee is removed from the diagram, and the principal paying agent is named as the fiscal agent. 20:19 The trustee structure is normally used where for instance there are a large number of bondholders. A trustee is appointed to represent the bondholders and all interaction between the issuer and the bondholders, including any enforcement action, must go through the trustee, thereby providing the issuer with a point of contact to deal with all of the bondholders. Now it\'s important to remember that the trustee is not an agent of the issuer. The trustee 20:48 as a trustee, as opposed to a pure agent, of the bondholders, and is duty bound to act in the interest of the bondholders. It has, in theory, discretion to decide matters on behalf of the bondholders without having to consult with or obtain the consent of the bondholders. In practice, however, given 21:13 the potential for liability, I think you\'ll find that trustees will rarely exercise such discretion without actually having recourse to the bondholders. 21:25 In a situation such as an event of default in a trustee structure, the terms and conditions of the bonds typically contain a clause which says that in an event of default, if a certain percentage of bondholders approach the trustee, the trustee would be required to declare an event of default. So bondholders don\'t individually interact with the issuer in such circumstances. As mentioned, they enforce through the trustee. 21:56 Now, the trustee structure is not strictly required on all transactions. Oftentimes, it\'s a question of whether it is appropriate for a particular transaction or not. If a trustee structure is not required, an issuer may follow a fiscal agent structure instead. The key features of a fiscal agency structure are as follows. 22:25 Firstly, there is no agent or trustee acting for the bondholders. And so each bondholder must monitor compliance with the bond documents and take enforcement action against the issuer directly on the occurrence of an event of default. 22:43 Unlike a trustee, the agents, including the fiscal agent, are agents of the issuer and not the bond holder. And so have much more limited discretion and must seek instructions on every issue. 23:06 We\'ll move on to the third aspect of this today\'s session, and we\'ll talk about prospectus and prospectus exemptions. 23:19 Perhaps it\'s worth to just quickly run through the key documentation on a typical bond transaction. The main documents required on an unsecured bond issuance are fairly standard, usually. But what is within those documents and agreements can vary greatly depending on the transaction and how the negotiation progresses. 23:44 On this slide, we\'ve set out the key documentation required for an unsecured bond issuance. I will not go through the details of what all these documents are for, so please do refer to your reading materials for that. Instead, I will only be discussing the requirements for the first document listed, which is the prospectus of the offering circular. 24:13 prospectus. 24:18 A local company or a foreign company wishing to offer or sell bonds or notes in Singapore will need to comply with the Securities and Futures Act 2001, or the SFA for short. The SFA is the main legislation that governs, among other things, the offering and selling of debt securities in Singapore and sets out the requirements governing the conduct of such offers and sales. 24:47 All offers of debt securities must generally be accompanied by a prospectus. It is an offense to offer and sell securities without a prospectus unless an exemption applies. So that\'s setting up the legal framework and context for you. 25:09 A prospectus really is the main offering document in an issue of debt securities. It is principally a legal and regulatory disclosure document. It is not a marketing document. The SFA requires that all information that investors would reasonably require to make an informed assessment of the securities should be included in the prospectus. In addition, 25:38 prospectus must also set up the information prescribed by the Monetary Authority of Singapore in regulations. 25:47 The usual sections in a prospectus for debt securities include a description of the bonds, including their terms and conditions, a description of the issuers\' business and operations, financial information about the issuer, risk factors relating to the bonds and the issuers\' business. It is an offence to omit any information required to be in the prospectus or to make 26:17 false or misleading statement in the prospectus. 26:23 Now, I\'ve alluded to the fact that there are exemptions to this requirement to issue a prospectus when offering or selling securities. I mean, there are several exemptions provided for the SFA, but I will only touch on the main ones, which are more commonly encountered. 26:42 We\'ve spoken about the wholesale market earlier this session. And so this is probably one of the important exemptions which touch upon the wholesale market. In the wholesale market, it should generally rely on the exemption from the prospectus requirement for office of debt securities made to specific classes of investors. These investors will include institutional investors and accredited investors. 27:13 An institutional investor is essentially a financial institution such as a bank or investment firm. And a creditor investor is an individual with net personal assets of Singapore, 2 million in value, all financial assets exceeding Singapore, 1 million in value, or whose income in the last 12 months is not less than Singapore, 300,000. 27:41 A corporation can also be an accredited investor if it has net assets of more than SGP 10 million in value. 27:52 Now, an issuer relying on this exemption from the requirement to issue a prospectus will typically issue an information memorandum to describe the securities being offered and the business and affairs of the issuer. An information memorandum is less stringently regulated than a prospectus. For example, it does not attract criminal liability for false or misleading statements or non-disclosure of 28:21 material effects. 28:26 So we\'ve spoken about what is generally the wholesale market, wholesale-borne exemption. And perhaps we could just quickly run through what exemptions are available for retail issuances. For retail issuances, issuers can invoke an exemption that\'s available only to issuers that are already listed on the stock exchange. Instead of issuing a prospectus, the issuer issues an offer 28:56 information statement instead. Disclosure requirements for an offer information statement are less extensive than those for prospectus. This is because since the issuer is already listed, it would already be required to provide up-to-date information about itself, its business and its affairs as part of its obligations as a listed company. 29:21 Accordingly, as an investor can readily obtain this information which is publicly elsewhere, the offer information statement can be less comprehensive in its coverage than in its prospectus. 29:36 Finally, I will briefly note two other common routes available in Singapore for selling bonds to retail investors without prospectus. These are bonds issued under the bond seasoning framework or the exam bond issuer framework. These are available to issuers that can meet the highest standards of size, listing history and credit. I will not go into detail about this. 30:05 any of these frameworks here, and you may read about them in your reading materials. Note that it is sufficient for you to know broadly about these frameworks and not the specific details of eligibility. 30:22 We\'ve come to the end of this session. I thank you once again for joining us and good luck. B24 BKF - 2\. Debt Capital Markets - Debt securities v syndicated Loans - **[Borrower will need to assess if it can comply with the more stringent level of covenants of debt securities.]** - Advantages of debt securities - Advantages of a syndicated loan - Bonds - What bonds are - Bond versus syndicated loans - Eurobond versus Domestic bond - Euro Medium Term Note (EMTN) - Advantages/ Disadvantages of EMTN - Why would a company seek to issue bonds on the international debt capital markets rather than issue bonds on a pure domestic basis? - Standalone versus Medium-term note (MTM) - Wholesale versus Retail bond markets - Who are the key participants in the bond transaction? - trustee structure, - Fiscal agency structure - Documents / steps required in a **[bond issue]** - 1 Prospectus or offering circular 1. 2. 3. 4. - Exemptions for institutional issuances - Exemptions for retail issuances - 2 Subscription agreement - 3 Fiscal Agency agreement - 4 Deed of covenant - A deed of covenant is only required if there is no trustee appointed for the issue. - 5 Trust deed - Trustee\'s powers - Paying Agency Agreement - Only if a trustee has been appointed (instead of a fiscal agent) 6 Forms of global bonds and definitive bonds 7 Terms and conditions of bonds - Other Documents - Auditor\'s comfort letters - **[Procedure]** for bond issuance - Stage 1: Pre-Launch - Role of the lawyer Documents - Due diligence - Stage 2: Lanuch - Stage 3: Signing and closing - Issuing **[bonds]** under **[Singapore law]** - Exam bond issuer framework bond seasoning framework 1\. What are the main **[restrictions]** on offering and selling debt securities in your jurisdiction? - **[accredited investor]** - **[Exemptions]** under s274/275 Securities Futures Act - 2\. What other legislation or guidelines do issuers and underwriters of debt securities need to be aware of in your jurisdiction? - 4\. Are different structures used for debt securities issues to the public (retail issues) and issues to professional investors (wholesale issues)? - Bond Seasoning Framework - Syndicated Loan - The Borrower - Borrower\'s considerations - Borrower\'s agent - Duties of the Arranger - Duties of the Book runner / coordinator - the most important job; **[\'Market flex\' clause]** - Underwritten or \'**[best effort]**\' basis? - \'**[No front running]**\' clause - Borrower\'s Commitment Letter - **[\'Clear market\' clause]** - Lender - Lender\'s agent - Duties of the Lender\'s agent in relation to drawdown - Duties of the Lender\'s agent in relation to default - Security trustee - Duties of the Security trustee - Secured versus unsecured loan