#10301 - Bond Prospectus V Facilities Agreement

Comparison Bond Prospectus v Facilities Agreement

Bonds	Bank Loan
Many lenders who can get in and out (don’t think of themselves as lenders but as investors)	Few lenders
Simpler Terms	Complex terms
Less onerous rules	Onerous rules
Little monitoring	Closely monitored
Rarely Secured	Often secured
No relationships (it’s just a business relationship)	Relationships (Stronger relationship with Bank)
Established Market	Limited market
Large scale borrower	Modest borrower
Lots of Publicity	Little Publicity
TERM	BONDS PROSPECTUS	FACILITIES AGREEMENT
NEGATIVE PLEDGE P.233	Generally a Less Onerous Negative Pledge typically prohibits any further “indebtedness”, so check the definition of indebtedness. Is there a “discretion”? Who exercises it? How If further indebtedness is allowed, what conditions are there? Typically requires that Co. grants equivalent security to new debt and current bonds. Effect: Bonds will rank equally with any new ones that are granted so, Why Include the NP? - This is important because it means the current issue will not be devaluated by a later one and will remain tradable (otherwise earlier bonds would lose value and everyone would want to purchase the new ones that ranked higher) - the NP It is included to ensure that the issuer will not issue debt securities ranking higher than the current issue, unless the bondholders of this current issue receive identical rights. - The NP is included to protect the current bondholders’ position with respect of future bondholders taking better security over them. - However, watch out for the defined terms as it may include authorising taking security over the assets by certain types of organisations (e.g. like a bank)	More Onerous Negative Pledge Granting security over any future debt is prohibited. The lender is protecting itself. This is usually a wider NP and cover any indebtedness, not just ones listed in the agreement. The lender’s primary aims is to make sure they are not pari passu with/subordinate to anyone. FA may contain provisions on sale and leas-back that have the effect of creating security. This is not usually covered in a bond prospectus.
CROSS ACCELERATION & EVENTS OF DEFAULT	- Not as strict. The bank wants to protect itself, wheras BHs do not really want early repayment - Overall the Bond agreement is more flexible because the obligations are spread over a larger number of people and therefore the grace periods will be longer in order to deal with this extended number of BSs as compared with just paying one bank. - the enforcement proceedings clause 9(c) is more difficult to enforce than clause 22.7(c) in the Facilities Agreement.	Very harsh and broad in scope – sometimes another creditor may not even have taken action and the bank can still call the money in.
ENFORCEMENT/ INSOLVENCY PROCEEDINGS	Trustee may have discretion to declare an event materially prejudicial. - The event of default is triggered in ahighly qualified clause. So, enforcement is usually harder as will usually require that all the undertaking assets or Material Subsidiary are subject to the proceedings.	NO 3^rd Party discretion The event of default clause for insolvency proceedings is less qualified. So enforcement will simply require that a member of the group or any of the assets are subject to the proceedings. Thus, the threshold is lower.
CONTINUING OBLIGATIONS	There are no on-going obligations. The money has already gone out. Thus no need to repeat warranties	Usually contains a MAC clause; lender is continuing to lend (e.g. in a revolving facility) and will not want to lend if circumstances change.
SUBORDINATION	Usually Unsecured: BHs will rank with other unsecured creditors. Structurally subordinated to the creditors of subsidiaries	Secured
TIME PERIODS FOR REMEDY	More flexible overall: - Periods for remedy are usually longer - Scope for beginning enforcement proceedings is narrower, e.g. against issuer or material subsidiary only.	More stringent: - Time for remedy is shorter - Scope for binging enforcement proceedings against members of a Co. group is wider e.g. any member of the group
DE MINIMIS INDEBTEDNESS	Higher	Lower
NON-PAYMENT	Usually given about 14 days to pay: this is because in the case of coupons, for example, it will have to pay a lot of BHs and will be administratively complicated and time consuming thus prone to errors and mistakes. Co will want extra time for this.	Short, usually 3 days. Co. only needs to pay one bank (the Managing Bank) or a smaller number of banks if there is no Managing Bank.
BREACH OF OTHER OBLIGATIONS	Triggers are much higher because there are so many holders – you do not want to trigger one unnecessarily as it will affect so many investors.	Ultimately BH’s are more concerned with the long term, whereas banks want repayment as fast as possible on any sign of non-payment. Should bond have to be repaid early it can no longer be traded. This is a disadvantage for BHs
BONDS ONLY - ¿Why have a trustee even if Bonds are not secured?
TRUSTEE	Appointing a trustee costs money but: the fact that there are many bondholders makes it preferable to have one entity (the trustee) to deal with law suits, events of default and other administrative matters. This is more practical for the Co. in terms of costs because sending out notices to all bondholders through clearing systems would be expensive and tie-consuming. the trustee is granted a number of specific powers which allow the trustee to make specific decisions in specific situations and therefore it gives a degree of flexibility for actions taken by the bondholders through the trustee. So, the fact that the trustee is a professional means that it: less likely to take panic decisions for minor breaches and will look out for BH’s interests will be able to deal with more sophisticated terms to the bond issue. The Co can therefore add these, knowing trustee can work through them. Trustees are likely to take a considered approach and may be able to waive minor breaches for the Co. protecting it from possible action by random individual BH’s whose reactions cannot be predicted. Rogue BH’s arguing for an event of default may stir up other BHs Meetings are much easier and faster. Holding a meeting of all BHs can present problems for quorum and passing resolutions - A trustee owes a fiduciary duty to BHs so is preferred by them.

LISTING BONDS

Prep Task

	Melvyns Proposal	Malcoms Proposal
Question 1 Why are the differences important?	Admit to LSE and Luxemburg Stock Exchange	PSM or offering them to any institutional investor
Question 2	30.000 euros	100.000 euros
Do we need a prospectus	Yes, it is offered to the public	No, it is not going to be listed as it is not offered to the public
Level of disclosure	Prospectus (Retail) Prospectus Retail Regime which is designed to protect the public	Listing Particulars
	- Luxemburg and London follow very similar structures and that is why “passporting exists” - Competent authority which authorizes the prospective is the CSSF rather than the FCA. - It has to be translated into English if it is an a foreign language. - It might be too expensive...

#10301 - Bond Prospectus V Facilities Agreement - Finance and Capital Markets

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