WHAT IS A CAPITAL MARKET? p.199

Investment Capital refers to the amount of capital available from financial institutions, pension funds & investment funds (& a few high-net-worth individuals) which want to buy securities, either to hold as an investment or to trade.
‘Size’ of a market refers to amount of funds available from participants and the tradeability of the securities issued.
An “Illiquid” market means that the participants are unwilling to buy new or trade in issued securities

DIFFERNECES BETWEEN DEBT SECURITIES & LOAN FACILITIES
ISSUE	DEBT SECURITIES	LOAN FACILITY
EVIDENCING DEBT OBLIGATION	Borrower (AKA Issuer) issues a docs (‘debt securities’, ‘instruments’ or ‘bonds’) evidencing debt obligation in return for the it receives from lenders	The Facilities Agreement is evidence for debt obligation
TYPES OF LENDER	Lender (i.e. investors who “lend” by purchasing securities) = Institutions & individuals	Lenders = Banks
RISK FOR LENDER	More investors willing to lend = less risk = lower interest rates, more funds available	Fewer lenders (banks) willing to lend = more risk = high interest rates, less funds available
EXPENSE FOR LENDER	Less Expensive = no Regulatory capital costs	More Expensive = Regulatory capital costs
LIQUID MARKET	Geared towards quick selling on liquid market .^.. more buyers .^.. lower yields .^.. lower costs for issuer	Limited market for selling .^.. less buyers .^.. higher yields .^.. higher costs for borrower
AMOUNT LENT	Usually investor invests smaller participations due to extensive market.	Usually lender invests larger participations due to smaller market.
TERM LENGTH	Certain debt securities significantly longer term (e.g. 30-year Gilt-edged securities (government bonds)	Usually Shorter terms
PUBLICITY	Involves publicity due to open trading	Can remain confidential
UNDERTAKINGS, EVENTS OF DEFAULT & Ts & Cs	Less onerous and restrictive (no Facilities Agreement) No specific relationship bank monitoring compliance with financial covenants Trustee will have basic role of overseeing standard undertakings	More onerous and restrictive Specific relationship bank monitoring compliance with financial covenants

DEBT AND EQUITY SECURITIES

‘Securities’ defined as ‘instruments in which a borrower (an ‘issuer’) acknowledges a debt or an investment.
Can be equity securities (shares) or debt securities (bonds)

DIFFERNECES BETWEEN DEBT SECURITIES & EQUITY SECURITIES p.203
ISSUE	DEBT SECURITIES	EQUITY SECURITIES (i.e. ordinary shares)
RETURN ON INVESTMENT	Investment has maturity date .^.. issuer must redeem security by repaying investor. Can be easily traded before maturity to realise investment	Non-returnable investment – can only realise capital through selling shares/winding up of Co
RIGHT TO RECEIVE RETURN ON INVESTMENT	Right to receive regular return on investment (an interest payment or ‘coupon’), or investment may be issued at a ‘discount’ to its face value on redemption at maturity	The investor has No absolute right to receive return over its investment (dividend)
INVESTORS PRIORITY ON INSOLVENCY	Commonly unsecured & rank behind all secured and preferred creditors & pari passu with all other unsecured creditors (but ahead of equity investors (i.e. shareholders))	Investor will Rank behind all other creditors of the Co (ie, those owed ‘debts’) in the event of winding up
TAKING EQUITY IN ISSUER	Doesn’t take equity or have any rights over the issuer other than basic rights to call an event of default if coupon or principal are not paid or undertakings are breached (EXCEPTION = Equity linked securities where original debt obligation may be exchanged for equity - see p4)	An investor will take Equity (a share) in the issuer and will usually have power to vote at SH meetings (but depends on the type of share)

BASIC DEATURES OF A BEARER BOND
A PROMISE TO PAY	T&Cs	COUPONS	TALONS
Face of the bond will include a simple statement to pay principal (& interest if relevant) on a certain date. Signed by a least 1 officer of the issue (usually part of security printing) Not valid until instrument is ‘authenticated’ by paying agent.	Printed on reverse of bond together with the addresses of the relevant paying agents	If bond bears interest, coupons will be printed on right-hand side of a bearer bond Must be torn off & surrendered to paying agents to claim interest payment as it falls due The coupon is probably a bearer doc itself. Name & address of paying agents printed on reverse side of each coupon.	Max # of coupons which can be attached to a eurobond is 27 (under ICMA rules). If bond carries +27 interest payment dates (e.g., a bond paying semi-annual interest with a maturity of 14 yrs), final coupon (at top left of coupon sheet next to bond) will be known as a ‘talon’. Talon can be exchanged for a further sheet of coupons in relation to remaining interest payments once all coupons on 1^st sheet have been claimed.

COMPARING REGISTERED AND BEARER BONDS
	REGISTERED BONDS	BEARER BONDS
Title	Purchaser will not obtain good title if seller stole bond certificate & was able to obtain a transfer in register	Bona fide purchaser for value w/out notice (of defects in title) can obtain better title than seller
Claims & defences of an issuer	Purchaser, in principle (although this may be varied under contract), is subject to rights issuer might have against transferor, such as set-off.	Always sold free from any claim the issuer might have against previous holder
PRIORITIES	Purchaser only take bond free of competing interests of which he had no actual or constructive notice	Purchaser usually take bond free of any equities (i.e., 3^rd party claims), e.g. a person for whom bond was held on trust
ANONYMITY	Issuer knows identity of registered holder, although true beneficial ownership may lie behind a nominee	Can be held anonymously as issuer won’t know at any time who owns bond
TRASNFER	Requires execution of instrument of transfer, & filing of instrument & original bond certificate with issuer/his agent for that purpose (whoever maintains reg. of BHs), & amendments to register. Longer than bearer bond processes	Transferred by delivery. Vulnerable to theft if they transferred by physical delivery, .^.. usually traded through clearing systems effected by book entries

PARTIES TO A BOND ISSUE CONT.

Choosing between a trustee and a fiscal agency
	TRUSTEE	FISCAL AGENT
COST	More Expensive (see below)	Cheaper (see below)
SECURED ISSUES	Holds security on trust from time to time for all BHs from time to time. Stops impracticality of individual BHs holding it & it passing hands when bond was sold (could restart ‘hardening period’)	Can’t hold security on trust for BHs as he is agent of the issuer acts in the issuer’s interests.
SUBORDINATED ISSUES	Same trustee may be appointed to both senior & junior issues to ensure effective subordination Common to achieve subordination contractually through T&Cs of issue creating ‘contingent debt’	Need different agents for senior & junior issues to ensure effective subordination

ADVANTAGES FOR ISSUER

Only trustee can act in event of a default by issuer (can only act within T&Cs trust deed, or on direction of a specific majority of BHs).
Better approach than if BHs could bring actions individually.
Professional trustee more sophisticated than individual BHs with varying views and requirements.
Many deeds provide trustee with authority to waive technical events of default where he sees fit
Protects the issuer from ‘rogue’ BHs.
If trustee mistakenly called an event of default this was not a BoC, but simply an ‘ineffective action’ (Concord Trust v The Law Debenture Trust Corporation plc).
NB could still be liable for an action in tort (for negligence or interference by unlawful means)
Can be given power to agree certain amendments to terms of a bond without calling a meeting of BHs (e.g. approve a restructuring of issuer’s group), providing issuer with greater flexibility.

ADVANTAGES FOR BH

If an event of default occurs, BHs can rely on a professional entity (the trustee) to pursue situation on their behalf.
Individual action by each BH (expensive & difficult to pursue due to different BH view) necessary since trustee will act on their behalf.
Trustee more likely to achieve a moratorium, or a negotiated resolution with other creditors, than individual BHs.
If BHs need to make a collective decision, trustee can chair any meetings and make recommendations.
After a default, an issuer must make any payment through trustee rather than to individual BHs. Avoids a powerful BH negotiating himself a good deal at expense of minority BHs.
Has investigative and monitoring powers (fiscal agent doesn’t)
Usual practice for deed to create specific duties of investigation for trustee but he usually acts as a medium for receiving certain info, e.g. issuer’s annual accounts, notices & certificates of compliance which must be available for inspection by BHs.
Common law duty to act with DD in best interests of beneficiaries (ie, BHs) is still applicable irrespective of contractual requirements of deed, e.g., if trustee is given power in trust deed to request financial info from issuer then has a +ve duty to do so if it would be in best interests of BHs.

ADVANTAGES OF USING FISCAL AGENT
COST	Trustee = More Expensive – requires...

#10292 - Debt Securities - Finance and Capital Markets

About Oxbridge

More Finance And Capital Markets Samples