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  • 1. Debt capital markets Feature An introduction Illustration: Andy Lovell PLC September 2005 Michael Doran, David Howe and Richard Pogrel of Gide www.practicallaw.com Loyrette Nouel explain the workings of the European debt capital markets 1 July 2005 will be seen as one of the land- mark dates in the history and develop- ment of the European debt capital mar- kets. After extensive debate, consulta- tion and market consideration, the Prospectus Directive (2003/71/EC) is now in force (see feature article “Listing and prospectus rules: a guide to the new regime”, www.practicallaw.com/4-200- 9841). In addition, the Transparency Di- this article, the first in a two-part series, • The role of the international clearing rective (2004/109/EC) looms just below sets out: systems. the horizon (see PLC Opinion “Trans- parency Directive: improved investor in- • A broad overview of some core prod- • Certain key considerations for new is- formation or over-regulation?”, www. ucts. suers accessing the debt capital mar- practicallaw.com/1-102-4194). As a re- kets. sult, the landscape of the European debt • An outline of the process of issuing capital markets has changed immeasur- debt instruments, the legal docu- The second article in this series will look ably. Against this background of change, ments and the participants involved. at derivatives. 21 (C) Legal and Commercial Publishing Limited 2005. Subscriptions +44 (0)20 7202 1200
  • 2. ments to issuing English law regis- provisions, usually including a negative CORE PRODUCTS Feature tered notes. pledge and a series of events of default. At the heart of the European debt capital The exact terms and scope of these pro- markets is an extensive investor (see • Bearer notes afford anonymity to in- tective provisions will reflect the issuer’s Glossary) base. For issuers, this gener- vestors. credit rating and its commercial and fi- ally allows a cheaper and diversified nancial strength, and are usually the re- source of funding relative to traditional However, given that the vast majority of sult of detailed negotiation between the borrowing from commercial banks. notes are now cleared and settled respective lawyers advising the arranger Meanwhile, the ability to access a broad through the clearing systems (see “Clear- and the issuer. range of products and credit profiles in a ing and settlement” below), with in- liquid market continues to draw in- vestors trading their “book-entry inter- vestors. Medium term notes ests” in their securities accounts within Medium term notes (MTNs) developed PLC September 2005 the clearing systems, the real commercial as a natural extension of the maturity There are three basic products in the Eu- and legal differences between bearer and range offered by commercial paper. ropean debt capital markets, but all are registered notes are essentially irrelevant They initially comprised discrete issues essentially the same under English law: for issuers and investors, save only of notes tailored to meet the investment instruments evidencing a debt under where particular investors require physi- needs of particular institutional in- which the obligor of such debt (the is- cal delivery of individual, definitive, vestors. Like commercial paper, they are suer) covenants to pay the beneficial www.practicallaw.com bearer notes. issued under a programme platform (see owner of such instrument (the investor) “Issuing notes” below). In 1991, the first a principal amount on a specified future With the recent coming into force of the publicly listed, syndicated English law date, usually with interest accruing and Savings Tax Directive (2003/48/EC) and bonds were issued under an MTN pro- payable on certain set dates. the tax withholding, or information re- gramme platform. This increased fund- porting requirements, that it imposes on raising flexibility propelled the popular- Commercial paper paying agents, the anonymity value of ity of MTN programmes: in fact, most Commercial paper is a short term debt bearer notes has probably disappeared notes and bonds issued in the European instrument with a maturity of less than for good. debt capital markets today are issued un- 365 days. It is highly liquid: many major der MTN programmes. corporations use commercial paper as a form of working capital given its low ISSUING NOTES Given that the core products are all es- Although there are historical differences cost of funding. It is marketed and sold sentially similar in nature, it is no sur- in terminology (“notes” traditionally re- principally on the basis of the issuer’s prise that the documents are broadly ferred to instruments with a floating in- name and rating (see “Rating agencies” similar for each product (see box “Key terest rate, “bonds” to fixed interest in- below), is usually unsecured and rarely documents”). Commercial paper and struments), the terms “bonds” and contains any form of investor protective MTNs are generally issued under a “pro- “notes” are now used interchangeably in provisions (such as events of default or a gramme” platform. Simply put, a pro- the debt capital markets and conse- negative pledge). Commercial paper is gramme platform is an uncommitted, quently in this article. This article fo- rarely “listed” (see “Listing” below) and “evergreen” facility (that is, the underly- cuses on MTNs, as these are now the is straightforward to document, custom- ing legal documents contain no termina- most popular form of debt instruments arily being issued under a programme tion date) established by an issuer with issued in the European debt capital mar- platform (see “Issuing notes” below). the help of an arranger and a group of in- kets. vestment banks as dealers. Once estab- Bonds lished, programmes are relatively Bonds are debt instruments issued with a Bearer notes or registered notes? straightforward to maintain subject, in Commercial paper, MTNs and bonds maturity of one year or more. Maturities the case of MTN programmes, to the are either bearer instruments (where can range up to 50 years (for example, production of periodic disclosure up- ownership passes by physical delivery) the recent bond issues by the UK Debt dates. or registered instruments (where owner- Management Office and the French gov- ship passes by transfer being recorded in ernment) but most issuance and liquidity Programme platforms have considerable a register). Historically, most issues of is in the two to ten year range. Origi- documentation, cost and timing advan- commercial paper, bonds and MTNs in nally, the international bond markets tages over the once more common the European debt capital markets have were dominated by highly rated sover- “stand-alone” issuance process, which re- been in bearer form, largely because: eign, state agency, supranational, bank quires an issuer to agree and execute a and multinational corporate issuers, but specific set of documents each time it pub- • English law was traditionally the gov- today a broad range of issuers access the licly issues bonds. For regular issuers, this erning law of choice for most issues markets. Bonds create medium to long is an inefficient and costly use of lawyers and historically there were a number term obligations and contain a custom- and other professional advisers, resulting of potential legal and tax impedi- ary combination of investor protective 22 (C) Legal and Commercial Publishing Limited 2005. Subscriptions +44 (0)20 7202 1200
  • 3. Feature Key documents The agreement between the issuer and the fiscal/paying agents (see Glossary) setting out the agents’ re- Agency agreement. sponsibilities for the payment of principal and interest to noteholders. For issues using a trust structure, only paying agents are appointed. The standard form agreement between the managers, detailing joint and several liability for the subscription Agreement among managers. of the notes. Closing certificate. A certificate to be given by the issuer (or any guarantor) on the closing date. This certificate, which is always a condition precedent to closing, states that the representations and warranties in the subscription agree- ment (see below) (dated on the signing date) are true, accurate and correct in all material aspects on the closing date, and that the issuer has performed all of its obligations under the subscription agreement to be PLC September 2005 performed on or before the date of closing. Comfort letter. A letter given by the issuer’s auditors to the managers/dealers as part of the due diligence process, confirm- ing (among other things) that any financial information included in the relevant offering document or prospectus has been correctly extracted from the issuer’s latest audited financial statements; that all finan- cial information has been properly computed; and usually, that there has been no significant change to such information since the date of its publication. www.practicallaw.com Cross receipt. The receipt signed by the issuer and the managers whereby the issuer acknowledges receipt of the subscrip- tion monies and the managers acknowledge receipt of their interests in the global notes. Dealer agreement. The agreement between the dealers under a programme and the issuer, defining the conditions under which the issuer agrees to issue and each dealer agrees to purchase and underwrite notes. The umbrella frame- work of the dealer agreement contains, among other provisions, the representations, warranties and under- takings given by the issuer to the dealers, the conditions precedent to the establishment of the programme and issuance of notes, as well as contractual restrictions limiting the sale of notes in specified jurisdictions. The dealer agreement contains no commitment by the dealers to buy bonds, which are issued and pur- chased on an ad hoc basis. Global notes. The single bearer or registered instrument representing an entire issue of notes while such notes are held by the common depositary for the clearing systems. The global note becomes “live” when authenticated on the closing date and delivered to the common depositary. The telex or e-mail to prospective syndicate members (managers) from the arranger describing a note issue Invitation telex. and its terms, and inviting such persons to participate in the underwriting of the issue. Mandate letter. The agreement between the issuer and the arranger confirming the latter’s appointment and its role in rela- tion to the proposed note issue. The letter usually sets out the principal details of the proposed note issue, the fees which are to be paid to the arranger on closing and possibly also the terms governing the relationship between the issuer and the arranger. Offering document. The document containing, among other things, disclosure relating to the issuer (including business and fi- nancial information), the terms and conditions of the notes, the salient financial terms of disclosure relevant to the issue and a description of the managers’ selling restrictions; and which constitutes (either on its own or together, in the case of a programme, with certain other prescribed documents) the “prospectus” required for an admission of the notes to trading on a regulated market in the EEA or an offer to the public, in each case as required by the Prospectus Directive (2003/71/EC). The offering document does not constitute a contract. Pricing supplement/ securities note/final terms. The document which, for an issue under a medium term note programme, sets out the final commercial terms of the notes which are to be issued. The relevant document is read together with the “master” terms and conditions set out in the “base” prospectus or other offering document. The traditional aide memoire agendas setting out the list of actions required at signing and closing and Signing and closing agendas. scheduling the required paper trail of authorisations and instructions. Subscription agreement. The agreement between the issuer and the managers executed on the signing date under which the man- agers agree to purchase the notes and the issuer agrees to issue the notes. A pro forma subscription agree- ment will usually be scheduled to the dealer agreement agreed on the establishment of a medium term note programme. Trust deed. The contract between the issuer and the trustee by which the notes are constituted. It sets out at length the rights and duties of the trustee and a direct covenant by the issuer to pay principal and interest to the trustee. 23 (C) Legal and Commercial Publishing Limited 2005. Subscriptions +44 (0)20 7202 1200
  • 4. in bulky documents and substantial legal Feature Issuing MTNs and printing bills for each issue. Conse- quently, for plain vanilla debt issues by regular issuers, the stand-alone issue Assuming an issuer wishes to carry out a syndicated issue under a medium term note process is now rarely used. (MTN) programme and apply for the notes to be admitted to the Official List of the UK Listing Authority (UKLA) and to be admitted to trading on the London Stock Exchange Programme platforms are not, however, plc’s Gilt Edged and Fixed Income Market (see “Listing” in the main text), the princi- suitable for more complex and intensely pal steps are as follows: negotiated products such as convertible, exchangeable or high yield bonds (for Award of mandate. An agreement is reached between the issuer and the relevant man- background, see feature article “High ager(s) (see Glossary) mandated to act as lead manager(s) in relation to a proposed is- yield bond issues: raising the stakes”, sue of notes. The terms of the mandate may be set out in a mandate letter. PLC September 2005 www.practicallaw.com/4-102-5427). Invariably these are still issued on an in- Launch. The principal terms of the proposed note issue (including any negotiated dividually tailored, stand-alone basis. terms of the notes, pricing details and details of managers’ fees) are evidenced by the invitation telex on or immediately following launch date, the terms of which are ac- The issue process cepted by each manager in the underwriting group. The terms of the invitation telex The issue process for MTNs is more will include the agreement among managers. www.practicallaw.com user-friendly than that for stand-alone bond issues, using an existing pro- Instructions to agents. The terms of the issue are promptly confirmed by the managers gramme platform and current disclosure and the issuer to the fiscal and paying agent, so that the agents can take all steps nec- documents put in place when the pro- essary (in accordance with their responsibilities under the agency agreement) to pre- gramme was established or most re- pare for the issue of, and receipt of payment in respect of, the notes. cently updated (see box “Issuing MTNs”). The procedure for an issue of Signing. The subscription agreement is executed by the issuer and the managers (who notes under a programme (also known will either be permanent dealers appointed under the programme dealer agreement or as a “take-down” or trade) will be set out will be appointed as programme dealers in respect of this issue only), and the docu- in the programme documents. A syndi- ment setting out the final terms of the notes (known as the pricing supplement, securi- cated trade (where the issue is subscribed ties note or “final terms” document) (pricing supplement) is finalised and executed by for by more than one dealer) involves the issuer. more procedures and documents than a non-syndicated trade, but is still reason- Application for “listing”. The pricing supplement is submitted to the UKLA. ably straightforward because the main documents governing the notes are Delivery of conditions precedent. The conditions precedent to the issue, commonly agreed and signed when the programme corporate resolutions and approvals, legal opinions, auditor’s comfort letters and clos- is established, leaving a minimum of key ing certificates, are issued. points (such as final, pricing information and key commercial terms of the issue in Closing. The purchase price is paid by the managers and global notes are authenti- question) to be documented and agreed cated (by the fiscal agent) and issued (see “Clearing and settlement” in the main text). at the issue stage. The cross receipt evidences these final steps (closing of the issue). Trustee or fiscal agent? Confirmation of listing. The UKLA confirms listing of the notes. MTN programmes and stand-alone bond issues can be structured using ei- ther a trustee or a fiscal agent. Most plain vanilla note issues use a fiscal agent Where there is a trustee, the trustee may without qualification. Where a trustee structure, whereas highly structured or exercise the noteholders’ rights on their structure is used, individual noteholders secured issues always use a trustee struc- behalf and will have certain duties and effectively cede their individual rights as ture. Due to their straightforward, short responsibilities under the express terms creditors to the trustee to conduct pro- term nature, commercial paper pro- of the trust deed as well as the general ceedings on their collective behalf. grammes invariably use a fiscal agent provisions of English law relating to structure. The fundamental difference trusts and trustees. A fiscal agent has a Listing between a trustee structure and a fiscal more contractually determined role and The Prospectus Directive is now the dri- agent structure is that the trustee is the is little more than an administrative ving force behind disclosure require- representative of the noteholders, agent. Crucially, where a fiscal agency ments in the European debt capital mar- whereas a fiscal agent is the agent of the structure is used, noteholders may exer- kets. Since its coming into force on 1 July issuer. cise their rights as creditors individually 2005, a person offering notes to the pub- 24 (C) Legal and Commercial Publishing Limited 2005. Subscriptions +44 (0)20 7202 1200
  • 5. lic in the EEA or making an application Feature Bond ratings for notes to be admitted to trading on a regulated market in the EEA, must pro- Bonds and notes will generally be rated by one of the three leading international rating duce a prospectus complying with the re- agencies (Fitch Ratings, Moody’s Investors Service and Standard & Poors Corporation quirements of the Prospectus Directive (S&P)) to provide investors with an indication of the issuer’s creditworthiness and the (Article 3, Prospectus Directive) (see corresponding level of risk involved in holding such an investment. The different “grades” PLC Opinion “Debt issues: will the new awarded by these rating agencies are as follows: EU listing regime scare away the pun- Moody's Fitch and S&P Interpretation ters?”, www.practicallaw.com/0-200- 6689). Investment Grade An “offer to the public” of notes means PLC September 2005 Aaa AAA Highest quality that the issuer (or, in certain circum- stances, a person other than the issuer) Aa1 AA+ makes a communication to persons in Aa2 AA High quality Aa3 AA- any form and by any means, presenting sufficient information on the terms of A1 A+ the offer and the notes to be offered, so as A2 A Strong payment capacity www.practicallaw.com A3 A- to enable an investor to decide to pur- chase or subscribe for such notes (Article Baa1 BBB+ 2(1)(d), Prospectus Directive). There are Baa2 BBB Adequate payment capacity various exemptions from the very broad Baa3 BBB- scope of these requirements, most no- Non-Investment tably exemptions for offers of notes with Grade minimum denominations of €50,000 (or Ba1 BB+ its equivalent) and offers to less than 100 Ba2 BB Likely to fulfill obligations; ongoing uncertainty natural or legal persons in any EU mem- Ba3 BB- ber state (Article 3(2), Prospectus Direc- B1 B+ tive). B2 B High risk obligations B3 B- Notes will be “admitted to trading on a regulated market” for the purposes of Various C/D gradings Vulnerable to default through to default the Prospectus Directive if the issuer (or, in certain circumstances, a person other investment than unlisted debt securities. to be sold only to professional investors than the issuer) makes an application for A further driver is that, in some jurisdic- and fall within an exemption so as not the notes to be admitted to trading on or tions, issuers of listed notes may benefit to constitute an offer to the public. It by one of a specified list of European from certain exemptions from tax re- remains to be seen whether listings on stock exchanges or securities markets. quirements. such exchange regulated markets will This is commonly referred to as a “list- prove to be acceptable to, or popular ing” and is different to the listing nor- Since the introduction of the Prospec- with, investors and, in particular, mally associated with shares. Debt secu- tus Directive, a “listing” for notes effec- whether such listings will be sufficient rities are not usually traded “on-mar- tively means that a prospectus comply- to satisfy any applicable internal or ex- ket”, but rather are traded “over-the- ing with the detailed disclosure and for- ternal prudential guidelines. counter” or “off-market” by profes- mat requirements of the Prospectus sional investors. Notes traditionally Directive must be produced by the is- Issues of commercial paper are rarely have the benefit of a listing on or by the suer and approved by the appropriate listed as there is no real investor demand. London Stock Exchange or the Luxem- regulatory authority. Given the oner- In addition, commercial paper falls out- bourg Stock Exchange because most in- ous disclosure requirements of the side the new Prospectus Directive regime stitutional investors in Europe are sub- Prospectus Directive and the Trans- (Article 2(1)(a), Prospectus Directive). ject to internal and external regulatory parency Directive, certain European or prudential guidelines requiring that a stock exchanges (including London Rating agencies minimum percentage of debt instru- and Luxembourg) have established At the most basic level, ratings guide is- ments held by them as assets are listed. “exchange regulated” markets which suers, arrangers and investors in pricing The rationale for this is that listed notes permit “listings” of notes under re- bonds. Rating agencies assign a “grade” must satisfy certain admissibility and duced disclosure regimes (essentially, to an issuer, which indicates the relevant disclosure standards and they are there- the pre-Prospectus Directive regime in agency’s views of the likelihood of the is- fore considered to be an inherently safer each jurisdiction) where the notes are suer defaulting on repayment. 25 (C) Legal and Commercial Publishing Limited 2005. Subscriptions +44 (0)20 7202 1200
  • 6. Most issues of debt instruments in the Feature European debt capital markets will be How do the clearing systems work? rated by at least one of the three leading rating agencies: Fitch Ratings, Moody’s Global note Investors Service and Standard & Poors Common depositary for representing bonds Issuer Euroclear/Clearstream Corporation. Ratings are important for a number of reasons: Depositary agreement Cash (2) relating to global note • Many institutional investors are sub- representing note issue ject to internal or external investment criteria, including relating to ratings. Euroclear/Clearstream Managers (3) Payment, trading The investor universe available to an PLC September 2005 and settlement of issuer will be substantially reduced in bonds respect of notes which do not carry Cash (1) (4) an “investment grade” rating of BBB/Baa or above (see box “Bond rat- ings”). (4) Euroclear/Clearstream Investors account holders www.practicallaw.com • Superior ratings help an issuer to re- duce its cost of funding. (1) Managers accept funds from investors through the clearing systems. • The display of a rating is often seen as (2) Managers pay these funds to the issuer against receipt by the common depositary a sign of confidence and trans- of an executed and authenticated global note. parency, and therefore is a useful (3) All managers will be account holders in the clearing systems. marketing tool for issuers. (4) Investors either hold interests in the notes directly as account holders or hold their notes via intermediary institutions who are account holders. A recent example of the significant role of the ratings process can be seen in the re- view in June 2005 by Moody’s Investors counter” directly between counterpar- • To facilitate trading of the notes be- Services of the default risk of govern- ties. These trades then settle (usually tween investors through Euroclear ment-related issuers in Europe. This re- with delivery of the bonds against pay- and Clearstream. view led to ratings upgrades of more than ment received) through the independent 40 companies that are partially or wholly clearing systems. On the closing of a standard note issue, a “temporary” global note and a “perma- state owned, including France Telecom, Deutsche Telekom and Thales. Ratings The key to understanding the role of nent” global note will be delivered to a upgrades boosted the price of these is- these clearing systems’ function is the use common depositary on behalf of Euro- suers’ existing bonds and should reduce of “global” notes. clear and Clearstream. These clearing systems will then credit the securities ac- their cost of funding going forward. A counts of each account holder with inter- less propitious example is that of General Global notes Motors, which was recently downgraded Global notes are simple documents ests in the temporary global note equal to to non-investment grade, with signifi- which set out certain basic provisions, the amount of their respective invest- attach the agreed terms and conditions ments. Accordingly, investors must ei- cant consequences for its fund raising. for the issue of notes and represent the ther be, or hold notes through, an ac- entire aggregate principal amount of the count holder in the clearing systems (see CLEARING AND SETTLEMENT box “How do the clearing systems The bedrock of the present day European notes being issued. There are three prin- work?”). On certification by investors as debt capital markets is the low profile cipal reasons for the use of global notes: to certain standard US tax requirements, (and frequently misunderstood) auto- the temporary global note will be ex- mated, mechanical and operational role • To save costs (the costs involved in changed for and replaced by the perma- played by the two major international printing individual definitive notes, nent global note, which will thereafter clearing systems in Europe: Euroclear with their standard security features, represent the entire issue of notes (based in Brussels) and Clearstream is substantial). through to maturity. In turn, the perma- (based in Luxembourg). Nearly all debt nent global note will itself usually be ex- capital markets payments, trading, clear- • To help ensure compliance with US changeable for individual, definitive ing and settlement are through these tax and securities laws of extra-terri- notes in certain limited circumstances clearing systems. In contrast to listed eq- torial application during the initial such as closure of the clearing systems or uities (which are stock exchange traded), distribution of the issue (see “US secu- default by the issuer. trading in notes is conducted “over-the- rities laws” below). 26 (C) Legal and Commercial Publishing Limited 2005. Subscriptions +44 (0)20 7202 1200
  • 7. • Representations and warranties to be wise be imposed on the underwriters of For commercial paper and MTN pro- Feature given by the issuer. an issue of securities, where such under- grammes, forms of “master” global writers have taken sufficient steps to ver- notes will normally be executed by the is- • Events of default. ify the information in the offering docu- suer on the establishment of the pro- ments. gramme and given to the fiscal agent or, • Key commercial covenants, such as where a trustee structure is used, the negative pledge provisions. The legal status of due diligence in the principal paying agent for safe keeping. European debt capital markets is less This helps to ensure swift execution and • Indemnification provisions (and any clearly defined. However, due diligence settlement of issues of notes. When the carve-outs). is still an important tool for the under- issuer chooses to issue a series of notes, writers in controlling their liability risk the fiscal agent, or principal paying • Fees and expenses to be paid by the in connection with underwriting an issue agent, will retrieve the “master” global PLC September 2005 arranger and the issuer respectively. of securities. There is no set standard note from its vaults, photocopy it, com- level of, or procedures for, due diligence plete the relevant missing information to • The need for, and extent of, due dili- enquiries that are or should be under- represent the particular terms of the gence (see “Due diligence” below). taken in relation to issuers in the Euro- notes to be issued (by attaching the re- pean debt capital markets. On the con- lated pricing supplement), authenticate If the issuer wishes to use other debt se- trary, the International Capital Markets it and “deliver” the now completed www.practicallaw.com curities issued by it (or any other group Association’s guidance on due diligence global note to itself in its capacity as company) as the basis or precedent on expressly recognises the impossibility of common depositary. which the documents and commercial prescribing particular procedures. Es- terms for the issue are to be based, this sentially the level of due diligence to be CONSIDERATIONS FOR NEW should be made clear to all parties as carried out for any particular issuer is a ISSUERS soon in the process as practicable. matter for arrangers to determine, de- A new issuer will also have to consider pending on the type of notes to be issued, the following: the rights attaching to those notes and the nature of the issuer and its business. Negotiation of commercial points Given recent corporate scandals (such as As mentioned above, the documents for Worldcom and Parmalat), increased fo- issues of debt capital markets products cus is being directed to the due diligence are relatively standard, so the process of process undertaken in relation to all debt negotiating the relevant contractual doc- securities issues, both in the US and in the uments (and, if necessary, any disclosure European debt capital markets. document such as a prospectus) should be relatively painless. However, this is The arranger will, by means of the due rarely the case. diligence process, seek to confirm that the information given by the issuer in the Considerable time and effort (and as a offering document is correct, that there result, cost) is often expended negotiat- are no material omissions from such in- ing contractual documents. In many formation and that there are no potential cases, this can be substantially reduced developments affecting the issuer which by focusing in a timely fashion on key should be disclosed to investors. As a commercial provisions. The best time general rule, offering documents should for issuers to negotiate such points will omit projections of future business activ- most often be at the time of negotiating ities or profits because of the difficulties the mandate letter under which the of verifying such information and the as- arranger(s) are appointed. This means sumptions on which such projections are that such issues are agreed at the outset, based. minimising the scope for subsequent protracted negotiation. It is also the Due diligence In order to perform due diligence prop- stage in the issue process at which issuers In most circumstances, the arranger will erly it will often be prudent (other than in have the greatest commercial leverage. wish to conduct some form of due dili- the case of issues by well established and gence before launch of the issue, during highly rated issuers) for the arranger to Negotiations and commercial discus- which the arranger verifies the informa- visit the issuer and have formal meetings sions invariably relate to a limited num- tion contained in the offering document. with its senior officers and external audi- ber of key provisions which issuers This practice arose in the US as a result of tors. For most plain vanilla issues by reg- should consider in detail at the mandate US securities legislation which provides ular issuers, such enquiries may take the stage: a defence to liability which would other- 27 (C) Legal and Commercial Publishing Limited 2005. 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  • 8. form of conference calls with analysts Feature Glossary running through a series of pre-prepared and pre-agreed “big-picture” questions. Account holders. Investors (usually institutions) which have their own accounts in the Any due diligence process invariably re- clearing systems to facilitate the purchase, sale, trading and settlement of securities. sults in considerable work for the issuer and its officers. Establishing at an early Arranger. The investment bank mandated by the issuer to arrange, oversee, document date the extent and depth of any due dili- and close (that is, arrange for the actual issue of and payment in respect of) the rele- gence process (such as the areas to be vant issue of notes. covered and the documents to be re- viewed) is essential, as is ensuring that Common depositary. The financial institution which holds the global note represent- adequate confidentiality arrangements ing an issue of notes under a depositary agreement with the clearing systems. Invari- PLC September 2005 are in place. This should be of particular ably the common depositary is the fiscal agent or principal paying agent on any issue of concern for issuers that have equity secu- notes, albeit in a different contractual capacity. rities listed on any stock exchange. Dealers/managers/underwriters. The investment banks mandated by the issuer in re- Disclosure spect of a programme (permanent dealers) or a particular issue of notes (managers or It is essential that issuers bear in mind underwriters), to manage and underwrite (on a joint and several basis) the issue of www.practicallaw.com that the offering document is principally notes. They commonly sell the notes to investors on the same day. a legal and regulatory disclosure document, not a marketing document. Events of default. Events which trigger rights for holders of notes to seek immediate re- Hyperbole must be eschewed. payment. They usually cover critical events such as non-payment of interest, cross de- fault, insolvency events and change of control of the issuer. The content of the offering document will be driven by general legal require- Fiscal agent. The bank which handles administrative matters for an issuer, including ments and, if applicable, the require- issuing and redeeming notes and handling payments due on the notes. ments of the Prospectus Directive and the relevant competent authority ap- Investors. Pension funds, insurance companies, dedicated bond funds, major corpo- proving the offering document. The of- rate treasury groups, hedge funds and other professional or institutional investors and, fering document will include a descrip- increasingly, individual non-professional (retail) investors. tion of the issuer’s (and, if applicable, any guarantor’s) business and opera- Liquid market. A market in which assets can be converted easily back into readily tions and will also provide, or incorpo- available cash or, in relation to a particular security, a market which can absorb a rea- rate by reference, certain financial infor- sonable amount of buying or selling of that security at reasonable price changes. mation. Negative pledge. A covenant given by the issuer which restricts the right, and usually Considerable care should be taken to en- the right of subsidiaries, to incur secured indebtedness (which would reduce the mar- sure not only the accuracy and suffi- ket value of the existing unsecured debt securities). Permitted carve-outs from this ciency of any such information, but also general restriction are often heavily negotiated. that the extent of information provided is appropriate for the type of issuer, its Paying agents. The banks appointed by the issuer to ensure timely payments of inter- market position and creditworthiness est and principal on its notes. There will normally be a “principal” paying agent and a (the weaker the credit worthiness of the number of other paying agents (including covering any jurisdiction in which the notes issuer, the greater the amount of disclo- are “listed”). sure). Plain vanilla debt. Debt securities of the most straightforward kind, paying simple, New issuers in particular should reflect regular interest amounts and which do not contain any complicating features such as carefully on the level and detail of disclo- conversion rights or complex financial and/or negative covenant packages. sure they intend to provide. Such disclo- sure will set a precedent for their future Regulated market. A market for securities which appears in the list of regulated markets debt capital markets financings. drawn up by the European Commission and, where notes are to be admitted to trading on such regulated market, which will require the preparation and approval of a prospectus. US securities laws The extra-territorial application of cer- Trustee. A professional trust corporation or a major commercial bank providing trustee tain US securities laws, in particular, the services (usually through a specified subsidiary that is a trust corporation). Securities Act of 1933 (US Securities Act), means that some consideration will 28 (C) Legal and Commercial Publishing Limited 2005. Subscriptions +44 (0)20 7202 1200
  • 9. need to be given to the application of US Feature Related information securities laws in relation to issues of debt capital markets products. Links from www.practicallaw.com and the web This article is at www.practicallaw.com/2-201-1581 In summary, most issues of notes in the European debt capital markets are is- Topic sued and offered to investors in compli- Debt capital markets www.practicallaw.com/9-103-1100 ance with the requirements of Regula- tion S under the US Securities Act. This Practice note means that the notes are issued in an Convertible and exchangeable bonds www.practicallaw.com2-107-3971 “offshore transaction” where there is no direct selling of the notes in the US to US PLC September 2005 Previous articles investors, thereby ensuring that the Listing and prospectus rules: notes have the benefit of a “safe har- a guide to the new regime (2005) www.practicallaw.com/4-200-9841 bour” under the US Securities Act. This Debt issues: will the new EU listing regime means that the complex registration re- scare away the punters? (2005) www.practicallaw.com/0-200-6689 quirements of the US Securities Act do Transparency Directive: improved investor not apply. information or over-regulation? (2003) www.practicallaw.com/1-102-4194 www.practicallaw.com High yield bond issues: However, historically, the depth and liq- raising the stakes (2003) www.practicallaw.com/4-102-5427 uidity of the US capital markets was sub- stantially greater than that for the inter- Weblink national markets. Non-US issuers often International Capital Markets Association www.icma-group.org needed to access US investors in order to ensure that sufficient investor demand For subscription enquiries to PLC web materials please call +44 207 202 1200 was available at competitive rates of funding. volve the use of US-style documents and The increased costs to issuers of US dis- Accordingly, from the early 1990s, notes the inclusion of mechanics facilitating closure requirements and the provision were often issued in compliance with trading of the notes between US holders of 10b-5 opinions inevitably mean sub- Rule 144A under the US Securities Act and non-US holders and between the stantially increased costs for issuers. (Rule 144A) which provides an exemp- principal US clearing system (The De- Many issuers now question the desirabil- tion from the registration requirements positary Trust Company) and Euroclear ity of subjecting themselves to the of the US Securities Act, enabling the and Clearstream. rigours of the US securities regime (par- notes to be sold directly to certain speci- ticularly following the introduction of fied types of US institutional investors, The advent of the euro in 1999 and the the Sarbanes-Oxley Act in 2002) and the as well as to non-US investors. Compli- resulting increase in liquidity in, and attendant increased regulatory and liti- ance with Rule 144A requires the provi- depth of, the European debt capital mar- gation risks, unless the inclusion of a sion of additional, extensive disclosure kets has resulted in less Rule 144A is- Rule 144A option is essential from a by the issuer, with a resulting increased sues. Today, Rule 144A issues are essen- marketing perspective, or to ensure suf- need for due diligence by the arranger, tially limited to very large issues (so- ficient investor demand. and also invariably means that the called “global” bonds) and high-yield arranger and managers will require the bonds, in each case where US investor Michael Doran is a partner, and David provision of legal opinions covering such participation is a key factor in ensuring Howe and Richard Pogrel are associates, disclosure addressed to them (10b-5 competitive funding rates and investor in the London office of Gide Loyrette opinions). Such issues usually also in- demand. Nouel. PRACTICAL LAW COMPANY PLC Corporate For more information visit www.practicallaw.com/aboutcorporate 29 (C) Legal and Commercial Publishing Limited 2005. Subscriptions +44 (0)20 7202 1200