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Private placement of bonds

Private placement of bonds

This note outlines the typical procedure for a company listed on The Hong Kong Stock Exchange Limited (“Exchange”) to issue bonds by way of private placement to borrow money from independent parties.

While the terms of the bonds are a commercial issue, we understand that often bonds:

  • will be issued to no more than 50 bondholders
  • have a duration of between 3 and 5 years
  • will be placed through a securities company in Hong Kong (“Securities Co”), as placing agent

This note is intended to provide you with an overview of:

  • the structure and parties involved in the private placement of unlisted bonds
  • the legal documentation required for the private placement of unlisted bonds
  • a typical timetable of a bond issue
  • Hong Kong tax and stamp duty considerations relating to a bond issue
  • the regulatory requirements in relation to the issue of bonds by a listed issuer

The Parties

As the relevant bonds will be issued by way of private placement to independent parties, we assume a simple structure whereby a lead manager (who would normally syndicate the issue, deal with allotment of bonds between managers, deal with over allotments/stabilisation etc.) would not be required. Further, we assume that the bonds will not be underwritten by managers but will be sold directly to the placees / lenders.

(NB: we have assumed in this note that clearing would not be done through a common depositary and bonds will be issued / registered upon receipt of subscription monies – i.e. no temporary global form, definitive form or permanent form distinction and this note is qualified accordingly)

The following are key parties that may be involved in the relevant issue:

  1. the issuer: Usually an offshore company

    primarily responsible for payment of principal and interest on the bonds and during the preparation of the issue, and is responsible for, inter alia:

    1. mandating the placing agent, Securities Co, to manage the issue
    2. agreeing the main terms and conditions of the bonds with the placing agent
    3. obtaining, with assistance from its counsel, all necessary consents and approvals for the issue from all applicable regulatory bodies
    4. taking responsibility for the information memorandum
    5. appointing the fiscal agent/ trustee and the paying agents (as required)
    6. meeting relevant fees and expenses (including management fees, selling concessions, legal expenses incurred by the placing agent, fiscal agent / trustee, printing and distribution costs of information memorandum etc.)
    7. passing all necessary resolutions for the issue
    8. executing all relevant documents
  2. the guarantor: (if any)

    guarantees the obligations of the issuer, including all payment obligations, under the issue

  3. the placing agent: Usually a Hong Kong Securities Company

    primarily responsible for arranging the transaction, including the sale of the bonds, legal documentation and settlement procedure; in particular, it will be responsible for:

    1. agreeing the terms of the mandate with the issuer / guarantor
    2. advising the issuer / guarantor regarding the timing of the issue and pricing
    3. instructing lawyers to prepare issue documentation and negotiation of the terms therein
    4. liaising with the issuer / guarantor generally and regarding the appointment of fiscal agent and paying agents
    5. sourcing and liaising with potential investors for the bond issue
    6. liaising with the issuer regarding settlement procedures at closing
    7. generally monitoring the timetable throughout
  4. the fiscal agent: this will be an independent agent of the issuer and will have a chiefly administrative role; its responsibilities will include, inter alia:

    1. authenticating the bonds upon original issue and execution by the issuer
    2. arranging for security printing of the bonds
    3. replacement of lost or damaged bonds throughout the life of the issue
    4. receiving monies from the issuer in respect of the principal and interest payments and making these available to the bondholders
    5. maintaining records regarding all payments made under the bonds and the bonds which have been cancelled or replaced

    It should be noted that a fiscal agent will have no personal liability in respect of the bonds vis-à-vis the bondholders and will only be obliged to pay when necessary funds are received from the issuer.

    NB: In respect of the bond issue of the issuer:

    • there is not usually a need for more than one paying agent but rather just one fiscal / principal agent
    • there is not usually a need for a trustee as they tend to be used in more complex structures (e.g. secured issues where the trustee will be holding security or where the issuer’s covenants in the bonds require close monitoring) and which will cost substantially more than a fiscal agent
  5. the agent bank: (if required) (NB: not required for fixed rate bond issue)

    where the bonds are floating rate notes (FTNs) or index-linked or linked to fluctuations of currencies, a reference / agent bank may be required. The reference / agent bank’s principal duty will be to periodically calculate the rate and amount of interest payable on the notes in accordance with their terms and publishing this information to the bondholders

Procedure and primary documentation

The following is a brief summary of the main documents that we anticipate will be involved in the private placement of unlisted bonds by the issuer (other than those relevant to regulatory requirements):

  1. mandate

    Parties: to be entered into between the issuer and Securities Company

    Purpose:

    • sets out the principal terms of the issue and its pricing
    • authorises the placing agent to arrange the issue
  2. information memorandum

    Purpose:

    • this is the selling and/or marketing document that will be distributed to the potential investors
    • should contain the following broad components
      • responsibility statement, selling restrictions and contents list
      • terms and conditions of bond
      • use of proceeds
      • an overview of the business of the issuer, including a statement of its equity and long term indebtedness
      • various financial statements and auditor’s report
      • description of tax treatment of bonds
      • section relating to subscription and sale
      • details of the issuer, fiscal agent, lawyers, paying agents etc.

      NB: must ensure strict compliance with all regulatory provisions applicable to the document (see section below on regulatory requirements in relation to a bond issue of a listed issuer)

  3. subscription agreement

    Parties: to be entered into between the issuer with each subscriber of bonds

    Purpose:

    • agreement under which the issuer agrees to issue and sell to the subscriber and the subscribers agree to purchase from the issuer and pay for the bonds
    • it should contain the following provisions:
      • representations of the issuer (including such representation as to the truth, accuracy and completeness of the particulars contained in the information memorandum, including financial statements; confirmation of due incorporation and good standing etc.)
      • indemnities by the issuer to the subscribers in case of any material breach of representation
      • fees, costs and expenses
      • condition precedents and closing conditions (which may include such things as delivery of legal opinions, auditors’ comfort letters and closing certificates, representations remaining true and there being no material adverse change etc.)
      • “force majeure” events which will result in the subscriber being released from the obligation to purchase the bonds
  4. auditors’ report and comfort letters
    • the auditors’ report will usually be included in the information memorandum, and for the issuer, can be a restatement of its auditors’ report in the most recent financial statements
    • it is usual to obtain a consent letter from the auditors agreeing to the inclusion of the report in the information memorandum
    • if the financial information is dated, it is usual to obtain a comfort letter from auditors confirming there has been no material adverse change in the financial position of the issuer since the date the accounts were audited
  5. fiscal agency agreement

    this agreement provides for the following:

    • appointment of the fiscal agent
    • authentication of the bonds (guarantees the genuineness of signatures of the relevant officers executing the bond on behalf of the issuer)
    • payment of principal and interest to the holders of the bonds (the issuer undertakes to place the fiscal agent with funds to meet payments of principal and interest falling due in respect of the bonds)
    • keeping of records with respect of payment and cancellation of bonds and coupons (in respect of interest)
    • resignation and replacement of fiscal agent
    • calling of meetings of the bondholders
    • fees and expenses payable to the fiscal agent
    • schedule of the bonds (temporary and definitive) together with interest coupons
    • schedule of terms of guarantee (if any)

    If the issuer gives authority to the fiscal agent to appoint sub-paying agents, this is effected by way of a letter from the fiscal agent to each of the sub-paying agents.

  6. bond

    assuming bearer bonds, the terms and conditions of the bonds will be printed on the reverse and interest coupons will be attached. The conditions usually printed on the bonds will include the following provisions:

    • ranking of the bonds
    • negative pledge
    • interest
    • payments
    • taxation
    • redemption and purchase
    • events of default
    • replacement of lost or stolen bonds
    • meetings of bondholders

    if the bonds are registered bonds:

    • the name of the placee and the particulars of the bonds will be recorded in a register held by the issuer
    • the issuer may require the engagement of a registrar / administrative agent (usually a bank or a trust company) to carry out, inter alia, the following responsibilities:
      • maintaining necessary records, which show the bondholder’s name and address; and when sales occur, the name of the transferor and transferee;
      • authenticating, delivering, or redeeming the bonds on behalf of the issuer; and
      • processing principal and interest payments.

      (NB: this may be the fiscal agent)

  7. agent bank agreement

    where the bonds are FTNs or index-linked or linked to fluctuations of currencies, this document would be required to appoint the agent bank for determination of the rates of interest for the bonds

  8. guarantee: may be either endorsed on the bond or included in a separate deed of guarantee
  9. legal opinions: often required as condition precedent to closing covering such aspects as power, capacity, authority and due execution, and legal, valid and binding nature of the documents under relevant laws
  10. signing and closing agenda: (optional) to assist an issue to be assigned and closed smoothly

NB: there will be no invitation or allotment telexes as there will not be any syndication. Accordingly, there will not be an agreement among managers.

Further documents that may be required include:

  1. internal approval documents of the issuer (e.g. board resolutions)
  2. power of attorney of the issuer appointing authorised signatories
  3. incumbency certificate setting out the offices occupied, and specimen signatures of, all persons executing documents on behalf of the issuer
  4. letter from the issuer appointing agents for service of process
  5. closing certificate from a senior officer or director of the issuer to the effect that there has been no material adverse change in the condition of the issuer and no breach of representation and warranties at the time of closing

Timetable of bond issue

The timetable of a bond issue can vary from a few days to several months depending on the complexity of the terms and conditions, the parties and their jurisdictions and whether the issuer is a first-time issuer. The issuer should consider the following:

  1. it will need sufficient time to collate information necessary for inclusion in the information memorandum; this may be affected by factors such as availability of necessary information such as financial statements;
  2. the fact that the bonds are issued by way of placement and will be unlisted and not underwritten may simplify the timetable significantly; and
  3. it is usual to allow a week between signing and closing for satisfaction of the conditions.

The following is a typical timeline for a bond issue:

Initial meeting: to determine

  • the basic terms and condition of the bonds
  • the timetable and allocation of responsibilities
  • marketing and strategy
  • general form and content of information memorandum
  • decision as to appointment of fiscal agent, agent bank, legal advisers etc.

Announcement

An announcement may need to be released to the market when it is definitively determined that the issuer will issue the bonds (see section below on regulatory requirements relating to issue of bonds by a Hong Kong listed issuer).

Post-announcement

  • the subscription agreement, fiscal agent agreement, agent bank agreement (if any), deed of guarantee (if any) and other ancillary documents will be negotiated between relevant parties
  • the placing agent will proactively liaise with potential investors

Prior to signing

  • all relevant resolutions of the issuer and, if relevant, the guarantor approving the issue of bonds and authorising the signature and sealing of any and all documents necessary or required in connection with the issue will be passed
  • all necessary government and regulatory consents will have been obtained by the issuer and, where relevant, the guarantor
  • the subscription agreement, information memorandum, fiscal agency agreement, agent bank agreement (if applicable), auditors’ signing comfort letter, bond notes, closing certificates, legal opinions etc. will be agreed between the relevant parties
  • all relevant powers of attorney required will be executed

(NB: the information memorandum may be finalised, signed by the issuer and despatched prior to signing)

Signing

The following will be executed, signed and sealed (as relevant):

  • subscription agreement (will be exchanged);
  • information memorandum (signed by the issuer and, where relevant, the guarantor)
  • agent bank agreement (if applicable)
  • fiscal agency agreement
  • bond notes (executed by the issuer, but not to be authenticated until closing)
  • deed of guarantee (where relevant)
  • executed comfort letter to be have been received from the issuer’s auditors, and where relevant, the guarantor’s auditors

(NB: the issuer to take custody of fiscal agent agreement, bond notes and deed of guarantee pending delivery at closing, these will be dated on the date of closing)

Post-signing and before closing

  • the issuer’s receiving bank account details and payment instructions are to be confirmed
  • legal opinions, auditor’s comfort letter and closing certificates etc. in a form confirmed by potential investors
  • all conditions precedent in the subscription agreement checked

Closing

The following documents to be produced, dated and delivered at closing:

  • closing certificates
  • legal opinions
  • auditors’ comfort letter
  • fiscal agency agreement
  • deed of guarantee (where relevant)
  • bonds (authenticated by the fiscal agent) ready for delivery pending receipt of subscription monies
Skills

Posted on

2016-05-09