So, you and your team have analysed your funding options and market opportunities in light of your capital structure and a decision has been made: to issue a public bond. But what should you do next?
As a lawyer, my answer is fairly predictable: call your lawyer! There’s a serious point in there though: in my experience, the smoothest and most efficient bond issuance processes start with early conversations between the issuer and its key advisers. I realise that pressures on advisory costs are getting ever greater, but in my experience those early conversations need not be expensive (or involved incurring costs at all) and are likely to highlight some key workstreams which require early attention, saving time and cost in the long term.
So what would I raise with a treasury client when they call and say they’re planning a bond issuance? I’d start by running through the key workstreams below and working out when they need to commence and what they need to achieve.
Disclosure
- First, it’s important to distinguish between a standalone issuer and an issuer with a bond programme (eg an EMTN programme).
- For a standalone bond, we would need to prepare a new standalone prospectus. The time and cost involved in that depends a lot on when the issuer last published a prospectus (for debt or equity). The more recent prospectus disclosure we can use as a base, the better. If the issuer hasn’t published a prospectus before, we would work with them to build one up based on other public disclosures (eg annual reports) and sector comparators.
- For an issuer with a programme, the key initial question is whether the programme is up to date, ie whether it is less than a year since the last annual update. Assuming it is, we would need to work out whether a supplement is required (eg due to the publication of updated financial statements or material changes in the business since the last update). If not, we’re ready issue. If the programme has lapsed, it would be necessary to update the prospectus (including risk factors and business description) before issuing, though this is usually a fairly straightforward process.
- Two other notes on disclosure:
- The newly revised Prospectus Directive came into force in summer 2019, so for new prospectuses published after that and EMTN updates there is some updating to do for the new regime, chiefly around the ordering and drafting of risk factors. We have worked on a number of new regime prospectuses now and can help issuers navigate that process with relative ease.
- Is it worth considering admitting the bond on a Prospectus Directive-exempt exchange, eg the International Securities Market in London or GEM in Ireland? Issuers, in particular financial institutions, but some corporates too, are increasingly looking at admitting their bonds on these markets as they combine a recognised disclosure regime and investor protection with an exemption from the need to comply with the Prospectus Directive. A prospectus is still required, but the process of preparing it in accordance with the exchange’s own rules and having it vetted is generally significantly cheaper and easier. This is a developing trend, and definitely one which is worth keeping an eye on.
Commercial terms
- Another question I will always ask issuer clients is whether they are intending to incorporate any new commercial terms their bond which they haven’t done previously. In this case of a programme issuance, this would require the use of a shortform “drawdown” prospectus in addition to the base prospectus to incorporate the new terms.
- A good example of this is the inclusion of ESG, or “green bond”, technology, which is growing in popularity but hasn’t yet made its way into most corporate EMTN programmes.
Auditors
- As well as your lawyers, you should talk to your auditors early about the comfort letter they will need to provide for the issuance. This will be addressed to the dealer banks, and will comment on the period between the issuer’s last audited accounts date and the issuance. The shorter that period, and the less eventdriven activity in that period (eg M&A activity), the easier that letter will be to produce.
- Note also that, where you are in the period between your year end and the publication of your accounts, so that you auditor is in the process of reviewing the latest year’s figures, they may not be in a position to provide a comfort letter in respect of the previous years accounts (ie those which are in the public domain), particularly as the date of publication of the new accounts gets closer.
- A word on issuances targeted at US institutional investors under Rule 144A of the US Securities Act: as well as enhanced prospectus disclosure and a Rule 10b5 negative assurance letter (which will require US counsel to be instructed on the issuance), these issuances required a more thorough piece of accounting comfort work (known as a SAS72 comfort letter) and, in particular, cannot be made more than 135 days after the last audited accounts date, so this is something which is definitely worth discussing with your lawyers and accounts if you want to target US investors. As a result, most London-market public bond issuances are made under US Regulation S, which exempts the issuance from these requirements provided that they are not marketed to US investors.
Rating agencies
- You should also talk to your raters early in the process, as you will need to ensure that they are able to announce a rating for the bond at issuance. Provided that your corporate structure and credit profile has not changed materially since the raters last assessed the company (and, in the case of an EMTN programme, rated the programme when it was updated), this should be an easy and quick process, but if there have been any major changes (eg M&A activity) the raters may need to conduct more analysis.
Roadshows
- Finally, I would ask the client if they plan to do a roadshow for the issuance alongside their dealer banks. If so, it is very important to ensure that the roadshow materials are both consistent with the prospectus and verifiable to the same standard. Whilst we would not expect to get involved in the roadshow itself, we would conduct a review of the materials to ensure that consistency and verifiability, and therefore involving us in the preparation of those materials from the start is advisable.
Overall, the process of issuing a public bond can be made straightforward and cost effective with some careful planning preparation, and even where complexities do arise, we can work with our issuer clients to and apply our knowledge of the market and the regulatory regime to ensure they are resolved quickly and efficiently. With that in mind, I am always happy to discuss the bond issuance process with treasury teams, both of existing and potential clients, to work out how we could help them get their bond away as quickly and efficiently as possible.
About the author
Oliver Storey, Partner, Slaughter & May
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