International Finance Law
4. International Bond Finance
The purpose of this module is to examine the structure nature of the international bond
market including government and corporate bonds, documentation and issuance procedures
and bond deviations as well as liability issues.
The learning Aims and Objectives of the Module are:
(1)
Explain the nature and background to the Eurobond markets
(2)
Identify the key issues covered in each transaction
(3)
Examine the main documentation covered
(4)
Identify specific deviations including shorter term instruments
(5)
Explain the party liability issues that have to be taken into consideration
What is a bond?
- A bond is a debt instrument (debt obligation) 🡪 a way for governments and
companies to raise finance by selling it.
- Bonds are transferable certificates (either paper or an electronic representation)
evidencing an underlying medium to long term debt.
- The issuer undertakes to pay the principal amount + interest or coupon payment (on
either a fixed or floating basis) during the term.
- The debt-based instruments are often referred to as either bonds or notes,
depending on the term, or “term bond” as a collective.
- Thus, both loans and bonds are methods of borrowing but has some differences.
Bonds work by firms selling a bond for say £1,000. In return, the firm agrees to pay back the
bond in 10, 20 or 30 years time. In the meantime, the government/firm will pay interest on
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this bond of say 5%. The purchaser of the bond gives the firm £1,000 and in return gets
interest payments for the duration of the bond term.
Advantages with bonds
- Bonds over loans:
o Bonds are transferable.
▪ First issued on the primary market (buying directly from the issuer),
and then bought and sold in the secondary market, either on a
regulated stock exchange or over-the-counter (OTC) market
🡪 Allows more flexible management of investment portfolios while
secondary trading increased liquidity.
▪ While mimicking loans with identical amounts, term and interest
o Lower interest rates:
▪ US and UK Government bonds are seen as low-risk and has a low
interest rate.
▪ Private loans on unsecured debt attract a higher interest.
▪ Corporate bonds are usually somewhere in between, depending on
the reputation of the firm.
o Simpler documentation:
▪ Bond documentation tends to be simpler than loans, especially
syndicated lending facilities.
▪ However, the number of documents involved may be larger, especially
where the bonds are underwritten.
● Underwritten 🡪 underwriting involves determining the risk
and price of a particular security.
●
▪
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Investors benefit from the underwriting process as the information
provided by an underwriting agency can help them take a more
informed buying decision.
Additional regulatory requirements will also apply where a public offer
is involved.
= Borrowers with good credit standing will be able to obtain funds at a lower cost.
Bonds over shares (equity)
o A bondholder does not have ownership in the company: Avoids the need for
increased shareholder representation, accountability and control.
Historic overview: Bond markets
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1300s: Bond markets can be considered to be the earliest type of security markets:
Can be dated back from the 1300s in the City of Florence.
Following WWI and II: International bonds were developed at an early stage in the
evolution of the Euro-dollar markets (see the importance of dollar following the gold
standard). 🡪 Before WWII, debt tended to be issued in the country of issuance
(foreign bonds)
1950s-1960s: The Euroloan and bond markets began to expand during the late 1950s
and early 1960s.
1980s: International bonds Became of particular importance during the 1980s
especially with the restructuring of Third World Debt and the Debt Crisis beginning in
1982.
o Expanded rapidly due to deregulatory measures removing obstacles on capital
mobility.
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1987-1990: The growth turned in the 1987-1990 with increased interest rates and
huge losses by firms and investors with the stock market crash in October 1997 🡪 less
confidence
1990s: Markets began to recover and allowed a new expansion in the early and mid
1990s.
In recent years a large number of variations have been developed: In particular, with
shorter duration euro notes, including floating rate notes (FRNs), medium term notes
(MTNs) and note issuance facilities (NIFs)) and dis-intermediated commercial paper
(CP) programmes.
Today: In recent decades: A preference of security-based financing in preference to
loan facilities. Reasons:
o Globalisation: Cross-border lending and investment which favours
security-based instruments.
o The expansion and changing role and function of stock markets and exchanges
🡪 including their demutualisation: changing form from membership-owned
non-profit organisation into a for profit shareholder-owned corporation by
launching IPOs (International Public Offers)
o Demobilisation (depository held securities) and subsequent dematerialisation
(issuance in only an electric or digital form)
▪ = the ownership can be easily transferred through a book entry rather
than the transfer of physical certificates.
The continued globalisation and digitalisation indicate that bond financing will be
even more important in the future.
Bond structures
Amount, Term and Interest Payment
- The issuer will decide the amount, term and interest.
The principal amount:
- Will be determined based on credit needs as well as market condition and appetite
for debt.
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Duration:
- Before: Simpler plain vanilla bonds for equivalent terms to syndicated loans: 10, 15,
30 years.
- Shorter instruments: E.g. Euro Notes: 2-5 years.
- Now: Instead of medium term notes: Prefer to issue shorter commercial paper:
30-360 days. 🡪 With the date being rolled over when required.
Interest:
- Either fixed or floating: Floating 🡪 Often use Libor (most commonly used market
indices)
- Distinction between coupons, receipts and talons:
o
o
o
Coupons: regarding interest payment. Generally made half yearly with debt holders
tearing off coupons and presenting them for payment to the local payment or fiscal
agent. Can be sold separately.
Receipts: refer to payment of principal instalments rather than interest payments.
Talons: used where large numbers of interest payments are to be made or long
maturity securities are issued.
Form
Registered or bearer securities:
- Registered securities: constituted by the record held by the company and transferred
in accordance with the relevant company law procedures. Transfers must be recorded
by the registry.
- Bearer securities: Constituted by the instrument itself and transferable by delivery.
Generally negotiable.
Global or immobilised, or dematerialised:
- Global securities: Temporary instruments which can be sold globally, and then
replaced by definitive securities in a bearer or registered form, which will replace the
provisional paper used.
- Immobilised
- Dematerialised: Not provided for under the common law in most jurisdictions 🡪 must
be effected under relevant statutory rules. UK: Uncertificated Securities Regulations.
Parties (see structural summary)
- Issuer: Produce or execute bonds
- Investor: Ultimately held bonds
- Manager or a manager group: may sell bonds
- Lead manager: The financial institution selected to manage key aspects of a securities
issue, including organising the syndicate of underwriters and ensuring efficient
distribution of the offer.
- Separate underwriting group(UW): The issue will often be underwritten
- Guarantor: The issue may be separately guaranteed
- Trustee: May be appointed to represent the interest of bond or security holders.
- A number of paying agents to be appointed on behalf of the issuer:
o Fiscal agent or principal paying agent: Used to make payments of interest.
o Fiscal agent: Appointed where a trustee is not involved
o Calculation agents: may be appointed to assist with calculation requirements
set out in the bond documentation.
o Transfer agents: may be appointed to assist with security transfers
o Exchange agents: may be appointed when the bond holders can exchange
bearer for registered instruments.
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Agents under separate instruments might also be appointed, e.g. if warrants are
involved.
o
(A stock warrant gives you the right to purchase a company's stock at a specific price
and at a specific date. Similar to a stock option, with some differences.)
Documentation
- Subscription agreement between the issuer and the lead bank:
o The initial issue terms: amount, term and interest.
o + supplementary rights and obligations for the issuer and debt holders
▪ Equivalent to the provisions in the loan agreement.
▪ Generally consist of a series of pre-issue, pre-payment and
post-payment terms.
- Separate selling group and underwriting agreements: for distribution and
underwriting purposes.
- A trust deed: When a trustee is appointed on behalf of bond holders or security
holders.
- Guarantee and collateral arrangements: Constituted by:
o A series of initial representations and warranties (pre-issue)
o Conditions (pre-payment)
o Covenants (continuing post-payment obligations)
- Breach will be supported by a series of events of default and remedies.
🡪 Although these provisions are similar to loan terms, bond provisions will often be
simpler and less severe in terms of economic sanction and legal effect.
Ancillary and Additional Provisions
Various additional arrangements may also be provided for. These may include:
- Guarantees
- Or security
o Security may, for example be granted over the assets purchased by the funds
raised, such as in connection with a project finance arrangement where
bonds are used in addition to syndicated loans.
- Or collateral
- Rights to convert payment obligations into different currencies:
o Such instruments: dual currency interest notes or dual currency redemption
notes. 🡪 the final principal amounts can be paid in an alternative currency
- Converting bonds into equity shares of the issuer or a connected company
(convertibles) or a third party (exchangeable)
- Security identification codes might be used: Clearing purposes: Euroclear and
Clearstream.
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Bond issuance
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Today: Most deals are pre-priced with the principal terms being fixed under the initial
mandate given to the lead manager
The most commonly used pre-priced deals used are now ‘bought-deals ‘ where the lead
manager legally commits itself to purchase the whole issue and either place them directly or
sell them on through dealers.
Mandate
- The lead manager needs a mandate.
- The mandate letter will be in similar terms as with a syndicated loan offering.
Launch Date
- The issue is launched through a public announcement sent out by the lead manager.
- Will contact other prospective banks and securities firm to form the managing, and
possible underwriting and selling groups.
- Followed up with a formal invitation telex to participate in the issue.
o The telex will specify the key terms, including price, interest, amount,
currency, maturity and redemption price.
o + generally referred to guarantees, negative pledges, sale restrictions cross
default, force majeure etc.
Documentation
- The lead manager will prepare the draft documentation: the prospectus or offering
circular, subscription agreement, underwriting agreements, selling agreements,
managers’ agreement and a trusted or fiscal agency agreement. 🡪 determines the
right and liabilities to the parties concerned.
- The prospectus or offering circular will include:
o Term and conditions of the bonds
o Background information regarding the issuer and its business activities
o The issuer’s financial condition.
▪ The issuer confirms that the information is complete and accurate.
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o Where the bonds are to be issued, the prospectus will also constitute the
listing particulars under relevant national law.
▪ Must comply with the relevant conditions.
▪ UK: FSA’s listing Rules
▪ EU Prospectuses: Prospectus Regulation.
Terms
- If the deal is not pre-priced, the manager and issuer will agree the final key terms,
including the subscription price (the price of the bond) and coupon (interest rate).
Signing
- The subscription agreement and any selling group agreement are formally entered
into at the signing.
- Often seven to fourteen days after the initial launch.
- The managers’ agreement and underwriting agreements will also be formally signed.
- All parties are legally committed from the signing date.
Dealing and Stabilisation
- First dealt with at the ‘grey market’ – sold short with dealers hoping to make a profit
on subsequent issuing.
- The lead manager may attempt to support the price of the bonds to counterbalance
the effects of such short selling.
o This pre-issue market support is permitted under precise stabilisation rules
contained in the securities laws in more sophisticated markets.
o The current UK rules are set out in the FSA Handbook.
- One of the difficulties is that the selling group may not receive as many bonds as they
have pre-dealt on final allotment.
Allotment
- Formal Bond Allotments are made under an allotment telex following signing
- Specifies the amount of bonds offered to members of the managing and selling
groups (as already prospected in the invitation telex).
- The offer is legally ‘accepted ‘ when the funds are transferred on closing.
Trust Deed 🡪 Entered into where a trustee is appointed.
- The trustee will act as an agent on behalf of the investment group.
- Where a trustee is not to be appointed, a separate fiscal agency agreement is
entered into appointing a paying agent and sub-paying agent in each of the main
international financial centres where bond holders will be able to collect interest
coupons and redemption amounts.
Listing
Positives
- Make the bonds attractive to both institutional and private investors, as e.g. some
institutional investors might be required to only hold certain portfolio amounts in
unlisted securities.
- May assist following secondary trading: advantages of price transparency and dealing
protection.
Negatives
- Additional cost and delay to get the bonds admitted to both listing and trading.
- Restrictions on secondary dealings
🡪 In practice: Many bonds may be rarely traded, and if traded, then only on an OTC market
(which are not regulated)
Closing 🡪 refers to the completion of the original issuance procedure
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At this point: The bonds themselves have been pre-placed by the managing or selling
group.
- On the closing, the subscribers will transfer funds to the lead manager’s account
which will be passed on to the issuer by same day transfer
Definitive Bonds
- Where paper certificates are used, the definitive bonds are prepared and delivered
to the trustee or the fiscal agent by the issuer following the closing.
- Often a ‘lock-up’ period for forty days following the closes: Required under US
Securities and Tax law: It is a window where it is not allowed to sell the securities.
o Shall prevent short-sellers
o For equity: Stabilise the share price
Global Bonds and Securities
- May be issued in a temporary or permanent form.
- If temporary, it has to be produced a definitive note.
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Global bond: A single and temporary bearer debt instrument evidencing an entire issue of
Eurobonds. Global bonds are used in Eurobond issues to meet the US securities law
requirement that bearer bonds remain locked up for a period of 40 days and also to provide
sufficient time after the issue of the bonds for definitive bonds to be security printed.
Bond negotiability
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Negotiability: refers to the ability of the purchaser of a legal instrument to acquire
perfect title free from any prior defects.
o Distinct from transferability or assignability: Only concerned with the passage
of title rather than perfect title.
Perfect title: Transferred either by delivery of a bearer instrument or certification of a
registered instrument.
If the instrument is not negotiable:
o transferees can only acquire the title held by the transferor and will
accordingly take subject to any prior defects, defences or other “equities”.
o priority of claim is determined in accordance with the date that notice is
given to the debtor of the assignment
o The debtor can also set-off any counterclaims against the holder
An instrument is negotiable if it falls within the definitions set out in the Bills of
Exchange Act 1882 (of a bill of exchange, promissory note or cheque – all bearable)
or it is otherwise recognised as such by mercantile custom or judicial precedent.
o A bond does not fall within the 1882 Act.
o For bearer bond: The negotiability is recognised by market practice and
judicial precedent. Edelstein -v-Schuler
Whether all bonds can automatically be treated as negotiable is however uncertain:
- The governing law determing negotiability will be the law of the place of negotiation
(lex situs) at the time of the delivery cf. Dicey and Morris (for chattels)
o
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The parties may decide on an express choice of law 🡪 however these will only apply
with regard to contractual rather than proprietary matters. (including the formal and
essential validity of the bond)
Practical issues can arise when determining the place of delivery where definitive
bonds are held by an assigned depository, either under the Euroclear or Clearstream
systems.
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o
It is possible that the express choice of law selected by the parties may govern all
contractual and proprietary aspects, especially where the definitive bonds are held
by a depository within the jurisdiction selected (such as London, UK)
Bond clearing
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Bond transfers are generally effected through either Euroclear in Belgium or
Clearstream in Luxembourg 🡪 the two principal international clearing systems.
o Will be involved on the initial issuance and the secondary trading.
Three separate stages concerning:
o 1) the post-launch but pre-close dealing in the (then non-existent) bonds.
o 2) transfers during the forty day lock-up period (with the bonds represented
by a Temporary Global bond (TGB) 🡪 a suri generis debt instrument
▪ The TGB will be held by a depositary on behalf of the clearing house.
No definitive bonds will exist at this time.
▪ Not a negotiable instrument.
o 3) secondary trading in the definitive bonds (although still generally held
within the clearing systems)
Bond structure
- May be issued in a number of forms, with different rights and entitlements.
- Four main classes:
(1) International (Eurobonds)
(2) Domestic government
(3) Domestic corporate
(4) Foreign bonds (issued by overseas parties in a local capital market)
- Earlier: Ten to fifteen years was normal
- Today: The trend has been towards short medium (two to ten years) and then other
short notes (of less than one year). Principally:
(With a large number of variants within these main formats)
o US Medium Term Notes (MTNs)
o Euronotes (including Note Issue Facilities (NIFs) or Revolving Underwriting
Facilities (RUFs))
o Commercial paper (US or UK)
Eurobonds
- Transferrable debt securities in a currency other than that of the issuer’s home
territory.
- Generally unsecured and issued in a bearer form.
- Usually negotiable and transferable and often sold to international investors, rather
than only in the domestic capital markets. Often sophisticated investors.
- Began in the 1960s, and developed with the syndicated loan market.
- Subsequent growth was substantial, mainly due to the transferable and anonymous
nature.
Plain Vanilla and Variable Bonds (“The basic Eurobonds”)
- The basic Eurobonds: a plain vanilla fixed coupon instrument 🡪 pays the interest in
fixed equal amounts at agreed intervals (usually six months).
- (See Walker’s chapter for other fixed rate options)
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Floating Rate Notes (FRNs)
E.g. plain vanilla floating rate notes
- The payment of interest is at a variable rather than a fixed rate.
- Most common reference rate: London Inter Bank Offered Rate (LIBOR)
- The first one issued in 1970, in 1983 FRN issues made up 37 % of the bond market.
- A preferable option when the interest rates rise, as the fixed rate stays at a lower rate.
However, if the rates fall, it means a lower income for floating rate note-holders.
- FRNs also have disadvantages because it does not offer flexible draw downs or
interest payment adjustment options.
- (See Walker’s chapter for other floating rate options)
Perpetuals 🡪 continuing
Bonds may have fixed or variable maturities, with additional redemption rights possibly
being made available.
- Fixed bonds: Generally fixed maturities
- FRNs and other variations may have different rights attached.
- Examples: (i)Perpetual Bonds (does not have a maturity date), (ii)Put Option Bonds,
(iii)Put and Call Options, (iv)Extendables (see Walker’s chapter for more examples)
- Mandatory early redemption requires that the principal amount outstanding is repaid
in instalments.
- Stepped Calls allow the issuer to redeem on coupon dates after a specified period
- Rolling Calls allow the issuer to redeem at any time after a specified period.
- Immediate calls allow for the bonds to be redeemed at any time after issue
- The terms and price at which the bonds may be redeemed will be set out in the Call
Schedule.
- Bonds may either be redeemed at discount, par (face value), or premium.
o (See Walker’s chapter for options)
Warrants 🡪 Attached to the bond
- Confer on the bond holder the right (but not the obligation) to purchase further
bonds on pre-determined terms (including price).
- Became popular during the 1970s and 1980s as they allowed the issuer to pay a
lower interest rate while the holder acquired the option to purchase an asset that
may increase in value. 🡪 if the bond does not rise in value, the holder is under no
obligation to purchase.
- The warrants can be detached and traded in the secondary market.
- The warrants may be exercised immediately or during a specific period (Window
Warrants)
- In the form of Equity Warrants 🡪 In the shares of the same company, or a separate
company. Either pay cash for the new share or convert the existing host bond
(Conversion Equity Warrants)
- or Debt Warrants (a lot of distinct options) 🡪 (i) Puttable or Redeemable Warrants,
(ii) Naket Warrants (see Walker’s chapter for more examples)
- The rights and obligations attached to the warrant will be set out in the original
documentation issued with the host bond.
- The procedure for exercise of the warrant can be set out in a separate warrant
agency agreement entered into between the issuer and a warrant agent.
- The warrant agent will issue a public notice confirming the option period.
- The original bonds, warrants and new bonds or equity will generally be held by one of
the principal clearing systems, Euroclear or Clearstream.
Equity Linked Bonds (see Walker’s chapter, hard to get an overview)
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Euro Medium Term Notes 🡪 Medium Term Notes (MTNs) are unsecured debt instruments
issued for a duration between 9 months to fifteen years.
- Interim maturity instruments between long bonds and short notes.
- MTNs are issued on a rolling or continuous basis under a programme agreement with
a separate agency agreement and information memorandum and possible trust
deeds.
- MTNs: Introduced in the US in early 1980s
- Beneficial for issuers and investors due to increased flexibility regarding options
available in structuring the amount, maturity and interest payable on the notes at
anytime.
- Variations on the plain vanilla MTN include: (i) Euro MTNs (ii) Global MTNs (see
Walker’s chapter for more examples)
Euronotes 🡪 Short dated bearer promissory notes (an unconditional promise in writing,
signed by the debtor, undertaking to pay a specific sum at a stated time) with maturities of 7
days to one year.
- Usually issued at a discount and redeemed at par value.
- Usually issued in US Dollars or Euros as other countries prohibits locally denominated
notes.
o In the UK: Short dated instruments can be issued at Sterling Commercial Paper
under relevant UK provisions.
- Difference between Euronotes and Commercial papers
o Euronotes are generally issued by non-banks, with bank paper being referred
to as certificates of deposit (CDs)
o ECPs are generally unsupported, in contrast to Euronotes 🡪 however no
underwriting commitment under a NIF, in difference to a RUF.
o The commercial paper is issued under a programme but can be exercised
within hours rather than days
o Settlement is same day rather than seven days for Euronotes
o Smaller denominations or US dollar one hundred thousand are typical, rather
than minimum US dollar five hundred thousand for Euronotes.
o However the distinction is unclear, and would generally be dependent on the
nature of the underlying issue programme.
- The euronotes market was established in late 1970s following the removal of
exchange controls and other deregulatory changes.
o The first programmes were referred to as Note Issuance Facilities (NIFs) 🡪 “An
agreement/arrangement by which a syndicate of banks indicates a willingness
to accept short-term notes from borrowers and resell these notes in the
Eurocurrency markets.”
o Revolving Underwriting Facilities (RUFs) were subsequently developed in the
early 1980s
(See Walker’s chapter for later variations)
- The issuer will pay separate participation, underwriting, commitment and utilisation
fees . 🡪 NIFs are generally 0.10% and 0.50% cheaper than a syndicated loan.
- Euronotes variations include among others Short-Term Note Issuance Facility (SNIF),
Securites Note Commitment Facility (SNCF).
Euro Commercial Paper (ECP) 🡪 provides for the issuance of unlisted short dated paper for
periods of up to one year.
- A negotiable unsecured promissory note (see above under Euronote)
o Treated as a negotiable instrument as a matter of market practice
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Developed during the 1980s by banks 🡪 allow them to buy and sell short term notes
between themselves.
- ECPs are generally issued in accordance with the British Bankers’ Association London
Market Guidelines.
- The Commercial Paper market originated in the US in the early nineteenth century
🡪 to allow companies to borrow funds across state lines.
o Sterling Commercial Paper (SCP) from 1986.
▪ Open to corporate entities complying with minimum listing and net
asset rules.
▪ Banks and building societies are expected to continue to issue CDs (see
under) rather than SCPs.
o The paper must be issued in minimum denominations of one hundred
thousand pounds and mature between 8 and 364 days
- The separate market in Euro CP began in 1985:
o with minimum denominations of one hundred thousand pounds and
maturities of between 2 and 365 days.
o Settlement is effected either through Euroclear or Clearstream
o Global Commercial Paper (GCP) may also be issued, which allows the
borrower either to draw on the Euro or the US Commercial Paper market
- ECPs are Issued under a dealer or programme agreement
o Separate issuing and paying agency agreements, a deed of covenant, deed of
guarantee and an information memorandum are used.
o Standard forms available from the Euronote Association.
- Regulation:
o SCP was permitted under the Banking Act 1979 (Exempt Transactions)
(Amendment) Regulations 1986 (SI 1986 No 769).
o Commercial Paper will, in practice, not constitute promissory notes for the
purposes of s83 of the Bills of Exchange Act 1882:
▪ not unconditional (containing purchase restrictions)
▪ and do not contain a promise to pay a sum certain in money (due to
the effects of withholding tax and grossing up).
o Commercial Paper is generally treated as constituting a debenture for the
purposes of the Companies Act 1985
Certificates of Deposit (CDs) 🡪 transferable certificates or securities evidencing an underlying
deposit of funds with a bank.
- generally issued in accordance with the EDA’s Guidelines on Certificates of Deposit on
the London Market – Market Guidelines (November 1999)
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London CDs are issued by regulated institutions in the UK 🡪 payable in the UK to trade
primarily in the London market.
Non-London CDs are issued by non-authorised institutions including non-BBA (British Banking
Association) banks
Overseas Domestic CDs may be issued, but not covered by the standard terms set out in the
guidelines.
Multi Option Funding Facility (MOFF) 🡪 allow borrowers to draw funds down under one or
more credit structures arrangement.
- Extends the Note Issuance Facility by including additional funding options.
- 1984: The first MOFF was granted a sovereign entity
- MOFFs tend to operate as short MTNs 🡪 durations 5-7 years.
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Distinct from a multiple loan facility as it includes a Euronote component with
additional committed and uncommitted facilities (including Commercial Paper).
Advantages,
o draw-down flexibility,
o obtain funds in different currencies, including those that may not be available
with a Euronote (only US and Euros).
Typical facilities include: (i) Short Term Advances (ii) Swing Line Facilities etc.
Bond structures and corporate bonds
- A range of security instruments are issued by governments and government agencies
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in all countries.
The largest markets: US and Japan, and in Europe: Germany, UK, France, Italy.
Purpose: Used by government and government agencies to borrow funds from the
domestic capital markets to fund their public activities.
The following are some of the most commonly used debt instruments…
UK: Gilts, Stocks and Bonds
Gilt-Edged Securities 🡪 Sterling denominated government bonds.
- Issued by the Treasury but backed by the government.
- Most commonly used tranches: shorts (up to 5y), mediums (5-15y), longs (over 15y)
and undated (irredeemables).
- Managed through the Debt Management Office 🡪 Generally issued in a
dematerialised form through CREST.
Local Authority Stocks
- For local authority agents, including towns, boroughs or counties.
- Issuance is conducted through the LSC.
Public Sector board Bonds
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For other public sector institutions.
Generally issued in similar terms to local authority stocks, although yields are higher, due to the
lack of secondary trading.
US: Treasury, Agency and Municipal Bonds
- Treasuries 🡪 Notes and bonds issued by the US treasury and backed by the
government.
- Us Federal Agency Securities 🡪 Notes, bonds (…) issued by US Government
established agencies.
- Municipal Bonds 🡪 Fixed rate bonds issued by State and local authorities.
Japan: Government Bonds and Debentures
- Japanese Government Bonds
- Government Agency Bonds
- Bank Debentures
- Corporate Bonds
- Electric Utility Bonds.
Germany: Government Bonds And Debentures
- Government and public sector notes
- Government debt certificates
- Federal savings bonds
- Discount treasury bonds
- (…)
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The most commonly used credit instrument is nevertheless the
Suhuldscheindarlehen which are transferable statements of participation in an
underlying loan.
Other Government Securities (do not think this is relevant)
Corporate Bonds 🡪 debt instruments issued by companies in the domestic financial market.
- Distinct from Eurobonds because they will be issued in the local currency.
- Generally registered, secured and locally listed.
- Interest is usually paid net and semi-annually.
- Issuance will be managed by local investment banks or stock brokers with a domestic
investor base.
- Generally issued in a straight or convertible basis:
o Straight 🡪 carry a fixed interest rate, floating rate may be used.
o Convertible 🡪 allows the instruments to be transferred into equity at the
holder’s option.
▪ Often a lower interest rate, because of this alternative benefit.
- Activity in the domestic corporate bond market will depend on local interest rates
and transaction costs.
o Corporate borrowers will be reluctant to issue debt at a high interest rate,
o or where they are competing with a high volume of government
instruments.
o or where the regulatory costs for domestic security issuance are high.
- May be issued at a discount, par or premium, depending on local interest rates and
yields.
- Bond yields tend to be higher than government security yields, although without
the same security. (thought: It is secure to lend from the State)
- The biggest markets are in the UK, US and Japan:
UK Debentures and Loan Stock
- Corporate entities may either issue debentures or unsecured loan stock in the UK.
- The UK corporate bond market was relatively passive during the 1970s due to high
rates of interest and competing government stock.
- Where possible companies will use the Eurobond market directly or bank loans or
equity issues.
- UK insurance companies are common investors, holding approximately 40% of issues
for long term investment purposes.
US Corporate Bonds
- The largest corporate bond market in the world.
- Grew substantially during the 1980s due to e.g. lower interest rates, especially from
1986 onwards and the desire of companies to re-finance higher costing debt.
- Various innovative options have also been developed, including deep discount bonds,
debt with warrants, liquid yield option notes
Japanese Bond Market
- Growth in the Japanese corporate bond market had been limited due to the previous
requirement for all issues to be secured
Foreign Bonds 🡪 Domestic (non-Euro) debt instruments issued in the local market of foreign
rather than domestic entities.
- May be used by other sovereign entities, international organisations or agencies and
corporations from other countries.
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Objectives: to tap the local capital market for funds with additional advantages
possibly being available in terms of lower interest rates or borrowing costs as against
the borrower’s home market.
- Commonly used foreign bonds include: (i) Swiss Auslandsobligationen, (ii) Yankee
bonds, (iii) Samurai bonds, (iv) Bulldog bonds.
Bond Variants 🡪 Developed in the domestic corporate bond market
- Influenced by developments in the Eurobond and derivatives markets
- And stimulated by increased competition in domestic markets.
- New options include: (i) Debts with premium puts, (ii) Debt payable in common stock
(iii) Equity note (US note repayable through shares or proceeds from the sale of
shares in the borrowing or associated company.)
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