www.pwc.no
Issuing Corporate
Bonds in the Nordic
capital market
June 2016
Content
1.
Executive summary
3
2.
The characteristics of the Nordic corporate bond market
6
A.
The market for corporate bonds in Oslo
6
B.
Light documentation, very efficient process and an active Trustee
7
C.
Legal basis for bond issues in Norway
8
D.
Offer documentation
9
3.
Considerations prior to a bond issue
10
A.
Bond financing versus traditional bank financing
10
B.
The ideal bond issuer
11
C.
The benefits and drawbacks with listed bonds
12
D.
Going for bonds: Specific issues to contemplate
17
E.
Involve US investors?
F. Using the bond market to refinance existing debt 17
17
4.
Bond covenants – protecting the bondholders
18
A.
Covenant package
18
B.
Testing of covenant structure
19
C.Ring-fencing
19
5.
Steps of the bond issue process
20
A.
21
Investment bank and mandate
B.
Term sheet and offer documentation, pre-sounding
21
C.
Launch of bond issue and road show
21
D.
Closing and settlement
22
E.
Possible listing on Oslo Børs or Nordic ABM
22
6.
Listing of the bonds in Oslo
23
A.
Listing requirements Oslo Børs – the main board
23
B.
Listing requirements Nordic ABM - the alternative bond market
24
C.
What is not required for listing on Oslo Børs nor Nordic ABM
24
D.
Specific requirements for bond issuers that have or seek a secondary listing
24
E.
Guarantees – specific issues for listed bond issuers
24
F.
Convertible bonds – specific issues for listed bond issuers
25
7.
Post-issuance: Issuer’s ongoing obligations
27
A.
Complying with the bond agreement and NT
27
B.
Continuing obligations for listed issuers
27
C.
Financial reporting for listed issuers
28
D.
Reports on corporate governance and social responsibility
29
E.
Inside information
30
F.
Primary insiders
31
G.
Investor relations with bondholders
31
8.
Buy-back of bonds
32
9.
Bond issuers in distress – some considerations
33
10.Conclusion
36
Attachment 1: Terms and definitions
36
Attachment 2: Prospectus requirements and exemptions
42
PricewaterhouseCoopers AS (“PwC”) is the author of this publication and has got the copyrights. Without written permission of PwC this
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accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance
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2
Issuing Corporate Bonds in the Nordic capital market
The process of raising bond capital through investment banks in Oslo represents
a relatively fast and straightforward gateway to Nordic, European and US
investors.
This guide outlines the process for both Norwegian and foreign corporations
considering bond issuances in the Nordic bond market.
For the benefit of foreign companies this guide also covers what is not required
when raising bonds in the Nordic bond market, compared to an internationaltype bond issue.
1. Executive summary
The Nordic bond market in Oslo is large and buoyant. Corporate
bonds1 make up 25 % of the total bond volume, the rest is made
up of the public sector and banks. About half the corporate
bonds issued are considered investment grade, and the other
half high yield bonds. Norwegian investment banks2 have
historically been very successful in raising bond capital within
the sectors of energy, shipping, property and seafood industry.
The interest for the Nordic bond market from foreign
companies is substantial and growing, as foreign companies
and investors alike have found the benefits of this market quite
attractive.
Norwegian companies have traditionally favored bank
financing as this has in general been considered cheaper.
However, with the rise of the bond market the companies have
an additional source of financing at their disposal. Each type of
financing has its advantages and drawbacks, as set out in
chapter 3 A below. The majority of Norwegian companies have
little experience in the bond market. The aim of this publication
is to provide guidance to Nordic and foreign companies whom
are considering entering the bond market, whether through
investment grade (IG) or high yield (HY) bonds.
The process of raising bond capital in Norway is characterized
by standard documentation provided by Nordic Trustee3 (NT),
documentation which is adapted for each bond issue. In
contrast to an international-type bond offering there is no
requirement for public rating, any due diligence or any comfort
letter, the lack of which translates into a very speedy offering
process of just a few weeks given a positive market sentiment.
This also has the positive effect of lower transaction costs.
However, should the bond issue involve US investors (in a
typical 144A transaction), a comfort letter will be required and
a public rating will often also be applicable.
1. Words in Italic in the executive summary are key points, and most of these are
defined in attachment 1.
2. Throughout this publication the term investment bank is used, for the advisors
assisting the company with placing the bond. In the Norwegian bond market
underwriting is not used, hence “underwriter” is not applied.
3. Nordic Trustee ASA, previously known as Norsk Tillitsmann ASA, is a private body
that usually represents the bondholders on the basis of the bond agreement. NT is by
far the dominant actor in the market for trustee services in Norway. Here is NT’s
template documentation: http://nordictrustee.com/documentation
3
The average bond issue is a bullet loan with a term of 4-5 years
with a floating interest rate based on three months NIBOR4 .
The bond issues are usually in the range of NOK 500 to 1,200
million (equivalent to about 90 to 140 mill USD). The bond
covenants are mainly maintenance covenants and to a lesser
degree incurrence covenants. Often the bonds have call options
and are hence callable, i.e. they can be redeemed early by the
bond issuer. The Nordic bond market is accustomed to a wide
range of covenants and security interests (collateral) which
are tailored to each individual issue.
Offer documentation is primarily the term sheet (based on
NT-standard), a company description, credit rating5, risk
factors and financial information; all collated through the
appointed investment bank. By subscribing to the term sheet
the bond investors grant power of authority to the trustee
(NT) to finalize the bond agreement and related
documentation when the offering process is closed. The end
result is an efficient work flow. The way offerings are usually
structured means that neither any formal offer prospectus6
nor any other pre-approvals will be triggered by the launch of
the offering.
Usually the bond investors will require the bonds to be
listed on Oslo Børs or Nordic ABM, as investors (which are
often institutional funds) regularly have mandates to invest
only in listed bonds.
A listing on Oslo Børs requires the company to prepare a
listing prospectus, which is to be reviewed by the NFSA7 . This
process is usually brief and straightforward. The audited
financial statements in the prospectus have to be prepared in
accordance with IFRS8 for the previous two years (or one year
for smaller companies – see section 6 A); this requirement is
aligned with the similar listing requirements of Oslo Børs.
Interim reports need not be audited when listing, unless the
issuer has been incorporated in the year of issue. If the bond
loan is guaranteed, the guarantors have to provide the same
amount of information in the listing prospectus as the bond
issuer itself (note that the Guarantor’s financial statements need
not be in accordance with IFRS, but still have to be audited).
Convertible bonds pose some specific issues which are covered in
section 6 F in this guide.
A listing will usually also require the company to set up an audit
committee9 and comply with other, more technical listing
requirements that are manageable. In contrast to a listing on
Oslo Børs the alternative bond market Nordic ABM does not
require that financial statements are prepared in accordance
with IFRS, nor is there a requirement for listing prospectus or
any audit committee. (It should, however, be noted that an audit
committee is in general required for Norwegian public limited
companies - Norway: ASA). Both Oslo Børs and Nordic ABM
are market places managed and monitored by Oslo Børs ASA.
4
Issuing Corporate Bonds in the Nordic capital market
Benefits and disadvantages for the
bond issuer of listing the bonds in
Oslo:
Main benefits:
•
Many investors are mandated to invest only in
bonds traded on a market place, hence a listing
will attract more investors and capital
•
The listing process in Oslo is very efficient
compared to foreign markets, a matter of couple
of weeks and not months
•
Listing requirements are fully consistent with EU
prospectus rules
•
Oslo Børs’ systems provide detailed information
of the trades in the secondary market – more
than other exchanges
•
The traded bonds represent a benchmark for the
company’s financing cost (the yield will give an
indication of the funding costs for the company)
•
Low listing costs
Possible disadvantages:
•
Costs related to IFRS conversion and listing
•
The company will need to be more transparent
and follow obligations to report relevant
information to the markets
4. Norwegian Interbank Offered Rate
5. The credit rating – a shadow rating - is prepared by the investment bank instead
of a public rating.
6. Prospectus requirements and exemptions are set out in an attachment 2 to this
publication.
7. The Norwegian Financial Supervisory Authority – Finanstilsynet.
8. IFRS – International Financial Reporting Standards, as approved by EU.
9. Some exemptions from an audit committee exist. See section 6 A – listing
requirements Oslo børs – the main board.
10. Other accounting languages (GAAPs) are acceptable, like US GAAP. Contact
PwC or Oslo Børs for a list of generally accepted accounting principles equivalent
with IFRS.
Subsequent to listing, the bond issuer is required to report annual
and semi-annual financial figures (both for listing on Børs or
Nordic ABM). The terms of the bond loan might, however, require
quarterly reporting in addition. Half year/interim reporting can
be unaudited. Guarantors of the bond issue might be required to
report financial figures on an ongoing basis as with the bond
issuer, but IFRS is not required for guarantors. Up-stream
guarantors (subsidiaries guaranteeing for issuer) might be
exempted from such ongoing reporting.
From a regulatory perspective, the major obstacle for many
companies is to prepare IFRS10 accounts for listing on Oslo Børs
(not required for Nordic ABM). When the bonds are listed and
reporting routines set up, most companies find it straight forward
to comply with reporting requirements of Oslo Børs/Nordic ABM.
All communication with advisors, Oslo Børs, NT and the NFSA
can be in English. The prospectus, financial statements and stock
exchange notices can also be in English.
The Nordic trustee NT plays an active role when representing
bondholders through monitoring the compliance of the bond
issuer. Major changes to the bond loan have to be approved by 2/3
of the bondholders at a bondholder’s meeting which is called by
NT. If the bond loan is listed on Oslo Børs or Nordic ABM, the
stock exchange provides additional investor protection through
market surveillance of the trading.
One of the main advantages of a Norwegian-type bond issue is the
much less onerous documentation requirements than a foreigntype offering. One of the objectives of this publication has also
been to set out what is not required for a bond issue in the Nordic
bond market, compared to an international- type bond issue.
We would like to thank Nordic Trustee and Oslo Børs for their
comments to this guide.
Figure 1: Overview of key parties in bond issue process
Investment
bank
Bond holder register
Bondholder
Bondholder
Bond issuer
Nordic
Trustee
Oslo Børs
Bondholder
Bondholder
Bondholder
Verdipapirsentralen
Bondholder
STOP!
The bond issuer and investment bank have no access to the bondholder register.
However, the investment bank will have a good idea of who the major bond
holders are, after making the initial bond issue to the bondholders and also
being involved as broker in day-to-day trading of the bonds.
5
2.The characteristics of
the Nordic corporate
bond market
A. The market for
corporate bonds in Oslo
The Norwegian bond market has experienced substantial
growth in recent years. This growth in part reflects the lending
constraints placed on banks post the financial crisis in 2008,
allowing the bond market to become a viable alternative for
companies seeking debt finance. This is especially true with the
more capital intensive sectors, such as oil field services, oil and
gas exploration and production (E&P) and shipping, which in
exchange for readily available finance, offer bond investors
more attractive returns. This recent transformation means the
Nordic market is now attracting both foreign capital and
companies for issuances that were previously the domain of
London and New York.
Government and municipalities are the entities currently
raising the majority of bond capital in the Nordic bond market,
followed by financial institutions and companies. While it is not
a requirement to list the bonds on a market place, many
investment funds have listing as a requirement for investing in
the bonds. The reason is that investors want the company to
report financial and other information in a timely manner.
Further, a listing implies that the bonds are subject to market
surveillance by Oslo Børs ASA, which carries out identical
market surveillance for both Oslo Børs and Nordic ABM11.
11. While only Oslo Børs is considered a regulated market place in line with EU
requirements, Oslo Børs ASA has decided to perform the same level of surveillance for
Nordic ABM.
6
Issuing Corporate Bonds in the Nordic capital market
Investment grade vs high yield
bonds
Bonds are debt instruments in which an investor
loans money to an entity for a maturity of minimum
12 months.
Corporate bonds – bonds issued by companies
– can be classified in two different categories
based on perceived risk.
Investment grade (IG) bonds are bonds with a
relatively low risk of default.
High yield (HY) bonds are bonds issued by companies
with a relatively higher risk of defaulting on the
payments, hence the bonds are considered to have
lower credit quality. The perceived higher risk means
that the company has to pay a higher interest
on these loans.
A portfolio of HY bonds might over time offer
potentially higher returns than IG bonds, but the risk
of a borrower defaulting is also much higher.
B. Light-touch efficient
process and an active Trustee
The Nordic bond market is characterized by light-touch
documentation, based on standard bond loan agreements, term
sheets and other documentation from Nordic Trustee ASA
(NT)12. NT is the trustee managing the contractual rights the
bond investors have towards the bond issuer, and playing a key
role both when the bond capital is raised and after the bond
issue. Nordic Trustee ASA is mainly owned by Nordic banks, life
assurance companies and securities companies. NT is involved
in most of the corporate bond issues in the Nordic market. The
standard documentation from NT is adapted as necessary for
each individual bond issuance. NT represents the bondholders
and signs the bond loan on behalf of the bondholder
community. NT monitors the company’s compliance with the
loan’s provisions (covenants, coupon, redemption, reporting
and more) and can pursue legal action on behalf of the
bondholders, including taking possession of collateral to
safeguard the bondholders. NT has sufficient power of
authority (dictated in the bond loan agreement) to decide
minor issues about the bond. Major amendments to the loan
agreement (like for instance an extension) have to be approved
by two-thirds of the bondholders in a bondholders’ meeting.
Such a resolution will bind all the bondholders. In times of
distress, the bond issuer can discuss with NT on a confidential
basis (if needed) possible amendments to the bond agreement,
prior to any bondholders’ meeting being called to approve the
changes.
Other key players in the process are the Norwegian investment
banks, which will assist the company raise funds from
investors. In contrast to international-type bond issuances, the
Norwegian investment banks do not require comfort letters
addressing the financial information of the offer document, and
no public rating or due diligence need be carried out.
Furthermore, due to the way Norwegian investment banks
structure the bond issuances no offer prospectus will be
required. The light-touch documentation makes a bond issue in
the Nordic capital market not only faster than a comparable
international-type bond issue, but the transaction costs are also
lower. This has the positive side-effect that Nordic investment
banks can take on smaller bond issues which benefit also
smaller companies.
While light-touch documentation might seem to provide less
protection for the bondholders compared to an international
type bond issue, the active role played by NT seems to a large
degree to mitigate this13.
12. NT website: www.nordictrustee.com
13. One recent example for NT’s active role: In 2014 the vessel owning company
Oceanografia defaulted on its bond loan. NT, as trustee for Oceanografia’s bonds,
declared Oceanografia’s $160 million of notes in default. NT took control of the vessel
which was security for the bonds and brought it into international waters, resulting in
no loss for the bondholders.
Comfort letter not required and no
“135 days rule”
In connection with international-type bond offerings
the investment banks require comfort that the
financial figures (beyond the financial statements
that are already audited) in a comprehensive offer
document are verified. Hence, the company’s
statutory auditors will go through all financial figures
in the offer documentation - all figures are “circled
up” - and verify that these can be traced back to
previously audited financial statements. The auditor provides a comfort letter that states that the figures
are in line with the audited figures, and that the
auditors will still stand by the audit opinions of the
financial statements enclosed to the offer
documentation.
For such international-type issues the auditors can
generally issue comfort letters only on audited
financial statements that are less than 135 days old
(i.e. less than 135 days from the latest financial
statements that were subject to an audit). Comfort
letters and this so-called “135 days rule” are not
applicable for issues in the Norwegian market.
If foreign investment banks are involved in the bond
issuance, they may require that the bond offering is
done in line with international practice (i.e. an
international type offering) and hence require that a
formal offer document with a comfort letter verifying
the financial information are prepared. This will
especially be the case if US investors (Qualified
Institutional Buyers - QIBs) are targeted in the
bond issue.
Indenture
Indenture is the term used for the legal contract
between the bond issuer and the bondholders in
foreign-type bond issues. Indenture is not a term used
for Nordic bond agreements/bond issues.
In foreign-type bond issues the indenture specifies all
the important features and terms for the bond issue,
as maturity date, callable/convertible features,
interest calculation and payments, financial
covenants regulating the issuer etc.
7
Rating of bond issuer – public versus
shadow rating
International bond rating firms, such as Standard &
Poor’s, Moody’s and Fitch use different designations
to identify a bond’s credit quality rating. Designations
from ‘AAA’ and ‘AA’ (high credit quality) and ‘A’ and
‘BBB’ (medium credit quality) are usually considered
investment grade, while credit ratings like ‘BB’, ‘B’,
‘CCC’ are considered low credit quality, and are
commonly referred to as high yield.
To provide a rating, the rating firm has to carry out a
financial and legal due diligence of the corporation,
and such a process is costly. In the Norwegian bond
market, the bond issuers rarely do such a public
rating, meaning that few bond issuers listed in Oslo
have public ratings by S&P, Moody’s or Fitch.
Instead of a public rating, the investment bank
assisting the company (its credit analyst teams)
provides a shadow rating of the issuer, based on
available, public information about the company.
The credit analysts do this along the same principles
as the rating agencies, but at no extra cost for the
issuer.
A bond rating – whether it is a public or shadow rating
– is a function of the company’s business and financial
risk. The business risk is dependent on factors like
competitive position, country risk, benchmarking
with peer companies etc. The financial risk is
dependent on the bond’s location in the capital
structure and the value of the assets.
C. Legal basis for bond
issues in Norway
Bond issues are covered by the Norwegian Securities Trading
Act (“NSA”), if the bonds in question can be “negotiable on
the capital market”14 which most often is the case. In
general, this act states that no one can employ unreasonable
business methods when issuing and trading financial
instruments.
Furthermore, section 3 of the NSA sets out additional,
detailed requirements for bonds which are listed (or where
listing has been applied for), on a Nordic regulated market.
These rules cover aspects like inside information, price
manipulation and more. The requirements are mirrored in
both Oslo Børs’ Bond Rules and ABM Rules (see section 7 for
the main ongoing obligations)15 .
The offer documentation itself is not specifically regulated,
unless when an offer prospectus in rare instances is
triggered. Furthermore, the role of the Nordic Trustee is not
regulated by any legal framework. NTs position as
representing the bondholders is regulated by the standard
agreements in place between the various parties in a bond
issue. NT’s position has been confirmed through several
Supreme Court decisions in recent years.
It is furthermore a legal requirement that all investors
holding the same class of bonds have to be treated equally16.
Issued bonds also have to be registered in
Verdipapirsentralen, VPS – the Norwegian Central Securities
Depository. The bond issuer has to enter into an agreement
with a conventional bank, which will do the registration of
the bonds and transactions with VPS. This bank will also act
as a paying agent, i.e. manage the cash flow of payments and
interest between the bond issuer and the creditors.
Bond issuances based on standard documentation from NT
will have Oslo as legal venue. This means the courts of
Norway will have exclusive jurisdiction to settle any dispute
which may arise out of, or in connection with, the bond issue.
This guide sets out a summary of the main legal
requirements for bond issuers. However, Oslo Børs’ Bond
and ABM Rules should be consulted when listing of a bond
is considered.
14. See section 2-2, second subsection point 2 in the Norwegian Securities Trading Act.
The article ”Foretaksobligasjoner i Norge” in Revisjon og Regnskap no 4, 2013 by
Arntzen de Besche advokatfirma provides a detailed description of legal basis and
related issues regarding corporate bonds.
15. The Bond and ABM Rules (as specified by Oslo Børs) set out the listing requirements
of bonds on Oslo Børs or Nordic ABM (see section 6 for the listing requirements). The
listing requirements are Oslo Børs’ own rules.
16. The equal treatment of investors is set out in the Norwegian Security Trading Act
section 5-14 and Oslo Børs own rules, ref point 3.1.1 (in the Bond and the ABM rules)
8
Issuing Corporate Bonds in the Nordic capital market
D. Offer documentation
The offer documentation itself is not specifically regulated by
Norwegian regulations, but is based on market practice. The
term offering memorandum (or offer documentation) is
typically used in a bond offering instead of the term
prospectus. This is to make clear that the bonds are offered in a
transaction that relies on certain exemptions from the legal
prospectus requirements. Prospectus requirements and
exemptions are set out in attachment 2.
The bond investors will base their investment decisions on
offer documentation, which primarily includes the term sheet
for the issue, an issuer description, credit rating (i.e. the
shadow rating prepared by the investment bank), risk factors
and financial information, plus the subscription form. Usually
the face value of each bond is more than 100,000 euro, which
means that there will be no requirement for an
offer prospectus.
The term sheet is a key part of the offer documentation, as it
sets out the basic terms (interest, maturity, any security) for
the bond issue, and any unique features/covenants. The term
sheet is based on an NT-template which later will be the basis
for the detailed, legal bond loan documents.
When subscribing to the bond issue the investor gives NT the
power of authority to finalize – after closing – the bond
agreement (which will be on the NT standard). Thus, the term
sheet is prepared and presented to the investors at the launch
of the bond issue, while the formal loan agreement (and other
relevant documentation) will be finalized by NT after the
closing. This provides for an efficient work flow.
Example of term sheet information
Key information from an actual term sheet presented
to potential investors:
“The bond agreement governing the Bond Issue (the
Bond Agreement) will be entered into by the Issuer
and the Trustee acting as the Bondholders’
representative, and shall be based on the Trustee’s
Norwegian standard. The Bond Agreement will
regulate the Bondholders’ rights and obligations with
respect to the Bonds. If any discrepancy should occur
between this Term Sheet and the Bond Agreement,
then the Bond Agreement shall prevail. Each
subscriber in the Bonds is deemed to have granted
authority to the Trustee to finalize the Bond
Agreement. Although minor adjustments compared
to the terms described in this Term Sheet may occur,
the provisions in the Bond Agreement will be
substantially consistent with those set forth in this
Term Sheet.”
Face value, identical to nominal or
par value
The face value of the bond is the nominal value of the
bond, as stated by the issuer. The face value/nominal
value will be the amount paid to the holder at
maturity, given the issuer does not default. The face
value is also known as par value.
Should the company involve US investors (Qualified
Institutional Buyer – QIB) the bond issue will be more
comparable to an international type bond offering, which
often requires a comfort letter.
9
3.Considerations prior
to a bond issue
A. Bond financing versus traditional bank financing
Nordic companies have traditionally turned to banks for
financing. A well-established relationship between the
company and the local bank have proved beneficiary for both
parties. The banks have provided competitive terms and been
able to respond quickly to the companies if the loan terms had
to be amended, like extending loan maturity in times of
distress. The financial crisis of 2008, however, changed the
picture as the banks were forced to restrict their lending and
the companies in turn switched to other capital sources for
financing, like the bond market. This illustrates the point of
having several sources of financing to tap into on when the
capital markets are in distress, a point which will be discussed
later.
Approaching just one conventional bank might seem easier
than launching a bond, which will involve investment banks,
NT, the NFSA and Oslo Børs (if the bonds are listed). On the
other hand, a bank loan that will be syndicated would as well
be demanding to get in place, as the various banks may have
different capital restraints. Should any waivers/amendments to
the loan be needed later, all the syndicated banks will need to
be involved in the negotiations.
With the strong rise of the bond market in recent years, Nordic
companies now have an additional source of financing to tap
into. This is valuable both in terms of diversifying the sources of
financing, but also that bond financing offer a slightly different
type of financing. Hence, below a comparison of bank and
bond financing is set out.
For bank facilities as well as bond loans maintenance covenants
are currently the norm, but for bonds the trend is moving
towards more incurrence covenants17 . What the bond market
requires of covenants is to some extent a reflection of the
prevailing market conditions. Generally speaking, when
investor demand for return is high, the covenants in new issues
tend to be more flexible. Opposite; when capital is restricted the
lenders are more in a position to set the terms.
Figure 2: Comparison of bank vs. bond financing
10
Bank financing
Bond financing
•
Often a more comprehensive covenant package
(negotiable).
•
Fewer covenants (negotiable)
•
Documentation based on tested standards
•
Maintenance covenants
•
Maintenance covenants, but trend is more incurrence tests
•
More flexible draw-down terms and repayments; when it
suits company
•
Funds usually received in one lump-sum, full redemption by
end of maturity (bullet)
•
Maturities of about 5 years, but can be longer
•
•
Company only needs to deal with the bank (however, a
syndicated loan means several banks and more
coordination) when raising the facility
Early redemption strictly regulated (put or call options) in
bond loan agreement
•
Maturities of typically 4-5 years(but trend that maturity is
increasing, not uncommon with 7-10 years)
•
IFRS not required for financial statements
•
•
Prospectus not required
A bond issue will involve many parties, bondholders are not
known
•
Lower public profile for company
•
Prospectus might be required (primarily for listing of bonds)
•
The loan covenants can be kept more confidential, while
bond agreement normally has to be public
•
Resources will be needed for follow-up (IR) of bondholders
•
The company will get a higher public profile
•
Any follow-up (IR) of bank not required
•
•
Any restructuring/waivers of loan after draw down: Usually
easier to deal with just one bank.
A listed bond provides a benchmark for cost of capital and
any subsequent financing
•
•
Syndicated loans can make any waivers/
amendments difficult.
Any restructuring/amendments of bond after draw down:
Involves NT and unknown bondholders, of which 2/3
to agree.
•
A bank loan may be lower priced, this can be due to the
bank also having other business with the company. Or it
could just be a reflection of the bank having better security
(different risk profile).
•
Bond financing can be obtained when bank financing
cannot take on additional, higher risk (high yield)
•
Bonds can be repurchased if the right opportunity arises.
Issuing Corporate Bonds in the Nordic capital market
17. The two categories of maintenance and
incurrence covenants are described further in section 4.
B. The ideal bond issuer
Bond investors will primarily focus on an issuer’s credit rating
and metrics (i.e. leverage and financial ratios). In making their
investment decision the investors will consider many of the same
factors as equity investors, like the company’s strategy and
growth prospects, which are elements also considered in a rating
of the bond issuer.
The following will characterize an ideal bond candidate:
• a stable and resilient business model
• an established financial track record
• a market-leading position and good growth prospects
• established in an industry like energy, shipping, property
or seafood
• an experienced management team with a proven
track record
• a sound balance sheet
• a healthy cash generation, plus the potential of future
debt-deleveraging
• financing needs of at preferably minimum 300 NOK million
It will also be of relevance whether the proceeds of the offering
are to be used for acquisitions, refinancing of existing loans or
general corporate purposes, and what security that can be
offered. If the company is currently not generating any cashflow,
it might still be able to raise bond financing if the cash-generating
assets will be in production shortly, but the terms will be less
favourable (i.e. higher coupon).
First stop for a company contemplating a bond issue will be an
investment bank, which will assist the company raise the bond
capital. The investment bank has placing power, i.e. the power to
place the issue in due time with a large number of potential
investors. The Norwegian investment banks are mainly
specialized within the shipping, property, seafood or
energy sectors.
The overview below sets out the typical considerations the
investment bank will make, when assessing the financial metrics
of the company at the start of the process. The pricing and terms
of the bond issue will to some degree be subject to negotiations
between the issuer and the investment bank. The company and
the CFO will want as much flexibility with the bond loan as
possible (i.e. few covenants/no collateral), while the investment
bank knows what the investors prefer, i.e. what terms of the bond
issues that are marketable. In the end the covenant package
must allow the issuer to preserve its operating and financial
flexibility so that it can execute the business plan and that its
competitive position is not compromised.
Figure 3: The figure gives examples of relevant financial ratios
What input is required for investment banks?
A. Strong balance sheet an advantage
“Business case”
has to be presented
to investment bank
• Balance sheet
• Cash flow (CF)
• Presentation of company
Bond issue has to be more than NOK 100
mill. for investment bank to find it worthwhile,
ideally more than NOK 300-500 mill. The
reasons being that transaction costs will be
disproportionately higher for smaller offerings,
and for smaller issues it will also be difficult to
develop a secondary market for trading.
•
Are there assets that can be used as collateral for bond loan?
> Yes = lower spread (ie lower margin on top of NIBOR)
> No = higher spread (ie higher margin on top of NIBOR)
B. Current capital structure to be considered
•
•
•
Any existing loans: Maturity dates to be taken into account
Loan terms existing financing to be factored in
Priority on assets to be assessed
C. Positive existing cash flow (CF) usually required*
•
•
Any existing loans: Maturity dates to be taken into account
NIBD/EBITDA often applied to consider debt servicing capacity**
*) Not always if future positive cash flow can be supported
**) The Net interest Bearing Debt to EBITDA Ratio is a measurement of
leverage, calculated as company`s interest-bearing liabilities (ie loans) minus
cash or cash equivalents, divided by its EBITDA. EBITDA is considered by
some investors to be an approximation to cash flow (which is arguable), and
that the net debt to EBITDA ratio is a measure of years of repayment
(also arguable).
11
C. The benefits and drawbacks with listed bonds
The advantages of having the bonds listed and traded on a
secondary market are numerous. First and foremost the
market bridges the long-term capital requirements of the
company with the investors short-term needs to be able to
invest and dispose of the bonds on a daily basis. One key
consideration for any investors would be how liquid the
investment is. With the possibility of trading the investment in
a secondary market, investors would be much more likely to
invest in the bond issue in the primary market.
The more liquid the bonds are for the bondholder, the less
discount will there be on the bond price. Any liquidity
discount will represent a cost for the bond issuer, since the
company has to price the bond issue higher when issuing
bonds that are not listed. Hence, the more the company can do
to facilitate trading of the bonds through a listing, the better
terms (lower costs) can be achieved for the bond issue.
Listed bonds are subject to reporting requirements and market
monitoring, meaning that there should be no asymmetric
information. This also translates into lower issue costs, as the
bond investors would know they are not left out regarding key
information.
An additional advantage will be that active bond trading in
the secondary market provides the company with a
benchmark for its financing costs.
The main drawbacks are the resources the company have to
spend on reporting and compliance, as well as the investor
and media focus a listing will attract. Another drawback may
be that vulture funds can buy up bonds and position
themselves ahead of an impending, financial restructuring.
D. Going for bonds: Specific issues to contemplate
Size of the issue
Capital structure
The company will usually have a good idea of what amount of
capital it will need for the planned transaction or investment.
While 100 mill NOK is considered as the lower limit for any
bond issue (when taking transaction costs into account), debt
issues below 300 mill NOK will in the Nordic capital market
usually attract little interest from investors as such smaller
issues will mean fewer investors and hence less trading, and
therefore low liquidity in the secondary market. Furthermore,
some investment funds do not have mandates to invest in
smaller bond issues. Typical for the Nordic capital market are
bond offerings in the range of 500 to 1,200 million NOK,
equivalent to about 75 to 180 mill USD. However, issues are
made both below and above this range.
How the bond financing fits in with the company’s
existing capital structure has consequences for price
and terms of the bond issue. The capital structure is how a
company (or group) finances its operations and growth by
using different sources of funds, in order to minimize funding
costs. The company should consider what (if any) security can
be provided, which could provide lower interest costs. Usually
the best collateral has already been used as security for senior
secured debt, while bond debt usually is added on next.
Currency of bond issue
Bond issues listed on Oslo Børs or Nordic ABM can be in NOK,
SEK, DKK, EUR, GBP or USD.
Hence, the bond issuer can take advantage of lower credit
spreads for instance in the Swedish capital market. For the
company’s own internal purposes the bond loan can then be
swapped to NOK or USD, while the bond issue remains listed
in SEK.
12
Issuing Corporate Bonds in the Nordic capital market
Bond financing will often rank behind secured debt with
respect to security. Subordination (meaning that the loan
ranks below other loans with regard to claims on assets or
earnings) will allow the bond issuer to take on additional debt
more cost-effectively. High-yield bonds will typically be
financing that comes on top of existing debt, with less/no
security and hence with a high interest rate (coupon).
A way to achieve a lower interest costs can be to issue
convertible bonds, as the bondholders will be compensated
with conversion rights in addition to the coupon. With
conversion rights the bondholders can take part in any upside
of the shares. (Convertibles pose some specific issues and are
covered in section 6 F).
Figure 4: “Debt” can either be bank financing or bonds, or a mix. “Hybrids” can typically be convertible loans or convertible bonds.
Capital structure of company
(or group)
Lowest
risk
Highest
risk
Priority of payments in liquidation
Risk of default
Interest cost (coupon) for company (or group)
Senior secured debt
Lowest interest cost, as loan has collateral.
Senior debt
Relatively low interest cost, due to priority before
subordinated debt
Junior/subordinated debt
Relatively higher interest, as debt is not secured
and subordinated other debt
Hybrids
Often lower interest than junior/ subordinate, as
option to be converted to shares is included
Shares
Carries no interest. Dividend paid from any
distributable profit
As is apparent above, it will be important to take into account
the company’s existing financing, as the maturity of the existing
debt will have consequences for the bond financing.
Furthermore, any loans already in place will have covenants
which have to be taken into account when new bond financing
is considered.
Financial modeling can be applied to see how the various
elements of financing fits together, also taking into account the
financial covenants of the respective senior debt, junior debt,
convertible bonds and any future investment plans,
transactions and so forth.
Who should be the bond issuer?
For listed companies, the bond issuing entity will often be the
listed company itself. For private companies however, the
identity of the issuer is not so clear. Given the purpose of the
bond, the overall capital structure of the company (or group)
and any existing senior bank debt, the bond issuer could
alternatively be the ultimate parent company, an intermediate
holding (or operating) company or a lower-level operating
company.
Usually senior debt is linked to and secured by the operating
company(ies) at the lower levels of the group structure. The
reason is that he senior debt will be closer to the assets,
meaning this type of debt has better security and can provide
lower interest costs. While high yield bonds on the other hand
are commonly issued by the parent holding company, with less
security as the senior debt already has been granted the best
security in the operational companies/assets.
When the bonds are issued by the parent company, the
bondholders have no direct access to the assets or cash of the
operating companies (unless guarantees are provided). Often
such bonds are secured with share pledges in the operating
subsidiaries. In a bankruptcy of the operating subsidiary, the
bondholder’s claim as shareholders in the subsidiary would be
junior. In other words, these claims will be subordinated to
claims of all the creditors of the subsidiary; not only any bank
debt, but also unsecured debt, trade creditors and so forth. This
so-called structural subordination means the bondholders will
rank low in a default.
Security – to improve pricing terms
Any collateral/assets that may be used as security, can improve
the terms of the bonds. Assets can be used as collateral, or
shares in subsidiaries can be pledged as security. Alternatively,
covenants can express that no assets should be pledged without
the consent of the bondholders – which is referred to as a
negative pledge.
As mentioned above, the best available security will already
have been used for senior bank facilities. However, bonds are
often ideal to increase the leverage further, which is especially
the case with high yield bonds.
13
Guarantees – an alternative way to provide
security and improve terms
“Selvskyldner garanti”- guarantee
To enhance the creditworthiness of the issuer and provide
better terms, occasionally bonds will be guaranteed by the
bond issuer’s subsidiaries (so-called up-stream guarantees).
This will in effect bring the bondholders closer to the physical
assets of the group and thereby avoid structural
subordination. If the bond loan is guaranteed by a parent
company of the bond issuer, this will constitute a downstream guarantee.
In the Nordic bond market mainly two types of guarantees are
utilised, it is therefore relevant to set out the differences – in
general terms – between the two types below.
“Påkravsgaranti” – on-demand guarantee
This type of guarantee is unconditional and independent of
the underlying conditions. It is not necessary to prove any
breach of contract and the guarantor must pay when a creditor
demands payment. The guarantor cannot raise objections
from the underlying relationship, i.e. it cannot raise any
objections that the debitor might have used initially for not
paying. Instead the guarantor will have to request the debtor
to refund the amount, if the guarantor believes there was no
basis for the guarantee to apply. Such a guarantee is also
referred to as a pay now – argue later guarantee.
In order to demand payment from the guarantor under this
type of guarantee, the creditor has to prove that the claim he
wants covered have already been defaulted by the issuer.
What more differentiates this guarantee from the
“påkravsgaranti” set out above, is that the guarantor may
dispute the claim with the same objections the borrower had
initially with paying the lender, for instance that the claim has
already been off-set by other transactions, or similar issues. In
short, with this type of guarantee the guarantor is as liable as
if he where the debtor, but the guarantor may also raise the
debtor’s objections to dispute the claim.
Type of guarantee should be clearly set out
The bond agreement should clearly state what type of
guarantee that has been provided, also setting out the
Norwegian text påkravsgaranti or selvskyldnergaranti as the
distinction can have important consequences for the
guarantors if the bond issuer later defaults18.
Note that a guarantee might require the guarantor to report its
financial statements in line with the issuer (if the bonds are
listed), and therefore adds an element of complexity to the
bond issue. This is covered in section 6, subsection Gurantees
– specific issues below.
Figure 5: Maturity profile HY bonds as of February 2016. Source: Alfred Berg, Stamdata and Nordic Trustee
120
100
80
60
40
20
0
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2030-2114
Year
14
Issuing Corporate Bonds in the Nordic capital market
Call and put options – to add flexibility to the bond
A potential drawback with bond financing is that the issuer
might not need the entire bond capital up-front. The company
may find it more advantageous with a bank loan which
gradually is drawn up as the funds are required, for example
with a vessel under construction. A bank loan can also be
repaid more easily, while a bond loan might not be redeemed
early if there are no conditions for this in the loan agreement.
To allow early redemption the bond agreement may include
options for bond issuer to redeem the bond loan prior to the
maturity (call options). A bond with call options – i.e. a
callable bond loan and denoted with a C in the loan reference
– is very common in the Nordic market. The call option will
add needed flexibility to the bond while still keeping the loan
as long term financing. If opportunities arise the issuer can
repay the bond loan with any excess liquidity, or refinance it
with a loan carrying lower interest costs19 . The use of call
options for the bond issuer will normally carry a financial
penalty, meaning that the issuer would need to redeem the
bonds for slightly more than the face value of the bond. The
reason is that the bond investors initially based their
investment decisions on a bond loan with a specified maturity
– when this is cut short the financial value for the bondholder
has changed.
Coupon vs yield
Coupon is the bond interest rate fixed at issuance. For
a floating interest bond this will normally be a margin
on the 3 months NIBOR interest.
After issuance the bond will most likely trade at a
price above or below par value, while the periodically
paid coupon still is NIBOR plus a margin. An investor
purchasing the bond (with a price above/below par)
in the secondary market will therefore have a
different, calculated return on his investment than
just the coupon. If the bond is purchased for a price
below par (at a discount), the calculated return on the
investment will be relatively higher than the coupon.
This is the “yield to maturity”; an annualized
estimate of what an investor will receive if the bond is
held to its maturity date.
The agreement might also occasionally include options for the
bondholders for early repayment (put options).
The use of call and put options will be strictly regulated in the
bond agreement.
Different sources of debt complementing each
other
In recent years a growing trend has been that companies are
funded with both bond and bank financing. The different
sources of funding can complement each other, especially as
bond issuers can take on higher risk - than bank financing with unsecured high yield bond financing.
Preparing a track-record to deal with asymmetric
information?
Nordic companies have traditionally been financed by the
local banks. In contrast to these banks the bond investors are
not familiar with the company. To overcome the issue of
asymmetric information a company - new to the bond market
- may do a limited bond issue. Servicing this bond will over
18. The difference of the guarantees came up in the Thule legal case.
19. Of course, the company will as well have the possibility to repurchase its bonds in
the market place, and that way indirectly redeem the bond loan. This is covered in
section 8 Buy-back of bonds below.
time create a favorable track-record. The company will - for
future bond issues – then benefit from lower borrowing costs as
investors are now familiar with the company. A positive
side-effect will be that any subsequent bond issues are much
faster, as much of the paperwork has already been prepared.
This alternative can be considered if the company wants to
diversify its sources of financing, which has been especially
relevant when banks have restricted their lending. An
additional advantage will be that the bond trading in the
secondary market provides the company with a benchmark for
its financing costs.
Still, in the current low-interest environment with investors
hunting higher returns, many companies new to the bond
market have nonetheless been able to raise funds on favorable
terms.
Maturity, floating and fixed interest of bonds
The company should consider the maturity of the bond loan (in
the Nordic market the average maturity profile is usually 3-5
years, but the trend is longer maturities). Usually the bonds
raised are with floating interest (Floating Rate Note - FRN in
short), but interest can easily be swapped into fixed interest
rates. This is often the case for companies wanting to lock in a
low interest rate or to achieve predictability of future interest
costs. Funds raised in NOK can also be swapped into USD.
15
Convertible bonds
To increase the investors’ appetite for a bond issue (often in
situations where the company already is highly leveraged),
some companies issue convertible bonds. Convertible bonds
are bonds that can be converted into a predetermined amount
(as set out in the initial bond loan agreement) of shares at
certain times during its life, usually at the discretion of the
bondholder given that the share price has moved in the
favorable direction. Such a bond will be a hybrid product of
debt and equity.
Convertible rights are often included with the bonds to
“sweeten the deal”, i.e. to attract more investor interest.
Bondholders are normally concerned with the downside of the
company, but with convertible bonds the bondholders will
also be able to take part in any upside of the shares. The effect
is that the coupon on the bonds will be lower than what it
otherwise would have been. On the other hand existing
shareholders might not be too enthusiastic about the
possibility of any future dilution. Issuing such bonds can
therefore often be considered as a “last resort” of financing
when other sources are unavailable. Alternatively, the use of
convertibles can in some circumstances be interpreted as a
sign that the board of the company believes that there might
not be much further upside in the shares, and that convertible
bonds can provide cheap financing without any dilution
issues.
Convertible bonds have a specified conversion premium; this is
the amount (as stated in the bond agreement) by which the
price of the underlying shares has to increase before bond
holders can require the bonds be converted into shares. Often
convertible bonds are callable as well, meaning that while
bond holders have a call option to convert to shares, the bond
issuer also has an option to call the loan. However, bond
holders would normally not invest in a callable, convertible
bond unless there is a period of time during which the bond
may not be redeemed (called), and this period is referred to as
the call protection period. Hence, convertible bonds which are
callable usually comes with specified terms for the call
protection period.
Convertible bonds represent some unique compliance issues,
which are therefore covered in a separate section (see section
6, and the subsection Convertible bonds – specific issues).
Coupon, margin and covenant package
The coupon will for floating interest bond loans usually be a
margin on the 3 months NIBOR20 rate. The coupon and the
associated covenant package will be a reflection of all factors
set out above plus investor demand.
20. Norwegian Interbank Offered Rate
NIBOR is the collective term for Norwegian money market rates at different
maturities, and reflects the interest rate level lenders require for unsecured money
market lending in NOK.
16
Issuing Corporate Bonds in the Nordic capital market
E. Involve US investors?
The company might consider involving US investors in the bond
issue, as this will expand the universe of potential investors and
hence the possibility of higher pricing/better terms. It should be
noted that US security regulations require securities offered to
US investors to be registered with the US Security and
Exchange Commission (SEC). One important exemption is if
the issue is done in accordance with the so-called Rule 144A in
the US requirements, if so the offering does not need to be
registered with the SEC. Main requirement for this “safe haven”
is that the US investors are QIBs, i.e. qualified institutional
investors. Bond offerings through the Nordic capital market
involving US investors, will therefore be done on the basis of a
144A exemption, which will be set out clearly in the detailed
offer document. Such bond offerings will usually also require a
comfort letter from the company’s statutory auditors and hence
be more costly.
F. Using the bond market to refinance existing debt
Most bond issues are driven by the corporations’ need for
additional funding. The bond market is only to a lesser degree
used for refinancing of existing debt.
Favorable market conditions or a strengthening of a company’s
credit rating may lead to the refinancing of corporate debt. Two
key factors for a company to consider in refinancing are
therefore decreases in the general interest rate level or
improvements in the company’s credit quality.
The company could also buy back bonds as part of refinancing
its debt, see section 8 for buy-back of bonds.
The company might also be in a position where it is not able to
service its current financing, which can force the company to
restructure its debts. Chapter 9 sets out some aspects to
consider when a bond financing has to be renegotiated, which is
usually a more complicated process than renegotiating a loan
facility.
17
4.Bond covenants – protecting
the bondholders
A. Covenant package
The purpose of bond covenants is to prevent the issuer from
becoming over-leveraged, protect the position of the
bondholders in the capital structure and preserve the assets
of the issuer (or the group, if relevant).
The covenant package therefore may limit the ability of the
issuer (or the overall group) to:
• incur additional debt
• pay dividends
• divest assets
• grant security interests on the assets
• issue additional guarantees
• enter into transactions with affiliates
• do any mergers or acquisitions
• change the ownership structure of the issuer (or group)
To control the bond issuer in these dimensions, two categories
of financial covenants are applied; maintenance and
incurrence covenants.
Maintenance covenants
A maintenance covenant requires the bond issuer to maintain
a certain level of financial performance (measured with key
financial ratios) to avoid default. Maintenance covenants are
tested regularly - often as frequently as every three months and are common for highly leveraged companies. These are
the kind of covenants traditionally set out in bank loans, but
are also common for bond issues in the Nordic capital market
(in contrast to foreign bond issues).
18
Issuing Corporate Bonds in the Nordic capital market
The NIBD/EBITDA ratio (see figure 3 above ) and the interest
coverage ratios are typical maintenance covenants. Another
important covenant is the liquidity covenant, where the issuer
(or group) undertakes at all times to maintain a certain
minimum of free cash. Other similar ratios exist as well.
Maintenance covenants are specifically tailored for each
bond issuer.
After the bond issue the company will have to periodically
provide NT with its financial statements plus a “compliance
report” confirming that the financial covenants (ratios) are
fulfilled, in line with the reporting dates in the bond
agreement. The company will need to have systems in place
to monitor and forecast the financial development of the
company along these dimensions.
Incurrence covenants
In contrast to maintenance covenants incurrence covenants
are only measured when the bond issuer undertakes some
specific actions. Such covenants can be that the company are
not allowed to pay dividends, incur additional debt, do
mergers or enter into transactions with related parties unless
the relevant incurrence tests are met.
In international type bond issues incurrence covenants are
used more frequently than maintenance convenants. Many
CFO’s would find it easier to deal with incurrence covenants,
as the company will not need to constantly monitor whether
the financial ratios are maintained. On the other hand
incurrence covenants provide less protection for the
bondholders, as they are only tested when the bond issuer
actually undertakes specific actions.
B. Testing of
covenant structure
The bond agreement can potentially dictate corporate actions
for years to come. While the investment bank has had a key role
in setting up the initial terms of the deal, it is still important
that senior management of the issuer is closely involved in the
process of testing the covenant structure. This is especially
important with more complex structures, as any outside experts
cannot be expected to foresee what level of flexibility the
company needs over the term of the loan. Some time must
therefore be devoted by management to assess whether
reasonable, foreseeable transactions and activities the company
might engage in are allowed under the proposed bond terms.
Some areas that could be examined in relation to the possible,
new covenant structure include:
•
•
•
•
•
Any future, planned acquisitions and investments
Anticipated funds flow between the issuer and
affiliated companies
Related party transactions and dividends
Other debts that might be incurred
Change of business strategy
Financial modelling
PwC can assist companies prepare financial models
which are important when raising debt and later
when the CFO needs to monitor how the debt
structure/financing develops over time, and in order
to make sure the company is in compliance with
financial covenants..
Of course, it is important to align the new bond terms with
covenants and other provisions in the existing debt facilities.
Any flexibility with covenants in a bond loan might not be so
useful if covenants with existing loans are stricter.
C. Ring-fencing
A different way of protecting the bondholders in addition to
covenants, is the concept of ring-fencing. Ring-fencing is a way
to structure the bond agreement so that a portion of a
company’s assets or profits are financially separated (without
necessarily being operated as a separate entity) to protect assets
(or profits) in favor of the bondholders which have these assets
as collateral. In essence, it is an asset protection scheme.
19
5.Steps of the bond issue process
Raising bond capital involves several steps. For a company that has
issued bonds in the past some of the steps will be reduced or not
relevant. Below a presentation of the basic steps is set out.
Figure 6: The process can take 4 - 5 weeks – or substantially less if the issuers has listed bonds in the past
(These steps may also come in a different order).
Mandate
given
Documentation
drafted
Term sheet
drafted.
Trustee starts
preparing
bond loan
documentation
(based on NT
standard).
The company’s
business model is
assessed by the
bank (see section
3). Engagement
letter signed
between issuer
and investment
bank.
20
Pre-sounding
Launch date
Road Show
Closing
Settlement
Prospectus
Listing
(if listing is required)
Deal is
announced, book
is opened.
Pre-sounding
among a few
investors. Main
terms finalised.
Presentations
prepared.
Issuing Corporate Bonds in the Nordic capital market
Book is closed.
Final pricing
determined and
announced. All
documents are
signed.
CFO/management
and investment
bank on road
show to investors,
giving
presentations and
term sheet
distributed.
If listing on Oslo
Børs: Prospectus
prepared and
approved by FT.
Distribution of
bonds. Investment
bank handles
payments from
investors. Funds
transferred to
bond issuer when
NT has issued
“release letter”.
Bond possibly
listed on Oslo
Børs or on
Nordic ABM.
A. Investment bank
and mandate
When the company has decided to pursue a bond issue, the
process usually starts with contacting one or more
investment banks.
The investment bank will consider the business model of the
company, especially the balance sheet and the cash flow that
will be used to service the bond loan. See section 3 for further
details.
The bank will also help prepare presentations needed when the
company meets the potential investors. The investment bank
will as well let its credit analysts (after having been made an
insider – if relevant) prepare a credit rating21, which will give
investors guidance in relation to the pricing. Shadow rating will
often be prepared.
An engagement letter will then be signed, giving the
investment bank a mandate for following up the bond issue.
B. Term sheet and offer
documentation, pre-sounding
The next step is that a term sheet is prepared by the investment
bank, usually based on the standard set out by NT and terms
based on discussions (and to some degree negotiations) with
the company.
The investment bank has an established network with investors
that might subscribe in bond offerings (the bank has “placing
power”), including large institutional investors like insurance
companies or investment funds. The bank often will seek initial
feedback from a small number of these investors, representative
of the issuer’s targeted investor base (pre-sounding). This will
help the investment bank assessing the depth of demand and
formulating appropriate initial price guidance, and so help guide
the terms of the transaction ahead of a public announcement.
(The potential investors who are pre-sounded may be made
“insiders” if the company is already a listed company and the new
financing is considered “inside information”).
C. Launch of bond issue
and road show
Given a positive pre-sounding and an approved terms sheet,
the company (if it is listed on Oslo Børs or Nordic ABM)
launches its offer with a public announcement22 .
The management of the company and the investment banks
will embark on a road show, where the company and the
investment bank meet potential investors and present the
offer and a price range, to test the interest of the bond issue.
One crucial part of the road show is also to familiarize the
investors with the company and its industry.
The bond investors – if interested - will subscribe to the bond
issue based on the offer documentation, but the subscribed
amounts will depend on the price range of the issue.
Alternatively – launching and closing the
same day
Many bond issues for companies listed on Oslo Børs are
launched in the morning and closed later in the afternoon.
The investment bank is able to do this as it has used the
pre-sounding phase to get sufficient pre-acceptances from
potential bondholders, so the transaction can be closed
within the span of hours.
This approach is, however, mainly available only for listed
companies, where much information about the issuer is
already available in the markets and the company often is a
repeat issuer. It is not without reason that bond issues done by
listed companies are usually successful, as the investment
banks will first launch the deal when they are comfortable
that the bond issue will go through.
Often the pre-sounding has not been fully favorable, and the
company and the investment bank need to go back and re-adjust
the terms of the issue.
When at this point the term sheet has been finalized, it would be
difficult later in the bond process to go back and adjust the terms.
However, the price is still not fixed. At this stage a price range will
be given, and the demand from the bond investors - when the
issue is launched - will eventually decide the price upon closing.
21. A so-called shadow rating, see section 2
22. See http://www.newsweb.no/newsweb/search.do?messageId=345844 for
an example of a notice setting out a “new contemplated bond issue”, and the
notice the following day “Successful placement of new Senior unsecured bond”
http://www.newsweb.no/newsweb/search.do?messageId=345995
21
D. Closing and settlement
When enough investors have subscribed to the bond issue, it
will be clear from the high (or low) demand what price
(coupon) is associated with the bond issue. The investment
bank will advise on the specific pricing of the bond, and the
board of the company will usually approve it23 .
Next, a public announcement will be made of the bond issue
and the pricing24 .
The formal bond loan agreement is then finalized by NT, on
the basis of the standard Nordic Trustee agreement. NT will
also prepare any documentation regarding collateral and
security provided in the bond issue, if relevant.
After distribution the bond issuers pay their funds to the
investment bank (on an escrow account), which keeps the
funds in escrow until all conditions are met. When all the
paperwork is deemed satisfactory by NT, NT issues a release
letter to the paying agent (the bank) whereby the funds are
released to the company.
Note that transactions can be structured so that funds are
raised before the transaction (which is to be financed by the
bonds) is carried out by the company. An example can be
bonds raised to finance a purchase of vessels. When the
transaction is closed the funds are released from escrow and
used as settlement by the bond issuer in the transaction.
E. Possible listing on Oslo
Børs or Nordic ABM
While there are no requirements that bonds have to be listed
on a market place per se, many bondholders still set this as a
condition for investing. This eventuality should be
contemplated early on in the process.
In contrast to listing of shares – where the investors would like
to trade their shares immediately after the capital issue – bond
investors usually accept that listing is to take place first after
weeks or even months. The deadline for listing of the bonds
will be specified in the bond agreement. The section below goes in detail about the advantages and
drawbacks of listing the bonds, and the listing requirements.
23. For listing on Oslo Børs/Nordic ABM a board resolution is a listing requirement.
For convertible bonds a shareholder’s meeting has to be held to approve any issue
– this is because the convertible loan has the potential of diluting the shareholders.
24. See previous note for example of announcement.
22
Issuing Corporate Bonds in the Nordic capital market
6.Listing of the bonds in Oslo
A. Listing requirements Oslo
Børs – the main board
Costs of a bond issue
The investment bank will usually get a fee of 1-5 % of the
bond proceeds (usually a success fee).
The two major hurdles: Listing prospectus and IFRS
The way offerings are usually structured in the Nordic bond
market, no offer prospectus25 will be triggered by the launch of
the offering. While Oslo Børs strictly speaking not has IFRS as a
listing requirement per se, it is indirectly required as the
prospectus rules requires financial statements to be in accordance
with IFRS (or IFRS equivalent GAAPS).
However, if the bond loan is to be listed on Oslo Børs a listing
prospectus has nonetheless to be prepared by the company/
advisors and approved by the NFSA. The audited, consolidated
financial statements to be included in the prospectus have to be
prepared under IFRS26, for two years (or less if the company has
been in existence for less than two years), alternatively one year
for small and medium sized companies27. Note that the parent
company’s financial statement does not need to be in line with
IFRS, given that consolidated figures are reported in IFRS. If the
issuer has been incorporated after the last yearend, audited
interim financial figures have to be prepared and enclosed to
the prospectus.
It should be noted that preparing a listing prospectus for bonds is
usually a lot easier than preparing a prospectus for listing/offer of
shares. While a prospectus for shares might involve up to a couple
of months of work, a listing prospectus for bonds will just take a
few weeks (given that financial accounts are in line with IFRS and
no additional financial statements have to be prepared/audited).
It is advisable to agree with NFSA early on in the
process the extent of financial statements to be included
in the prospectus, if the transaction is complex, involves
foreign issuers, guarantors and/or several levels of
companies/bond issuers and more. Such pre-clearance
can avoid surprises coming up late in the process.
Requirement for an audit committee
– only on Oslo Børs
In general bond issuers seeking a listing of bonds on Oslo Børs
must establish an audit committee or equivalent corporate body28.
This is also a requirement for foreign bond issuers, unless it is
registered in another EEA country and already has established an
audit committee or equivalent corporate body in line with the
requirements in the country where the borrower is registered.
It should be noted that if the borrower is a Norwegian public
If the bond loan is listed on Oslo Børs costs for a listing
prospectus would be incurred, plus listing fees on Oslo
Børs. (Listing on Oslo ABM would not incur any
listing prospectus).
Such a process would also incur some additional costs
from legal advisors and the company auditors, but far
lower than an international type bond offering.
limited liability company (Norway: ASA), it must establish an
audit committee with the duties and composition mentioned in
the Public Limited Liability Companies Act, Sections 6-41 to and
including 6-43 regardless of whether it lists bonds or not.
At least one member is to be independent and proficient in
accounting or auditing. For a bond issuer that is only a Norwegian
private company (Norway: AS) the independent member does not
need to be part of the company board, but can be only a member
of the audit committee.
An audit committee is not required for a Norwegian public limited
company if two of the three following criteria are met: An average
of less than 250 employees last year, total assets of less than 300
million NOK by end of the financial year and a net turn-over of
less than 350 million NOK29.
Furthermore, an audit committee is not required if the bye-laws
state that the entire board is the audit committee, given that
management is not represented on the Board and at least one
member is independent and proficient in accounting or auditing.
If the company believes that an exemption from having an audit
committee applies, this should be discussed with Oslo Børs
or PwC. An audit committee is not a requirement for listing on
Nordic ABM.
25. Prospectus requirements and exemptions are set out in an attachment 2 to this
publication.
26. Other accounting languages (GAAPs) are acceptable, like US GAAP. Contact PwC
or Oslo Børs for a list of generally accepted accounting principles equivalent with
IFRS. SME companies which issue bonds of face value of 100,000 euro or more, can in
some circumstances apply Norwegian GRS in the listing prospectus, and report in line
with IFRS later when reporting to Oslo Børs commences.
27. This listing requirement is equivalent with the prospectus rules for financial
statements to be included in the listing prospectus
28. See section 2.5 in the Bond Rules.
29. Figures based on consolidated figures if the bond issuer is a group.
23
Foreign companies
For foreign companies there are some extra, minor technicalities
that have to be addressed, but no additional major listing
requirements30. In other words, the same listing requirements
that are set out above for Norwegian companies apply as well in
general for foreign companies. However, it should be noted that
for companies incorporated in countries outside the EEA area
the auditors must be registered with the NFSA register31 of
so-called third country auditors before listing.
The financial statements, listing prospectus and all
communication with advisors, NT, Oslo Børs and NFSA can be in
English. However, Norwegian issuers with bonds with face value
less than EUR 100,000 must apply for an exemption from the
requirement to report in Norwegian, in order to report
in English.
Reports on corporate governance and social
responsibility: Not required for listing
Reports on corporate governance and social responsibility are a
reporting requirement (see chapter 6) subsequent to listing, but
such reports are not a listing requirement. In other word, these
reports do not need to be prepared nor included as part of the
listing prospectus. Such reports will only be required when the
company files the first annual report after listing.
Application for listing
When the prospectus has been approved by the NFSA, the
preparation of application for listing of the bonds to Oslo Børs is
a straight-forward process, as the more technical listing criteria
are easily dealt with32. The listing application can usually be
approved by Oslo Børs within days.
B. Listing requirements
Nordic ABM - the
alternative bond market
What is set out above for listing on Oslo Børs, applies as well
for Nordic and foreign bond issuers applying for listing on
Nordic ABM, with the differences that:
•
•
there is no requirement for a listing prospectus (and
hence no involvement from the NFSA)
the audited financial statements do not need to be in line
with IFRS
Instead of a listing prospectus the company will need to
prepare a listing document that will be reviewed by Nordic
ABM before it is made public, preparing sch a document is
quite straight-forward.
24
Issuing Corporate Bonds in the Nordic capital market
C. What is not required
for listing on Oslo Børs
nor Nordic ABM
Below is a list of various items not required for
listing on Oslo Børs nor Nordic ABM.
- Not a requirement to be a public limited company
There is no requirement that the company needs to be a
public limited company (Norway: ASA) when listing bonds.
- Gender requirement in the board of directors not
required for foreign companies
The gender requirement of 40 per cent is only relevant if
the company is a Nordic public limited company
(Norway: ASA).
- Due diligence is not required
Due diligence is not a requirement for listing of bonds on
Oslo Børs (in contrast to listing of shares).
- Public rating not a requirement
A rating of the bond issuer is not required for listing on Oslo
Børs. The investment bank will, however, still do a
shadow rating.
- No limited review of interim financial statements
While yearend financial statements have to be audited,
there is no requirement that quarterly or half-year financial
statements have to be audited, neither as part of any listing
prospectus nor as part of ongoing reporting after listing.
The only exception is if the bond issuer has been
incorporated after yearend, if so the interim financial
statement usually has to be audited.
D. Specific requirements
for bond issuers that have
or seek a secondary (dual)
listing
Specific listing and continuing requirements apply for
foreign and Nordic bond issuers that have a secondary listing
of the bonds or are applying for a secondary listing for the
bonds. These more technical requirements are not covered
here, please refer to section 4 in Oslo Børs/ABM rules.
E. Guarantees – specific
issues for listed bond issuers
Guarantees provided to the bond issuer can pose a problem for
the listing of the bonds. This is because guarantors are required
to provide the same information as the bond issuer in the
prospectus and after listing, and some guarantors might not be
able to provide such reporting. The reason for these
requirements is that the bondholders need to see how the
guarantors are doing financially and whether they are able to
stand by the guarantee(s) if the bond issuer should fail.
It should be noted that Oslo Børs can require the guarantor,
prior to the borrower’s bonds being admitted to listing, to enter
into a statement of acceptance that regulates in detail the
guarantor’s responsibilities and duties in respect of Oslo Børs.
This also applies if the loan acquires a new guarantor during
the term of the loan and the new guarantor has not previously
given such a statement. This means that the guarantor will be
bound by the same rules as the borrower.
While all guarantors33 have to enclose their financial statements
to the prospectus, so-called up-stream guarantors will usually
not be required to report their financial statements on an
ongoing basis after listing. The reason is that these guarantor’s
financial standing will be reflected in the overall consolidated
financial statements of the group. The financial statements for guarantors do not need to be in
accordance with IFRS, but they must be prepared in a form
consistent with what will be used after listing. (I.e. if the
guarantor has prepared financial statements in line with
N-GAAP for the last financial year, and will prepare NGAAP
after listing, it will be sufficient with N-GAAP for the
guarantor’s financial statements in the prospectus). It should
also be noted that the NFSA requires the guarantor’s financial
statements for the last financial year to be audited.
As guarantees introduce substantial uncertainty of
what will be required of financial reports to the bond
prospectus, it should be agreed with NFSA as early as
possible what specific financial statements that will
be included to the prospectus, and with Oslo Børs
what the Exchange will require of financial reporting
from the guarantors after listing of the bonds.
F. Convertible bonds –
specific issues for listed
bond issuers
The rationale for convertible bonds
Convertible bonds are bonds that can be converted into a
predetermined amount (as set out in the initial bond loan
agreement) of shares at certain times during its life, usually
at the discretion of the bondholder. So in contrast to an
ordinary bond a convertible bond has embedded a
stock option.
For convertibles there are some specific factors the bond
issuer should consider, these are set out below.
Listing of convertible bonds – not always possible
Convertible bonds can usually only be listed on Oslo Børs or
Nordic ABM if shares of the same class are either already
listed on Oslo Børs/Nordic ABM (or have applied for/listed
on another recognised and regulated market)34.
Oslo Børs might grant exemptions from this requirement.
Investment mandates
The investment mandates of some funds might only cover
bonds, and any shares that might result from conversion of
bonds will be a complicating factor.
Registration of convertible bonds
For Norwegian companies the convertible bond loan have to
be registered in the Registry of Business Enterprises
(Foretaksregisteret)35.
Approving convertible bonds - shareholders
meeting
While board approval is sufficient for a bond issue, a
shareholder’s meeting has to be held to approve any issue of
convertible bonds for Norwegian companies36.
Notification requirement for primary insiders
and disclosure of acquisitions of convertible
bonds
There is in general no requirement for the primary insiders
to report trades of ordinary bonds to Oslo Børs. However, for
convertible bonds the primary insiders have to report the
trades (just like if the bonds had been shares)37, if the shares
of the bond issuer are listed on Oslo Børs or Oslo Axess.
30. However, for bond issuers that have or seek a secondary listing specific
requirements and continuing obligations apply.
31. Broadly speaking audit firms auditing issuers from non-EEA countries.
32. For the full set of listing requirements see Bond Rules and ABM Rules: http://
www.oslobors.no/ob_eng/Oslo-Boers/Regulations/The-Issuer-Rules. Bond issuers
should contact Oslo Børs or PwC for any questions regarding listing criteria.
33. Typically subsidiaries guaranteeing for the bond issuer
34. See section 2.3.4 to Oslo Børs’ Bond Rules and the ABM Rules
35. See section 11 in the Norwegian Public Limited Companies Act.
36. Section 11 in in the Norwegian Public Limited Companies Act.
25
Furthermore, any acquisition of convertible bonds that passes
certain thresholds has to be immediately notified to the issuer
and Oslo Børs (equivalent to similar disclosure requirements
for shares – Norway: flagging) by the buyer/seller.
Conversion of bond loan to shares – no prospectus
Any conversion of a bond loan to shares will normally not
trigger a requirement for a prospectus38, given that the shares
originating from the conversion are of the same class as the
shares already admitted to trading on the same regulated
market place.
Accounting treatment
As the convertible bonds are so-called “Embedded
derivatives”, accounting rules (IAS 32 and IFRS 9) require the
company to decompose the bond instrument into debt and
equity, which makes the accounting treatment more difficult
and can have consequences for leverage ratios. This falls
beyond the scope of this publication.
Tax
Convertible bonds will pose some specific tax issues, which is
beyond the scope of this publication.
37. See section 4-2, second subsection in the Norwegian
Securities Trading Act.
38. See EU prospectus directive 4.2 g
26
Issuing Corporate Bonds in the Nordic capital market
7.Post-issuance:
Issuer’s ongoing obligations
A. Complying with the bond
loan agreement and NT
After the bond funds have been raised, the bond issuer is under
a contractual obligation to follow up on the bond loan
agreement. NT will monitor that the company reports its
financial reports in line with what is set out in the bond loan
agreement, furthermore that the loan is serviced and covenants
complied with. NT will – based on its role as Trustee - be in a
position to take required legal action if this is deemed necessary
to protect the interests of the bondholders.
If the bonds are unlisted, the bond agreement will nonetheless
require the company to report information (financial
statements etc) to the bondholders, via NT.
B. Continuing obligations
for listed issuers
Publication
Financial reporting, inside information and other
relevant information have to be distributed through
Newsweb. In addition, such information has to be
made public, usually through News Point or through
a third party information provider. (Newsweb and
Newspoint are systems managed by Oslo Børs).
After such distribution the information also has to be
made available on the company’s own website.
If the bond loan is listed on Oslo Børs or Nordic ABM, the
company would also need to comply with the Exchange’s
so-called “continuing obligations” for bond issuers. These
requirements are quite similar whether the company is listed on
Oslo Børs or Oslo Axess. When the bonds first are listed and the
reporting routines set up, most companies find it rather easy to
follow the reporting requirements from Oslo Børs.
If the company is already listed with its shares, the company
would be following the “continuing obligations” for equities,
and the additional reporting requirements for bonds are
uncomplicated to deal with.
Below a brief summary of the main requirements is set out. For
the full set of reporting requirements see Oslo Børs’ website39.
39. The full set of reporting requirements can be found here (see Bond Rules and
ABM Rules): http://www.oslobors.no/ob_eng/Oslo-Boers/Regulations/The-IssuerRules
27
C. Financial reporting for listed issuers
Financial reporting requirements
Bond issuers have to report periodic financial information to
its investors, through stock exchange notices on Oslo Børs. It
might be advisable to agree with Oslo Børs – prior to listing what is required in terms of financial reporting. Especially if
guarantors are involved; these might have to report their own
financial statements in line with the bond issuers’ reporting
(see more about “Guarantees” in section 6, subsection
Guarantees – specific issues). All reporting can be in English.
The deadlines for the financial reporting requirements are the
same for companies listed on Oslo Børs or Nordic ABM40. The
bond issuer is required to report annual and half-year
financial statements. Interim reporting (for quarters 1, 3 and
4) is not required; however the bond loan agreement will
often specify additional reporting. Currently the trend
appears to be that bond investors require the company to
report quarterly.
The half-yearly financial report shall be made public as soon
as possible after board approval after the end of the relevant
period, but at the latest two months thereafter.If the issuer
prepares an interim report for a period shorter than six
months, this report shall be made public no later than the time
at which the report is made publicly available in another
manner.
The annual financial report shall be made public immediately
it has been approved by the board of directors or equivalent
corporate body, and at the latest four months after the end of
the financial year. (Oslo Børs may grant an exemption from
the requirement of release immediately after board approval,
while there are no exemptions from the four months deadline,
nor the two months deadline for half-year reporting for
bondholders listed on Oslo Børs.).
The above reporting requirements will be for consolidated
figures. Annual reporting of parent company statements is
required as well for companies with Norway as home-state (ie
for Norwegian companies and third country issuers).
IFRS required for bond issuers on Oslo Børs
For bond issuers listed on Oslo Børs the consolidated financial
statements will have to be in accordance with IFRS. The
parent company’s financial statement (in the annual financial
reporting) does not need to be in line with IFRS, given that
consolidated figures are reported in IFRS (or in IFRS
equivalent GAAPs41).
Accounting language for issuers listed on Nordic
ABM
Companies with bonds listed on Nordic ABM do not need to
follow IFRS, neither for consolidated nor for the parent
company statement.
Guarantors
Guarantors of the bond issue usually have to report their
financial statements just as the bond issuers, as the investors
need to know how the guarantors are doing financially.
However, so-called up-stream guarantors – typically
subsidiaries guaranteeing for the bond issuer – will normally
not be required to report their financial statements as these
are consolidated with the parent company. See section 6
for Guarantees.
All financial reports have to be kept available to the public for
at least five years.
Bond issuers listed on Oslo Børs with home state in another
EU country will, however, need to report financial reports in
line with their domestic rules for listed companies. (In EU
lingo; these companies will have Norway only as host-state,
and their home-state in another EU country means that the
home-state regulations will take precedence over
Norwegian rules).
40. Section 3.4 in the Bond and ABM Rules.
41. Other accounting languages (GAAPs) are acceptable, like US GAAP. Contact
PwC or Oslo Børs for a list of generally accepted accounting principles equivalent
with IFRS.
28
Issuing Corporate Bonds in the Nordic capital market
Foto: Annette Larsen
D. Reports on corporate
governance and
social responsibility
Report on corporate governance
Norwegian and foreign bond issuers with bonds listed42 on Oslo
Børs will annually need to prepare a report on its principles and
practice in respect of corporate governance43, either in its
annual report or a document referred to in the annual report.
As a minimum, the report has to cover the following:
1. A description of the main elements of the borrower’s
systems for internal control and risk management in
respect of the financial reporting process and, if the
borrower is required to produce financial accounts and
produces consolidated accounts, the equivalent description
of the group’s systems in this respect,
2. The provisions in the articles of association that regulate
the appointment and replacement of members of the board
of directors,
3. Any provisions in the articles of association and any resolve
that the borrower shall buy back or issue own shares or
equity certificates.
Third country44 issuers with Norway as home-state can apply
for exemption from these requirements, if it prepares a report
equivalent to Norwegian requirements in its home-state45.
A report on corporate governance is not required for bond
issuers listed on Nordic ABM.
Report on social responsibility
For Norwegian or foreign companies with bonds listed on Oslo
Børs46 a report on the company’s social responsibility is required
as part of the annual financial reports (or as part of any other
publicly available document).
If the company does not have such a report, this fact has to be
disclosed.
A report on social responsibility is not required for companies
listed on Nordic ABM.
It should be noted, however, that all Nowegian public companies
(Norway: ASA) have to report on social responsibility regardless
of whether these have bonds listed or not.
42. Note that this is a requirement when the bonds have been listed, i.e. it is not a
listing requirement per se.
43. See section 3-3b in the Accounting Act and section 3.10 in the Bond Rules.
44. Broadly speaking issuers from non-EEA countries. If such a company issues a
prospectus in Norway or lists the bonds on Oslo Børs, Norway will become its “home
state” in the EU area (given that it has not any prospectus/listing in another EEA
country already).
45. See section 4.3.2.3 in the Bond Rules.
46. See sections 3-3c and 1-5 in the Accounting Act.
29
E. Inside information
In addition to the financial reporting as set out above, listed
issuers have to follow the other “continuing obligations” as set
out by Oslo Børs. These obligations cover a range of
requirements, below are the most important of these set out.
The rules of disclosing inside information apply to the
company from the time of applying for listing on Oslo Børs.
For listing on ABM the rules apply from the first day of listing.
All companies listed on Oslo Børs or Nordic ABM –
(Norwegian as well as foreign47) are required to “without
delay and on his own initiative publicly disclose inside
information which concerns the issuer directly”.
Furthermore, the information should in addition be made
available on the issuer’s internet site after publication.
Inside information refers to precise information about the
bonds, the issuer of the bonds or other matters that likely may
influence the price of the bonds or related financial
instruments appreciably and which is not publicly available or
commonly known in the market. For bonds such information
will typically be new debt issues, loan redemption,
refinancing, compliance issues and so forth. Whether the
event is considered “inside information” has to be assessed on
a case-by-case basis.
The requirement to disclose inside information applies to
issuers whose financial instruments are listed, or for which
admission to listing has been requested, on Oslo Børs or
Nordic ABM48.
Legitimate interests
The main criterion for delayed disclosure is whether
the company has “legitimate interests”.
Legitimate interests may typically relate to:
1. Negotiations in course, or related elements, where
the outcome or normal pattern of those negotiations
would be likely to be affected by public disclosure. In
particular, in the event that the financial viability of
the issuer is in grave and imminent danger, although
not within the scope of the applicable insolvency law,
public disclosure of information may be delayed for a
limited period where such a public disclosure would
seriously jeopardise the interest of existing and
potential shareholders by undermining the
conclusion of specific negotiations designed to ensure
the long-term financial recovery of the issuer.
2. Decisions taken or contracts made which need the
approval of another body of the issuer in order to
become effective due to the organisation of the issuer,
provided that public disclosure of the pending
decision or contract together with the simultaneous
announcement that final approval is still pending
would jeopardize the correct assessment of the
information by the public.
In some situations the company may delay the public
disclosure of inside information such as not to prejudice its
legitimate interests, provided that such omission does not
mislead the public and provided that the issuer ensures the
confidentiality of that information.
Hence, the company can delay the disclosure if the three
criteria all are met.
In situations with “delayed disclosure” the company would
need to inform Oslo Børs (on a confidential basis) that there is
inside information, Oslo Børs will then take steps to monitor
the trading more closely. Furthermore, the company will need
to keep lists with insiders.
It should also be noted that the company must not disclose
inside information to any unauthorised individuals. Inside
information will have to be handled with due care to avoid
leaks and any misuse. Finally, the company must have
routines in place to ensure that inside information is kept
confidential.
47. This is a requirement regardless of whether the company has Norway as “home”
or “host state”, in EU parlance. See section 5-2 in the Norwegian Securities Trading
Act.
48. See section 3.2.1 in the Bond and ABM Rules.
30
Issuing Corporate Bonds in the Nordic capital market
F. Primary insiders
For a bond issuer with bonds listed on Oslo Børs the primary
insiders of the company have specific obligations set out in the
Norwegian Securities Trading Act.
In contrast to ordinary insiders (which are deemed as such since
the company has occasionally shared inside information with
them – see section above), primary insiders are key individuals
in the companies that on a regular basis are exposed to inside
information. Hence, these individuals are specifically set out in
the Norwegian Securities Trading Act, and are specified
as follows:
Member of the board, senior employee, member of the control
committee, auditor, deputy member, observer, board secretary
and company secretary to the board.
This also applies to senior employees and board members of a
company in the same group who can normally be expected to
have access to inside information.
The primary insiders have a specific obligation to check49 if
there is any inside information, before they subscribe,
purchase, sell or exchange financial instruments issued by the
company. The same goes for entering into, purchase, sale or
exchange of option or futures/forward contracts or
corresponding rights connected to financial instruments issued
by the company.50
Primary insiders are generally not allowed to enter into any
transactions (as set out above) if inside information exists51.
Furthermore, the primary insiders are not allowed to incite
others to do such transactions if there is inside information.
While primary insiders for companies with listed shares are
required to report share transactions to the stock exchange,
there is no requirement for primary insiders to report trades of
ordinary bonds52 to Oslo Børs/the markets. However, if the
bonds are convertible bonds and the shares of the company are
listed, the primary insider still have an obligation to report the
trade, as the bonds can be converted to shares.
Furthermore, there is no requirement to report large
acquisitions of bonds that passes certain thresholds (Norway:
flagging), unless the bonds are convertible, see section 6,
Convertible bonds.
What is set out above refers to listing of bonds on Oslo Børs.
Also the Nordic ABM rules state that it is not allowed for
any person with inside information of the bonds to trade53.
Furthermore, if a company has convertible bonds listed on
Nordic ABM and shares listed on a regulated market (i.e. Oslo
Børs or Oslo Axess), all the requirements as set out above also
applies for primary insiders to a bond issuer on Nordic ABM.
G. Investor relations
with bondholders
Bond issuers should consider following up the bondholders
with investor relations work - beyond what is required in
terms of financial reporting as set out above. In recent years
a growing trend has been to focus more on investor relations
work for the bond market. Often this is done to pave the way
for future bond issuances, especially for repeat issuers.
Many issuers, especially in volatile times, focus on ensuring
investor familiarity with their businesses in order to take
advantage of any short and unpredictable issuance windows
that might come up. This may include holding investor
meetings that, unlike transaction-specific meetings
(“deal roadshows”), are not intended to market a specific
transaction. Still, such investor meetings may nonetheless
provide useful investor feedback that can encourage further
bond issues.
There is no obligation for the company to have a list of primary
insiders at Oslo Børs (in contrast to a company with shares
listed on Oslo Børs).
49. In Norwegian; undersøkelsesplikt
50. See section 3-6 in the Securities Trading Act.
51. However, the normal exercise of any option or forward/futures contracts
previously entered into upon the expiry of such contracts is exempted from the ban
on trading with inside information
52. There is no obligation to disclose trades in bonds, unless the bonds are
convertible
53. See section 3 in the Nordic ABM rules
31
8.Buy-back of bonds
Buy-back of bonds will often be relevant , especially for issuers
with listed bonds. The trading on Oslo Børs or Nordic ABM
will give an indication of the price of the bonds. If the bonds
trade below par it might make sense to repurchase the bonds,
either as excess liquidity is available, or to lower future
interest costs. A buy-back program can also be relevant in
relation to changes in the company’s capital structure or
market conditions, or to redeem a bond loan with problematic
covenants ahead of a restructuring.
An alternative view is that a buy-back program may be
considered a better commercial opportunity than investing in
the company’s business.
Buy-backs is especially relevant when the general interest
level is rising and the bonds have fixed interest, as a higher
interest rate level will lead to commensurately declining bond
prices and makes a buy-back an interesting proposition. On
the other hand, the interest cost on a fixed-interest bond will
- with increasing market rates - provide the company with a
very favorable financing.
Offer of buy-backs
In addition to a program of buy-backs – as outlined above –
the company can go for an outright offer of all the bonds. In
contrast to a share offering there are no requirements for the
bond issuer to give an offer to all of the bondholders. However,
where an acquisition of convertible bonds must be considered
to be in reality an acquisition of the shares, Oslo Børs may
impose a mandatory bid obligation on the party that through
the acquisition will get control of more than 1/3 of the votes of
a stock exchange listed company. 56
In some circumstances an offer might also trigger a
requirement for an offer prospectus.
Bond issuers are advised to discuss any general offer of
buy-backs with Oslo Børs prior to any offer being launched.
Equal treatment
As with all interaction with the company’s investors, any
buy-back transactions have to be based on equal treatment of
the investors.
Buy-back programs
Buyback of bonds can raise the issue of whether it is
manipulation of the bond prices in the market, as the
Norwegian Securities Trading Act specifically makes this
illegal.54 However, buy-back programs carried out in
accordance with EU55 rules will not violate the market
manipulation rules. The decision to start a buy-back program
may also constitute inside information.
Bond issuers contemplating a buy-back are advised to
discuss this with Oslo Børs prior to launch of any buy-back
program.
32
Issuing Corporate Bonds in the Nordic capital market
54. See section 3-8 in the Norwegian Securities Trading Act.
55. See EEA Agreement Annex IX No 29 (Commission Regulation (EC) No
2273/2003) on buy-back programmes and stabilisation of financial instruments,
with modifications as follow from Annex IX, protocol I to the Agreement and the
Agreement in general. It is not clear whether Oslo Børs applies these EU
requirements.
56. Section 6-11 to the Securities Trading Regulations.
9.Bond issuers in distress –
some considerations
A company might find itself in a situation where it cannot
comply with the terms of the bond agreement. This can be
anything from minor, temporary issues to more severe
situations where the company - due to a lack of sufficient cash
flow - cannot pay interests and/or repay the bond loan as set out
in the bond loan agreement.
With a bank facility the approach would have been
straightforward; the management would sit down with the
bank and discuss the options. In contrast a bond issuer would
need to first approach NT to discuss the situation. NT would
then deal with the bond holders, as the Trustee represents all
the bondholders and the bondholder register is confidential.
Discussions with NT can be done on a confidential basis (within
the legal frames of inside information and delayed disclosure
for listed bonds). The company should involve its legal advisors
to make sure that it does not overstep any legal requirements in
such a process.
Example of a stock exchange notice for
bondholders’ meeting (3 October 2011)
The Company announces that it has summoned a
Bondholders’ Meeting regarding the Company’s proposal to
extend the maturity date of the Company’s NOK 182.5
million bond loan by 12 months. In return the bondholders
will receive early repayment of parts of the bond loan.
A Bondholders’ Meeting is called for 11 October 2011
to vote for the proposed changes to the Loan Agreement.
The company informs that the proposal is supported by
the largest bondholders.
(....) Securities AS acts as the Company’s financial advisor
in connection with the proposal.
Each case is different. Below three scenarios are set out,
reaching from the simple issues to very complex restructurings.
1) Only minor non-compliance from bond issuer:
Can be dealt with by NT
Minor non-compliance may be dealt with by NT without
involving the bondholders, as the bond agreement usually
provides sufficient power of authority to NT on behalf of the
bondholders.
2) Major changes to bond agreement like extension of
maturity: 2/3 of bondholders to agree
The company might be in a position where the cash flow is not
sufficient to service the debt, and more time is needed (longer
maturity) than initially agreed in the bond agreement. This will
constitute a major breach of the bond loan covenants and is
therefore a serious matter. Nonetheless, it should be kept in
mind that most likely the bondholders would not want to take
over the assets, and/or stand to lose from any liquidation of the
company. At least initially it will therefore usually be in the
interest of both the company and bondholders to keep the
business going. Such substantial changes (like extending the
maturity) require 2/3 of the bondholders to approve the
amended bond loan in a bondholders’ meeting.
33
3) Full debt restructuring required: Interests of
shareholders and bondholders are splitting
The case might be that the company’s cash flow will not be
sufficient to pay interest/repay the bond loan, neither in the
short or long term. Basically the company might have taken on
too much debt, or has a permanent loss of income.
As extending the maturity will not be sufficient for the
company, more serious steps have to be taken. This would
usually be a reduction in the debt via a “haircut”57 and/or
conversion of bond capital to equity, in addition to other
measures like extended maturity of the loan/adjusted
covenants etc. All of this in order to give the company
enough room to again be able to service the adjusted debt.
A haircut will be a percentage reduction of the nominal value
of the bond loan, i.e. the creditors will be repaid less than the
initial face value, enabling the issuer to repay the reduced
debt. It should be noted that if the company has been in
distress for a period, the bonds will likely have been traded at
a discount to the face value. (This can be seen as the market
having taken a de-facto haircut already). Hence, many new
bond investors may now in reality have a lower acquisition
cost so that a haircut will be easier to accept. Furthermore,
the investment bank that initially placed the bonds and has
followed up on the trading, will know the prices and implicitly
the acquisition costs for many bondholders. This information
is valuable when considering whether a possible solution is
acceptable for the bondholders.
By conversion to equity (debt-for-equity) the bondholders will
get the opportunity to recoup at least some of their
investments via a future upside in the shares. The
shareholders will as a consequence become seriously diluted.
Often it is also a prerequisite for the bondholders to accept a
restructuring that the shareholders contribute with new
equity, to recapitalise the company.
Aggravating the situation is that the interests of shareholders
and bondholders may now be splitting. Initially the
assumption was that the shareholders and bondholders had
the same interest of keeping the company afloat (see the
previous section), but as things get worse the priorities of
shareholders and bondholders may change. Furthermore, if
there are bonds issued with different securities, also interests
of different classes of bondholders will diverge. The reason is
that for bonds fully secured with collateral in the issuer, there
are no reason for the bondholders to get anything less than a
full return. These bond investors have less or no incentive to
keep the company intact unless there is substantial doubt
about the market value of the collateral, and they may require
the assets to be divested to pay off the debt. While for other
bond classes without security - and for shareholders - it will
Example of outcome of bondholders’
meeting (11 October 2011)
Reference is made to Stock Exchange Announcement
dated 3 October. The Company announces that the
Bondholders today voted against the Company’s proposal
to extend the maturity date of the Company’s NOK 182.5
million bond loan by 12 months. In return the
Bondholders would have received early repayment of
parts of the bond loan. The bond loan matures in May
2012. The Company received 60 per cent support for its
proposal versus the required 66.7 per cent. Based on the
outcome of today’s meeting the Company will evaluate
whether there is basis for proposing a refined deal.
still make sense to keep the company afloat in the hope of
recovering a future upside.
All the interests of the various stakeholders have to be
factored in. When an outline of solution has been made, the
company can pre-sound it to key bondholders and get
sufficient pre-acceptance (ideally more than 2/3) ahead of the
bondholders’ meeting. The challenge with this approach is,
however, to identify the bondholders, as the list of
bondholders is confidential.58
The company can get around this situation by contacting the
investment bank, which initially raised the bond capital. The
bank would have been key both in contacting/placing initial
bond offer, and in the subsequent trading of the bonds. This
means the bank will have a good overview of the identity
of the main bondholders.
The investment bank can therefore play a key role both on
advising on the restructuring, and by pre-sounding a possible
solution with a select number of identified bondholders –
often on a confidential basis. This work might be done with
the understanding of NT. NT can also pay a more active role
if needed.
Bondholders should at some stage consider whether their
interests are best served with the involvement of NT only, or if
a special legal counsel should be mandated to take care of the
bondholders’ interests as there might be several bond classes
(with different collateral) and conflicting interests involved.
58. That the list of bondholders is kept confidential is in line with international
practice, to avoid the company reaching separate agreements with selected
bondholders.
34
Issuing Corporate Bonds in the Nordic capital market
Handling of inside information
Chapter 11 reorganization
If the bonds are listed (on Oslo Børs or Nordic ABM) and/or the
company’s shares are listed, the company would need to
consider if the criteria for delayed disclosure is in place when
discussions are made with NT, the investment bank and with
pre-sounding of key bondholders (see section 7 for a discussion
of inside information). If delayed disclosure is the alternative
chosen by the company, Oslo Børs will need to be informed
about the process, and a list of insiders to be prepared and
maintained. All involved parties (investment bank, NT, key
bondholders that are contacted) will have to be made insiders
when they are contacted, meaning that the discussions are
confidential and that is illegal to trade bonds for these parties
as long as inside information exist.
Norwegian companies with assets or operations in the U.S. may
consider reorganizing under U.S. Chapter 11 bankruptcy laws
as opposed to Norwegian insolvency laws since U.S. bankruptcy
laws tend to be more debtor-friendly. For example, Chapter 11
prevents creditors from suing or seizing debtor’s assets (which
facilitates continued operations during the reorganization), and
it also allows the court to impose and enforce a restructuring
plan despite dissenting creditors. One Norwegian company
that chose to file for bankruptcy and reorganize under Chapter
11 was PGS ASA in 2003. However, a Chapter 11 reorganization
is highly complex and Norwegian companies (and Board
members) must still comply with the Norwegian Public Limited
Liability Companies Act.60
The bondholder’s meeting
Next a notice summoning a bondholder’s meeting will be issued
and the inside information released to the market – if it has not
been released already. A sufficient majority of the bondholders
(2/3) in the bondholders meeting will need to vote in favor of
the restructuring to bind the entire bondholder community.
Such a bond meeting will often take place in the opening hours
of the trading, so it is advisable that the company contacts Oslo
Børs ahead of the meeting as the trading of the bonds might be
suspended while the bondholders decide on the restructuring.
As would be apparent from the example of stock exchange
notice set out separately in this section, the outcome of a bond
holder’s meeting cannot be taken for granted. In some cases it will be beneficiary to set up a bondholder
committee with key bondholders, negotiating on behalf of all
bondholders with the company to find a solution. This might
also involve the bondholders own legal counsel.
It should be noted that the Norwegian legal framework requires
that all investors holding the same class of bonds have to be
treated equally, both during the normal course of operations by
the company, but also in situations of financial distress.59
Shareholders might have to approve the
restructuring
Finally, a restructuring which involves shareholders rights
beyond only affecting bondholders rights, will need a
shareholder’s approval on a shareholder’s extraordinary general
meeting. Shareholders have to approve the restructuring with
usually a qualified majority, which is that at least two thirds of
both the votes cast and of the share capital represented at the
general meeting have to approve the changes (which often are
reduction of share capital, change of bye-laws etc). Hence, also
the shareholder’s interests have to be factored in during the
reorganization process if the shareholders will have the final
word on the restructuring.
From investment grade to high yield
Distressed securities trade at substantial discounts to their
face value and are therefore considered to be below
investment grade. Bonds that previously were investment
grade can be traded as high yield bonds, which is a de-facto
downgrading by the market. Such bonds are internationally
often referred to as “fallen angels”.
Example of stock exchange notice
for shareholders’ approval
Reference is made to previous announcements concerning
the proposal for restructuring of the Company.
Further to the summons letters of 12 February 2014,
bondholders’ meetings (…) have today been held to
consider the restructuring proposal. The Company is
pleased to report that the bondholders’ meetings for
all three bond loans resolved to approve the Company’s
proposal with sufficient qualified majorities.
“The Company has been in urgent need of a solution,
and the Board is very pleased to have been able to obtain
consensus among the bondholders for the proposal. We
now hope that the shareholders also unite behind the
solution,” says the Chairman of the Company.
As per previous announcements, the proposed
restructuring remains dependent on approval by a
qualified majority of shareholders. The shareholders
will consider the proposal in an extraordinary general
meeting to be held tomorrow, (….) at 12:00 CET.
59. The equal treatment of investors is set out in the Norwegian Security Trading Act
section 5-14 and Oslo Børs own rules, ref point 3.1.1 (in the Bond and the ABM rules)
60. Source: Attorney at Law, Cand. Jur. (Norway) Camilla Merrick, Taft Stettinius &
Hollister LLP
35
10. Conclusion
Bond financing has many unique features and complements
the traditional bank financing. While high yield bonds often
come on top of conventional bank financing, investment grade
bonds can be the main source of company funding.
The CFO will need to constantly assess which type (or
combination) of equity, bank and/or bond capital that can
provide the best overall financing for his company, based on
available collateral, covenant package and pricing.
Finally, with the current high volatility of the capital markets,
any company with long-term funding requirements should be
ready to tap into one or the other types of financing as
opportunities arise, whether it is equity, bank or bond
financing. Attachment 1: Terms and definitions
Below is a list of terms often used for bond issues in the Nordic capital market set out.
Amortizations
The paying off of debt with regular installments over a period of
time. Typical for bank debt, but not for bond loans (see Bullet
loans).
Bullet loans
A type of loan where the entire face value of the loan is paid in
one lump-sum at the maturity date. Bullet bond are noncallable (see Call option and Amortizations).
Bonds
A debt instrument in which an investor loans money to an entity
(corporate or public) for minimum 12 months at a fixed or
floating interest rate.
Call option
An option for the bond issue to redeem the bond loan in whole
or in parts prior to maturity. The requirements for such
redemption are set out in detail in the bond agreement. Bond
issues with call options are referred to as “callable”, and are
denoted with a C in the loan reference.
Bond agreement
The agreement entered into between the bond issuer (the
borrower) and the Trustee. The agreement regulates the bond
issuers’ rights and obligations in relations with the issue, and
grants the Trustee authority to act on behalf of all the
Bondholders to the extent provided for in the agreement. When
bonds are subscribed / purchased, the bondholder has accepted
the bond agreement and is bound by the terms of the agreement.
Bondholders meeting
Meeting of bondholders. The Bondholder’s Meeting represents
the supreme authority of the bondholders’ community in all
matters regarding the bonds. Resolutions passed by the
bondholders at the meeting are binding and prevail for all bonds.
For important decisions a majority of at least 2/3 of the votes for
such resolutions is required.
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Issuing Corporate Bonds in the Nordic capital market
Call protection period
The period of time during which the bond may not be redeemed
(called).
Carve-out
A specified exception in a bond covenant, the use of which (by
the bond issuer) may reduce the bond covenant’s value for the
bondholders.
Collateral
Specific assets that have been pledged to secure the bonds. I.e.
these assets can be sold if necessary to pay the bondholders.
Comfort letter
A document prepared by the audit firm to the investment banks
in an offering, assuring that the financial figures in the
prospectus or offering memorandum are in line with previously
audited figures and that the auditors stand by their audit
opinions for the financial statements enclosed.
Continuing obligations
Various reporting and other requirements a company with
bonds or shares listed on Oslo Børs, Oslo Axess or Nordic ABM
has to comply with upon listing on of the shares or bonds.
Default
The failure by the bond issuer to pay interest or principal when
these have fallen due, or the company is not complying with
other key covenants in the bond agreement.
Convertible bonds
Bonds that can be converted into a predetermined amount (as
set out in the initial bond loan agreement) of shares at certain
times during its life, usually at the discretion of the bondholder.
Defeasance
A provision in the bond agreement that explicitly allows the
borrower at his option to set sufficient aside cash (or other assets
like government bonds) in such amounts that it will be sufficient
for the payment of principal (discharge) and interest on the
outstanding bonds. This provision allows the bond issuer to
substitute cash for income-producing collateral to fulfill the bond
agreement.
Corporate bonds
Bonds issued by companies. Can typically be classified in two
different categories based on perceived risk, either Investment
Grade (IG) bonds with a relatively low risk of default, or High
yield (HY) bonds with a relatively higher risk of defaulting on
the payments.
Corporate governance
The set of rules, policies and processes by which a company is
directed and controlled. Involves balancing the various
interests of the many stakeholders of the company, like
investors, management, customers, suppliers, banks and the
community.
Coupon
Rate of interest applicable to the bond when it is issued. Can be
either fixed or floating interest rate.
Covenants
Contractual obligations specified in the bond agreement that
the bond Issuer agree to undertake as long as the agreement is
in place. Can be divided into financial and non-financial.
Financial covenants can be either maintenance or incurrence
covenants. Non-financial covenants can typically be reporting
requirements.
Covered bond
A bond which gives investors recourse to a specified pool of the
issuer’s assets. (Norwegian; obligasjoner med fortrinnsrett).
Only specialized credit institutions can raise loans by issuing
covered bonds.
Conversion premium
The amount (as specified in the bond agreement) by which the
price of the underlying shares has to increase before bond
holders can require the bonds be converted into shares.
Cross default
A covenant in some bond agreements that puts the bond issuer
in default if the issuer defaults on another debt agreement.
Often a ceiling is set for the default on the other debt
agreements, meaning that minor defaults do not trigger cross
default.
EBITDA
A company’s Earnings Before Interest, Taxes, Depreciation and
Amortization. EBITDA is an indicator often used when investors
monitor a company’s financial performance.
EBIT
A company’s Earnings Before Interest and Taxes. EBIT is an
indicator of a company’s profitability.
Engagement letter
For bond issues: A written agreement between the company and
the investment bank to help raise bond financing in exchange for
compensation, setting out the scope of the engagement.
Encumbrance
In general a claim another party has against a bond issuers
property (like mortgage, pledge, lien).
Fixed interest
The interest paid to the bondholders (coupon) is based on a fixed,
predetermined interest rate explicitly stated in the bond
agreement. The interest is usually paid with quarterly interest
payments.
Floating rate - FRN
The interest paid to the bondholders (coupon) is based on a
floating reference rate in the capital market, typically 3 month
NIBOR + a margin explicitly stated in the bond agreement. The
interest is usually paid with quarterly interest payments. Such
bond loans are denoted “FRN”.
Guarantors
Entities (typically parent company or subsidiaries) that
guarantee to the Bond Trustee (on behalf of the bondholders),
the performance by the bond issuer of its obligations under the
bond agreements.
37
Guarantee
For a true guarantee (Norwegian; selvskyldnergaranti) the claim
cannot be enforced until a breach has occurred of the underlying
contract, in contrast to an on-demand (Norwegian:
Påkravsgaranti). See on-demand guarantee below.
Lien
A security interest for bondholders in one or several assets, in
exchange for secured debt financing. The bondholders have a
legal right to sell these assets of a bond issuer who fails to
comply with the bond agreement.
High yield
Bonds issued by companies with a relatively higher risk of
defaulting on the payments, hence the bonds are considered to
have lower credit quality than Investment Grade bonds. Often
referred to as.
Listing requirements
The requirements the bond issuer has to fulfill in order for the
company to have its bonds listed on Oslo Børs or Nordic ABM.
Indenture
Indenture is the term used for the legal contract between the
bond issuer and the bondholders in foreign-type bond issues.
Indenture is not a term used for Nordic bond agreements/bond
issues. In foreign-type bond issues the indenture specifies all the
important features and terms for the bond issue, as maturity
date, callable/convertible features, interest calculation and
payments, financial covenants regulating the issuer etc.
Investment grade
Bonds issued by companies with a relatively low risk of default,
with higher credit quality than High Yield bonds.
Incurrence covenants
Covenants in the bond agreement that forbids the bond issuer to
do specific (corporate) actions, like mergers, paying dividends
etc. Incurrence covenants comes into play when the company
carries out a specific event, such as when a borrower wishes to
take out more debt.
IFRS
International Financial Reporting Standards (IFRS).
Junior bonds
A bond loan that is either unsecured or has a lower priority than
another debt claim (senior debt) on the same asset or property.
Often junior bond debt is unsecured debt, i.e. there is no
collateral behind the debt.
Legal venue
The jurisdiction (i.e. courts and legal framework) that according
to the bond agreement can exclusively settle any dispute which
may arise out of or in connection with the bond issue. For
Norwegian bond issues this will most often be the courts of
Norway.
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Issuing Corporate Bonds in the Nordic capital market
Maintenance covenants
Covenants set out in the bond agreement, and which require
the bond issuer to maintain a certain level of financial
performance (measured with key financial ratios) to avoid
defaulting.
Managers
The advisors to the bond issuer in relation to raising and
pricing of the bond loan. Typically this will be investment
banks, which have experience with the market and placing
power with its clients. Joint lead managers will be the
mangers in charge of these advisors, if there are several
managers.
Maturity
The period of time for which the bond loan remains
outstanding.
Margin
The percentage points to be added (or deducted – if the
margin is negative) to the reference rate for a bond loan with
floating interest. The reference rate is most often NIBOR.
Negative pledge
A covenant included in a bond agreement to restrict the bond
issuer from allocating or allowing further security over its
assets. With such covenant the bond issuer cannot pledge any
of its assets. This is to ensure that the bondholders will not get
less security after the bonds have been issued.
NFSA
The Norwegian Financial Supervisory Authority Finanstilsynet.
NIBOR
The Norwegian Interbank Offered Rate. NIBOR is the
collective term for Norwegian money market rates at different
maturities, and reflects the interest rate level lenders require
for unsecured money market lending in NOK.
Nordic ABM
A market place managed by Oslo Børs. Not a regulated market in
terms of the MIFID directive, but listing requirements and going
obligations are rules set by Oslo Børs (in consultation with
market participants) and which the bond issuers have to comply
with upon listing. Oslo Børs exercises the same level of trading
surveillance as for the regulated market “Oslo Børs”.
Par value
The face value of each bond.
Nordic Trustee
The trustee managing the contractual rights the bondholders
have towards the bond issuer. NT represents all the bondholders
when the bonds are issued and on an ongoing basis after the
bond issue. Formerly known as “Norsk Tillitsmann ASA”.
Pari passu
Refers to bonds that have equal rights of payment or equal
seniority. Is a Latin phrase which literally means “with an equal
step” or “on equal footing”. Typically a bond agreement will state
that “the Bonds rank pari passu between each other”.
Norsk Tillitsmann
Nordic Truste, formerly known as Norsk Tillitsmann.
Placing power
(Informal). The investment banks have a network of investors
that have been involved in previous transactions. Hence, the
banks have the power to place a new bond issue with a large
number of potential investors, these will in due time be contacted
for the bond issue.
Offer memorandum
The offer documentation prepared in relation to a bond issue by
the company and the investment banks, and which technically is
not a prospectus as a prospectus will have to fulfill certain
criteria and be reviewed by the NFSA.
On-demand guarantee
For an on-demand guarantee (Norwegian; påkravsgaranti) the
liability of the issuer to pay does not depend on breach of the
underlying contract, which is a key distinction from an ordinary
Guarantee (Norwegian; selvskyldnergaranti), see Guarantee
above.
Open bond issue
A bond loan where the bond issuer has issued less than the
borrowing limit, and through further tap issues (see Tap Issue) or
will reach the borrowing limit.
Option
For bond agreements: A covenant which gives the owner of the
option the right, but not the obligation, to require redemption of
the bonds or conversion of bonds into shares. See Call and Put
options.
Oslo Børs
Oslo Børs ASA offers Norway’s only regulated markets for
securities trading. The regulated markets are “Oslo Børs”, the
main board for shares and bonds and “Oslo Axess” which is the
junior market. In addition Oslo Børs ASA manages the market
places Nordic ABM for bonds and market places for other
financial instruments.
Paying Agent
A bank which accepts payments from the issuer of a security and
then distributes the payments to the holders of the security. Is
also acting as registrar for the bonds in the Securities Register.
Pre-sounding
(Informal). The manager (investment bank) of a prospective
bond issue will usually seek initial feedback of the terms of the
issue from a small number of potential investors, representative
of the issuer’s targeted investor base.
Prospectus
The document that has to be prepared and reviewed by NFSA
when bonds are offered to the public (offer prospectus) or listed
on a regulated market place (listing prospectus). When such
document is not legally considered to be a prospectus, the term
offering memorandum (or offering documentation) is used for
the bond issue.
Public rating
Rating issued publicly by international bond rating firms, such as
Standard & Poor’s, Moody’s and Fitch, on the credit quality of a
specific bond issue. Contrasts to shadow rating, which is what
typically Nowegian investment banks will prepare for bond
issues in the Nordic capital market. Not a requirement for bond
issues in the Nordic capital market.
Put option
A right for the bondholders for redemption of the bond loan in
whole or in parts prior to maturity. The requirements for such
redemption are set out in detail in the bond agreement.
39
Påkravsgaranti
Norwegian term, see On-demand guarantee.
QIB
A Qualified Institutional Buyer. QIBs are US investors allowed
to participate in the market for securities under Rule 144A,
which is an exemption from the SEC’s registration requirements
for securities.
Release letter
Letter from Nordic Trustee that proceeds of the Bond issue from
an Escrow Account can be released, given that the Trustee has
received various documentation (documentation and
resolutions) from the bond issuer and guarantors (if applicable).
Registrar
Financial instruments have to be registered at VPS, the
Norwegian Central Securities Depository. The assignment itself
of registering the instruments and transactions will, however,
be done by a bank working for both VPS and the bond issuer.
The bond issuer will have to enter into an registrar agreement
with a bank for this assignment. The bank will also act as a
Paying Agent.
Ring-fencing
Ring-fencing is when a portion of a company’s assets (or profits)
are separated financially without necessarily being operated as
a separate entity. This is done in order to protect assets (or
profits) for the benefit of a class of bondholders.
Rule 144A
According to US security regulations the main rule is that any
securities offered to US investors have to be registered with the
US Security and Exchange Commission. One exemption is if the
issue is done in accordance with Rule 144A, then such
registration is not required. Main requirement is that the
investors are QIBs, i.e. qualified institutional investors.
Selvskyldnergaranti
Norwegian term, see Guarantee above.
Share pledge
Shares used by the bond issuer as security for the payment
under the bond agreement.
Shadow rating
Rating issued by Norwegian investment banks for bond issues
in the Nordic capital market, with no additional costs for the
bond issuer. Contrasts to a public rating prepared for
international-type bond issues by rating agencies as Fitch,
Standard & Poor’s, Moody’s.
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Issuing Corporate Bonds in the Nordic capital market
Security Interest
Are the rights - created by the bond agreement - of the
bondholders over certain assets, to secure the performance of
the bond issuer. The security interest in a bond issue will be set
out in precise detail in the bond agreement.
Securities Register
Bond issues have to be registered in a securities register, which
is the VPS, the Norwegian Central Securities Depository. A
Registrar (see this) will do the actual work of registering the
bonds and transactions.
Senior bonds
Bonds that will have priority over other unsecured or otherwise
more “junior” debt owed by the bond issuer. Senior debt is
usually secured by collateral and as such carries lower risk and
a relatively low interest rate.
Structural subordination
If a bond loan is issued by a parent company, that bond will be
structurally subordinated to a lender who loaned money
directly to a subsidiary operating company, which is lower in
the group structure. The implications will be that the
bondholders will not have access to the assets of the operating
subsidiary until after all of the subsidiary’s creditors have been
paid and any remaining assets have been distributed up to the
parent company as an equity holder. (Given that no guarantees
have been provided by the subsidiaries to the parent).
Subordinated bonds
Bonds which rank after other debts (like senior bonds) if the
bond issuer falls into liquidation or bankruptcy. Referred to as
“subordinate” because the bondholder’s claims have
subordinate status in relationship to the normal debt. As such it
carries a relatively higher interest than senior bonds.
Tap issue
A procedure that allows bond issuers to sell additional bonds
based on the documentation from a past issue. Whether any
subsequent tap issues are allowed will be specifically set out in
the initial agreement, and the total bond issue will be restricted
by the borrowing limit set out in the agreement. Bonds in the
tap issue will be issued at their original face value, coupon rate
and maturity (i.e. with the same rank as the previous bonds
issued in the initial bond issue); but sold at the prevailing
market price. Tap issues provides the bond issuer with more
flexibility and costs with a new issue.
Third country auditors
Broadly speaking audit firms auditing issuers from non-EEA
countries.
Third country issuers
Broadly speaking issuers from non-EEA countries.
Underwriter
An underwriter is usually an investment bank that a company
hires to place a new issue of financial instruments with investors.
Internationally the investment bank might have guaranteed –
underwritten – the issue, meaning there is a risk that the bank
would end up with much of the instruments itself. For the Nordic
bond market there is neither any need for nor any tradition to
guarantee – underwrite - any bond issue, hence the use of the
phrase “underwriter” would be misguided for the Nordic bond
market.
VPS
Verdipapirsentralen – the Norwegian Central Securities
Depository.
VPS Account manager
Same as Registrar, see this.
Yield
The return an investor will realize on a bond. While the coupon is
the return – expressed in percentage - on the face value of the
bond, the yield is calculated based on the interest paid (the
coupon) and the current market value of the bond. If the bond
trades below the initial issue price, it will be trading at a
discount, and the implicit, calculated yield will be higher than
the coupon. The yield can be calculated as “current yield” (which
is the coupon as a percentage of the current market price of the
bond), and “yield to maturity” (an estimate of the bondholder’s
annualised return if the bond is held to its maturity date).
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Attachment 2: Prospectus requirements and exemptions
Bond issues in the Nordic capital markets are structured to
make use of exemptions from prospectus requirements. Hence,
it is uncommon that any offer prospectus is triggered when a
bond issue is launched. A listing prospectus is, however,
required when the bonds later will be listed on Oslo Børs. For
listing on Nordic ABM no prospectus is required. The NFSA will
review and approve prospectuses. Below are the prospectus
requirements and exemptions set out.
Prospectus – offer and listing
A prospectus can be triggered in two circumstances60 for bond
issuers;
I) Where an offer to subscribe for (or purchase) bonds is
addressed to 150 or more persons in the Nordic securities
market, and involves an amount of at least EUR 1,000,000
calculated over a 12 month period (an “offer prospectus”), or
II) if the bond is to be listed on a regulated market, i.e. Oslo Børs
(a “listing prospectus”). The content of an offer or a listing
prospectus is very much the same.
Note that a buy-back program of the company’s own bonds can
- in some instances - be considered as purchase triggering a
requirement for an offer prospectus.
Exemptions from prospectus requirements
There are several exemptions from making an offer prospectus.
The main one is when the securities offered are issued in
minimum lots of EUR 100,000 in terms of nominal value or
subscription price61. This is the exemption mainly used for bond
issues in the Nordic market, which means that the main bulk of
corporate bonds traded on Oslo Børs or Nordic ABM have a face
value of minimum EUR 100,000. (The trading of bonds is
therefore primarily between institutional funds, only a small
part of the trading is considered to be “retail”). Alternatively,
the offer is made to professional investors62.
Even though no offer prospectus has been required, a listing
prospectus will be needed upon listing on Oslo Børs, as Oslo
Børs is a regulated market. In Nordic ABM is not considered to
be a regulated market place, hence there is no requirement for
prospectus for listing on Nordic ABM.
60. See sections 7-2 and 7-3 respectively in the Norwegian Securities Trading Act
61. See the Norwegian Securities Trading Act, section 7-4, first subsection point 10.
62. See the Norwegian Securities Trading Act, section 7-4, first subsection point 8.
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Issuing Corporate Bonds in the Nordic capital market
What is required in the prospectus
The format and content of an offer and listing prospectus are
basically the same. A prospectus is primarily made up of two
parts; one which sets out all relevant information about the
company and one part with information about the transaction/
bond issue. The prospectus can also be split in three different
documents, the registration document (the company
information), the security note (setting out the transaction) and
a summary. (Splitting the prospectus in three parts may be
relevant if the company wants to re-use the registration
document when raising new bond issues later).
The security note needs to set out the main criteria of the loan,
like the size, maturity dates, floating or fixed interest, dates for
interest payments, who is the trustee (most often NT), the
margin, any collateral, if there are put or call options and any
extraordinary covenants of the bond loan, and any guarantors,
if the issue is guaranteed.
A confirmation from the persons responsible for the prospectus
has to be included; that “the information contained in the
prospectus is, to the best of their knowledge, in accordance with
the facts and contains no omission likely to affect its import”.
The bond agreement will be included with the security note.
The registration document needs to address specific risk factors
and relevant information about the issuer. Financial statements
have to be included. Usually audited figures for the last two
financial years (or less if the issuer has not existed two years)
have to be included. The consolidated financial statements will
have to be in accordance with IFRS, while the parent company
financial statement does not need to be in line with IFRS. For
small or medium sized companies as defined by the
requirements (“SME” in short) only one year of IFRS figures is
required.
Some prospectus requirements which are relevant for share
issues, are not relevant for bond prospectuses:
- No complex financial history
In contrast to prospectuses for shares, there is no requirement
for so-called complex financial history. This means that the
company does not need to go back and rework previous year’s
figures or provide financial information for entities other than the
issuer (given that there are no Guarantors). This can be done on a
voluntary basis, however.
- No pro forma figures
Furthermore, there is no requirement for the company to prepare
so-called pro forma figures when the bond issuer has carried out or
plans a major transaction which often is to be financed with the
bond issue. (A pro forma figure set-up is often a requirement for
share offerings when large transactions are done). Still, investment
banks might require pro forma figures on a voluntary basis as this
can make it easier to raise capital. Preparing pro forma figures – on
a voluntary basis – is therefore permissible, if so the pro forma
requirements have to be followed and the auditor’s pro forma
statement included.
Different check lists
When submitting the first draft of a prospectus to the
NFSA, it has to be accompanied by specific
checklist(s) to make sure that all relevant information
is included.
Different checklists exist for the registration and
security note, depending on whether the bonds have
a face value of more or less than 100,000 euro per
bond.
- Prospectus and bond loan agreement made public
When the prospectus has been approved by the NFSA and the bonds
listed on Oslo Børs, the prospectus and the bond loan agreement will
be made public on Oslo Børs’ web site (on the company’s ticker code).
If the company is deemed to be a “small or medium
sized company”, a checklist with fewer prospectus
requirements is to be used.
A checklist for any Guarantor(s) has as well to be
submitted, as these have to provide the same amount
of information as the bond issuer itself. See section 6,
subsection Guarantors – specific issues for listed bond
issuers.
See NFSA for prospectus requirements:
http://www.finanstilsynet.no/en/Listed-issuersprospectuses/Prospectuses/Regulations/Laws-andregulations/
PwC Capital Markets, Accounting Advisory Services and PwC Risk
Contact:
Per Fossan-Waage
Director
+47 952 60 126
[email protected]
Kjersti Aksnes Gjesdahl
Director
+47 415 58 225
[email protected]
Owen Lewis
Partner
+47 952 60 209
[email protected]
43
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