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This article looks at some of the main issues in relation to the issue of bonds whether by way of a public own name bond issue or privately placed bonds.
Previously bonds and private placements were not eye-catching for local authorities when compared with loans from the Public Works Loan Board (PWLB). However, the PWLB in 2010 increased the cost of borrowing resulting in bonds and private placements becoming a more attractive alternative source of finance.
As a result of the increase in the cost of borrowing by the PWLB there has emerged a local government collective agency, known as the Municipal Bonds Agency. This has been backed by 60 local authorities and the Local Government Association. It is envisaged this Agency will, among other things, act as a bond aggregator vehicle meaning it will issue bonds and on-lend the proceeds to those local authorities who apply to it for loans.
What is a bond?
A bond is principally an IOU, a commitment to repay the monies borrowed to an investor with interest at the end of the loan period. Public bonds are usually listed on a recognised stock exchange and are therefore tradable. They key benefit of a bond issue (or private placement) is that you can raise a large amount of money on a long term basis (normally 20 years or more) at competitive interest rates.
Entities usually issue bonds through a corporate treasury vehicle for tax purposes. The treasury vehicle would then on-lend the money received to the local authority. However, local authorities can also issue bonds in their own name under the general power of competence, but the decision whether to do so will vary on a case by case basis.
What is a Private Placement?
A private placement is another method of raising finance. Unlike a public bond issue, it is not a public offering and is a transaction arranged privately with a select number of investors. As the bonds are issued ‘privately’ one of the benefits is that the relationship between the issuer of the bonds and the investor is closer than the relationship with bondholders on a public bond issue. Furthermore as private placements are not publicly traded or issued they do not require a rating from an approved credit agency. However, as the bonds are not listed the secondary market for such bonds is more limited.
Issues to consider:
a) Credit Rating
In order to issue a listed bond a local authority will need to have a credit rating. This credit rating process is undertaken by one or more credit agencies (for example, Moody’s and/or Standard and Poors). Most local authorities will be aiming for an investment grade rating as this can influence the pricing of the bonds, potentially saving significant sums depending on the amount being raised. Most recently in May 2015, Warrington Borough Council was rated Aa2 by Moody’s, this is one score higher than the highest rated housing association, which indicates how highly local authorities can be rated.
b) Get the right advice
Local authorities may be wary of issuing bonds due to the perception that accessing such finance is complex and unfamiliar. It is therefore important to select a bank or banks to act as lead managers for the issue of the bonds and they will assist throughout the process (including determining the issuance route, assisting with the credit rating process and ultimately the marketing the bonds to potential investors).
The legal advice you receive is also essential in order to guide you through the legal documentation. It is important for the legal firm to have capital markets experiences as well as an understanding of Local Government law.
A listed bond issue or a private placement can be completed within a matter of weeks or can take a number of months. On average it takes around three months from the appointment of the lead manager(s). Much depends on the nature of the transaction and security requirements.
Bond investors do not monitor covenant compliance in the same way that other funders might. You therefore normally find that bond documents are more ‘covenant light’ with less restrictions or intrusions on your day to day business operations.
Where bonds are more inflexible is in the situation where you do need a waiver or consent because, for example, you are in danger of breaching a covenant. In order to obtain such a consent, a resolution of the bondholders may be required which, in certain cases may require a majority of 75% of the bondholders.
e) Amounts to be raised
Public bond issues tend to be considered where the fundraising requirement is in excess of £100 million. If the fundraising requirement is below this amount then a private placement may be the more appropriate route.
With the imminent introduction of the Municipal Bonds Agency and the need to raise finance, a bond or private placement presents a viable alternative to the PWLB for local authorities. Recently Warrington Borough Council has issued a private placement in August 2015 for £150 million. Is Warrington Borough Council the catalyst for other local authorities to follow and do the same?
What we can do to assist?
Anthony Collins Solicitors have extensive experience and knowledge on capital markets transactions and our Local Government team have experience and knowledge of the vires and financial issues that are faced during a bond or private placement and are able to ensure compliance with public sector and financial regulatory requirements.
Over the past 18 months, we have completed in excess of 45 funding transactions on behalf of borrowers (amounting to over £1bn of new borrowing in total). These include:
- Advising on a £250 million public listed bond;
- Advising on a restructure of existing facilities which included a £90 million US Private Placement; and
- Advising on a £25 million UK Private Placement
More recently we have been acknowledged within the top 3 legal advisers to Housing Associations on capital markets deals by Social Housing Magazine.
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