Legal Viewpoint: Structure and Issue of Eurobonds by Dr AbdelGadir Warsama Ghalib, Legal Counsel, Bahrain

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Dr AbdelGadir Warsama Ghalib, Legal Counsel

Eurobonds are of paramount importance for potential investors in securities markets. In this regard, the transparency issue is essential to pave the way for inviting good sophisticated investors for each Eurobond issue. For explanation purposes, it would be appropriate to mention that, the classical structure of ‘Eurobonds’ issues always involves or requires the presence of three groups. That includes in the 1st place the managers who arrange the issue. In the 2nd place, the underwriters who are normally a large group of financial institutions who agree among themselves to underwrite the issue in case investors do not subscribe. In the 3rd and last place, the selling-group who are professional dealers in securities who place the bonds with their clients.

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In many cases, there may be only two groups instead of three groups the managers and the underwriters. Herein, the subscription agreement is normally between the managers and the issuers and this agreement includes the terms upon which the managers agree to purchase or procure purchasers for such bonds.

The agreement terms normally include the following important points. The 1st point covers the subscription necessary details. Herein, the issuer agrees to issue, and the managers agree to subscribe for, or procure subscribers for the bonds in return for agreed commission and subject to listing, execution of the documents and the warranties remaining true until the issue is made.

The legal liability of the managers in such deals is joint and several. In other words, each manager is liable to subscribe to the whole issue if the selling group, the underwriters, and the other managers all fail.

The above-mentioned stand is according to the English practice, whereas in the American practice, the case is different because the legal commitments of the managers in this respect (usually called underwriters) are several.

The 2nd point covers, the provisions related to the warranties. In this respect, the issuer gives warranties that should correspond to the terms stipulated in the loan agreements. An important warranty, we could say, is the one regarding the accuracy of the prospectus i.e., the offering circular.

The warranties are given only to the managers and not the investors. Legally speaking, breach of a warranty is not an express event of default in the bonds. This takes us back, to the legal difference between warranties and conditions. As breach of a condition, is regarded as an event of default and breach of the contract.

The 3rd point refers to, market disruption. In case of market disruption, the managers are permitted at their discretion, to terminate the agreement at any time prior to closing date.

The standard usual clause for market disruption normally provides that, “if, in the opinion of the managers, there shall have been such a change in national or international financial, political or economic conditions or currency exchange rates or exchange controls as would in their view be likely to prejudice materially the success of the offering and distribution of the bonds or dealings in the bonds in the secondary market”.

As a matter of fact, this clause is rarely used since the time between signature and closing date is often no more than a few days.

We believe that it is probably not worth spending too much time on this issue of market disruption, particularly because all parties concerned have, in fact, a commercial interest to complete the issue, unless there appears to be a good reason to ‘pull out’ and not to complete the deal.

In addition to the above three major points, the agreement normally contains miscellaneous clauses such as the clauses that relate to expenses, stabilization clauses, compliance with related securities regulations, jurisdiction applicable to the issue, waiver of immunity and governing law.

The above highlights briefly the necessary legal points that are required for the structure and the issue of Eurobonds. We draw the attention of any potential investor in Eurobonds, to comprehend and fully understand above points and make sure that they are properly drafted to minimize related risks.