LEGAL PERSPECTIVE: Bond issues, by Dr AbdelGadir Warsama, Legal Counsel

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Dr AbdelGadir Warsama, Legal Counsel

At the global level, bonds play an important role in the financial, corporate and banking business. Very often, we see governments and international financial institutions issue bonds whenever there is a need to raise money for certain prime projects or to cover the deficiency in the budget by borrowing from local market or potential international investors. Nowadays, there are new bonds with new specialized trends, as in green bonds and blue bonds that are mainly catering for environment, climate and oceans conservations. They are in the move within certain interested circles.

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For bonds, there good examples in companies, airlines, banks and others, wherein issuing bonds proved to be successful due to the good performance of the issuer and the subject-matter of the issue. Generally speaking, methods related to issuance of bonds vary according to certain merits and circumstances such as the need to see market response by publishing a preliminary prospectus and the need to identify the interested investors as sophisticated private or public investors. The main techniques for issuing bonds include, the “Private placements”, wherein manager(s) subscribe for the whole issue and thereafter places it with selected private clients or single private investor. These issues may be listed or unlisted and is primarily used when the issuer is interested to deal with certain investors.

The purpose of “Preliminary Prospectus Offerings”, is to list the market before managers fix the interest rate and or any discount (or premium) on subscription. The managers normally contact selected financial institutions and give them brief details of the issue, the issuer and an indication of the terms of the proposed issue. Managers also send out a preliminary prospectus, which omits disclosure of the issue terms and is stated to be subject to future amendments. This is known as the “red – herring” or “pathfinder” prospectus. In response to the prospectus, managers agree with the issuer on the interest rate and arranges for the issue to be underwritten and then offers the bonds to the interested financial institutions. These institutions hold and keep the bonds for themselves or they keep them in for sale to clients or to the public-at-large, if permitted by the securities authorities.

What has been explained constitutes the traditional method followed in international bonds offering in Europe and the same applies to American and Canadian domestic offerings. However, it has been noticed that many bonds issues are nowadays “bought deals”. That is to say the managers dispense with the preliminary prospectus, however, the entire issues themselves are on-sale to dealers.

Regarding the” Impact Day offerings”, the managers fix the issue terms with the issuer and announce the offering by public advertisement on an “impact day”. Public can apply on certain application forms for the concerned securities within certain period. The disadvantage of this method, is that managers are not able to fix the issue terms in the light of an initial market response and must hope that the terms they decide on will attract sufficient investor’s interest. It is important to note that this is the method used in many domestic offerings and most likely, they are possibly used in many international capital markets. To conclude, we could say that bonds market is volatile and there are many important factors to be involved, from the issuer or investor perspective, including legal issues and accurate documentation. Potential investors need to be fully aware of such sophisticated institutional investments to achieve their goals. 

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