By Dr AbdelGadir Warsama, Legal Counsel
At the global level, bonds play an important role in the financial, corporate and banking business. Very often, many 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 markets and \ or international investors. We have good examples in big companies, airlines, banks, infrastructure projects and many other sectors, who issued bonds that proved to be very successful due to the good performance of the issuer and the subject-matter of the issue. Herein, generally speaking, the marketing method related to the issuance of bonds varies according to certain merits and many circumstances such as the need to list the market response by publishing a preliminary prospectus and the need to identify the range of the proposed investors who could be interested in the bond. This includes private investors and sophisticated or public investors. The main techniques for marketing bonds could be summarized o include, for example, the “Private placements”, in this respect a manager or group of mangers subscribe for the whole issue and thereafter places this issue with selected private clients, or in some cases, with a single private investor. These issues may be listed or unlisted and this is primarily used when the issuer is interested to deal with certain person or group of persons as investors.
The “Preliminary Prospectus Offerings”, the purpose of this method is to list the market before the managers fix the interest rate and /or any discount (or premium) on subscription. The managers normally contact a group of selected financial institutions and give them brief details of the issue and the issuer and an indication of the terms of the proposed issue. The 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 usually known as the “red – herring” or “pathfinder” prospectus. In the light of the response to the prospectus, the 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 financial institutions hold and keep the bonds for themselves or they keep them in for sale to their clients or to the public-at-large, if permitted and allowed by the securities regulations and related laws.
What has been explained above constitutes the traditional method followed mostly in the case of an international Eurobond offering and the same applies, for example, in the case of American and Canadian domestic offerings. However, it has been noticed that many Eurobond 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. The “Impact Day offerings”, herein, in this method 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 a stated period. The disadvantage of this method, if we could say, is that the 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 this market is volatile and there are many factors to be involved, from the issuer and \ or investor perspective. Potential investors need to be fully aware of such investment to achieve their end goals.