STAGES OF A BOND ISSUE (Part - 6)

STAGE 3: ISSUE - SIGNING AND CLOSING (continued)

 

Closing - At closing, the remaining documents are signed by the relevant parties. The bonds are transferred from the issuer to the bondholders and the payment for the bonds is transferred from the bondholders to the issuer.This process is simple in theory but, in practice, involves additional parties. This is due to:

High value of the bond - The high value of the bond instrument means transferring and holding it safely can be problematic.

Simultaneous delivery and payment - Delivery of the bonds must be simultaneous with transfer of the bonds' sale proceeds. With numerous investors in different jurisdictions, this may logistically be difficult to achieve (for example, transferring cash from banks in different currencies, jurisdictions and time zones when banks might not be open for business in one of the jurisdictions at the required time).

 

Closing parties - The above difficulties have been overcome in the following ways:

Banks hold global note - An issuer usually issues a global note, which is deposited with a bank for safekeeping, rather than issuing definitive certificates directly to each investor. A global note is a single document that represents an entire issue of securities. This avoids the risks associated with transferring high value paper instruments to each investor.

Clearing systems - Electronic systems allow investors to hold their securities in electronic form. The transfer of ownership between securities holders is achieved by book entries in an electronic accounting system instead of through the transfer of physical certificates. This means payment and delivery can be simultaneous. Sellers and buyers (or intermediaries on their behalf) open both cash and securities accounts with the systems, which are credited or debited, as appropriate, whenever a sale or purchase is made.

 

Closing procedures - The closing procedures set out below are general procedures that apply to both structures and include the documents that need to be signed at the closing meeting.

Before closing - The lead manager will already have informed the clearing systems, just after launch, of the details of the issue and the arrangements for the closing.

Closing date - Closing usually takes place between two days and a week after signing. As with signing, the closing often takes place by fax or e-mail, but can still take place at a meeting of the parties.

Pre-closings - Where an issue is pre-closed, payment instructions are given the day before the closing date and the closing documents are usually signed and held in escrow until the next day. 

Amount the issuer receives - The amount the issuer receives (the net subscription amount) is not simply the principal amount of the issue. It is the principal amount of the bonds plus any accrued interest, less:

1.Commissions paid to the managers for managing and underwriting the issue.

2.Expenses of the lead manager.

3.Selling concessions allowed for selling the bonds.

 

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