01. Introduction and Overview of Debt Agreements
Introduction
Corporate bonds and Credit Agreements involve large loans to corporations
Class is about the contractual provisions of these lending arrangements
macro perspective: general purpose
micro perspective: how clauses should be constructed, exceptions
nano perspective: is expression ambiguous, does the literal meaning conforms what we intended
Credit Agreements
typically/ mostly with banks
one bank
syndicate
types
term loan: due on a specific date
revolvers: co. can borrow and repay up to a certain amount (line of credit)
difficult to transfer your participation to another bank
letters of credit: co. handle payment for goods purchased, future obligation
credit facilities: multiple types of agreement
Corporate Bonds
Debt Securities
Often issued publicly and traded
Multiple holders of bonds of same issue
Insurance companies
Other institutional investors
Few retail investors
Indenture and Certificate
Some bonds are “private placements:” not publicly issued, less trading, usually no “indenture” but Note Purchase Agreement (or so).
Comparison
Corporate Bonds
Holdings tend to be more dispersed than Lenders in Credit Agreement
Trading is more frequent than trading/assignment in Credit Agreement
To the extent Credit Facility involves ongoing obligations of lenders (as in revolver, letter of credit), assignment is difficult.
Not doable via bonds.
Interest rate variable versus fixed
Variable: revolvers tied to market rate, LIBOR (determined by a no. of banks)
trading in corporate bonds
public placement
larger number of holders
trading frequently
trading/ assignment in credit agreement
private placement
lower no. of creditors, little or no trading
Focus of the Course
Study contractual provisions in agreements through Problem Sets
What is purpose of provisions?
How do provisions within one agreement relate to other provisions in same agreement?
Compare provisions within same type of agreement.
Compare provisions across types of agreements?
Drafting problems: mistakes, loopholes, imperfections
Case law
Parts are very detail oriented. Prior Preparation is KEY
Terminology
Bonds, Debenture, Notes
All terms for debt securities
(Even Bank Agreement will contain a “Note”)
“Bonds”
used as catch-all term
Also used more narrowly for secured obligations - What is “secured?”
Notes
Used for short-term publicly issued securities
Also used for non-public debt
Also a promise to pay, used for all kinds of debt
Debentures
Used for public debt than is longer term
Terminology and usage conventions have no legal significance
Certificated versus Uncertificated
Certificated = an actual piece of paper representing the security, the Note, Debenture, Bond, etc. Signed, often kept in a safe
Most corporate bonds in the US are certificated.
Registered versus Bearer
Registered = owner of the security is the person registered as owner by the Registrar, and not the person who possesses the piece of paper.
A register is kept, can get replacement
Bearer bonds are virtually non-existing in US for tax reasons.
Equivalent to cash, ownership transferred by that piece of paper
Sources of Legal Provisions
Indenture
For public bonds, most legal provisions are contained in the “indenture.”
contract between the Issuer/Company and a trustee
Trustee acts as representative of the bondholders (not contractual party but are third party beneficiaries of the indenture)
Bondholders are “third party beneficiaries”
Security
Some additional terms are on the Security itself.
“Form of” Security is usually part of Indenture.
Not the actually signed note, only a copy of the note before being signed
Interest Provision
In public bonds, typical pattern
Semi-annual
Interest Payment Date
Interest record date
slightly before the interest payment date, cut-off date established by a company in order to determine which shareholders are eligible to receive a dividend or distribution.
Example: Freeport Indenture
Where do you find payment and record dates?
What are the dates?
Amihud, Garbade & Kahan, A New Governance Structure for Corporate Bonds
Conflict of interest between creditors and shareholders & managers
Managers serve interests of shareholders – acts to maximise company’s common stock’s value
But enhancing value of equity may reduce value of company debt, e.g.:
cash distributions to shareholders (dividend/ stock repurchases)
spin-offs to shareholders of common stock of lightly leveraged subsidiaries owning valuable corporate assets
dealings between shareholders and co. on terms favourable to shareholders
investments in projects with greater risk than originally anticipated by creditors
financing new projects with debt (and not equity)
Shareholders still want co. to take such actions if it reduce co.’s debt by more than they increase value of equity (overall value of co.)
Agency costs of debt: losses in corporate value caused by shareholders’ actions in advancing their parochial (narrow-minded) interests, while in control of a...
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