Pan-Nordic template bond agreement to be launched
As further described below, the Bond Terms allow for some more flexibility by including options or examples instead of more or less mandatory provisions. This development is very welcome. At the same time, it brings a need for a higher degree of specification in the term sheet. If used correctly, the new Bond Terms represent a positive development for the Nordic corporate bond market.
As per today, a draft version has been circulated to certain market participants. Several topics are subject to discussions and the final form remains to be agreed. The below is based on the draft, but with certain comments included.
Users who are familiar with the existing Bond Agreement will recognise most of the content in the Bond Terms. But looking more closely, the Bond Terms contain several revisions which users should be aware of; some of a more technical nature and others with a direct commercial impact. The most important changes are highlighted below.
The Bond Terms introduce the term Listing Failure Event; an event where the Issuer, despite an undertaking to pursue listing of the bonds, fail to achieve actual listing. The occurrence of a Listing Failure Event gives each bondholder a put option towards the Issuer and thereby protects any bondholders who are restricted from holding unlisted securities from having to dump the bonds in the market instead. An alternative penalty being discussed is a coupon step-up.
Events of Default
The most significant change to the events of default is the complete removal of the Material Adverse Change-provision. Although a reasonable "safety net" for any creditor, the MAC provision is undoubtedly less practical in a bond context, where it leads to a more uncertain situation for issuers as well as being difficult to enforce by the bondholders.
Several minor revisions have also been made to the remaining Events of Default. Such changes include an amendment to the remedy period for non-payment defaults. The previous 10 business days from the time the Bond Trustee gave notice to the Issuer, becomes 10 business days from the time the Issuer became aware of the breach. In our opinion, this change warrants an extension of the remedy period and we have suggested a remedy period of 30 days for non-payment defaults. Further, the Bond Terms allow an extension of grace periods given by other creditors without triggering a cross default and also introduce a remedy period for misrepresentations.
The standard set of operational covenants included in the existing Bond Agreement; which today is mostly applied to frequent issuers at the stronger end of the high yield segment, is removed and replaced by a few examples of similar provisions. There is a clear need to tailor these provisions in each specific case. The standard information covenants are retained with certain minor tweaks.
It is worth noting that an issuer-friendly change is made to the definition of Material Adverse Effect. More specifically a material adverse effect on "the business, financial condition or operations of the Issuer" (or other relevant companies) will no longer constitutes a MAE. In our opinion, there are good reasons for making this revision as the previous clause did not differentiate between negative effects that actually compromised the issuer's ability to fulfil its obligations and negative effects that the company was equipped to handle. Commercial parties are of course free to negotiate this clause specifically.
Representations and warranties
The list of representations and warranties has been reduced to three core representations being (i) no misrepresentation in the information provided to investors, (ii) no event of default and (iii) validity of any security provided. Although this could seem like an issuer friendly change on paper, we believe it should not have any major impact from a legal perspective, as the important matters should be covered by the deal specific covenants and events of default and therefore be included by reference to the representation regarding no event of default having occurred or occurring as a result of the bond issue. In any event, if added to the term sheet, further representations may be added, as required for each specific bond issue.
Market practices standardised
The Bond Terms also incorporate certain features which are not part of the current template Bond Agreement, but which are still often seen in the market. Incorporation in the standard Bond Terms will hopefully create a more standardised market practice and allow for easier implementation. Among the relevant features are tap issue-clauses for open bond issues, long stop date for release from the escrow account and make-whole provisions for callable bond issues. Although some questions remain unresolved, the standardisation also brings clarity to certain debated issues, such as the calculation of make-whole amounts for FRNs.
Written resolutions and bondholder decisions
The new template introduces an alternative to the physical bondholders' meeting, namely a written resolution. The written resolution allows bondholders to resolve on a matter in writing (or electronically). It also allows for a more efficient process as the resolution will be effective as soon as the sufficient majority of bondholders have cast their vote. All decisions which could have been made at a regular bondholders' meeting can be passed by a written resolution.
Certain other revisions are made in the provisions regarding decisions by the bondholders, including clarifications in the procedures for bondholders' meetings, deciding to call a default and the options available to the bondholders in declaring a default. These revisions are mostly in line with how the existing Bond Agreement is interpreted and used in practice today.
Please observe that several other provisions are changed, presumably either to cater for specific concerns or just to align practices between the Nordic countries. An example is the slight change to the term Issuer's Bonds, which takes away the voting rights on bonds held by entities more distantly related to the Issuer than was the case before. In this provision, as for a lot of the other changes, it seems that the devil is in the detail.