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Debt Capital Markets The Basics for Issuers (Asia Edition)

October 2015

Important Notice

This document is confidential and accordingly its contents are not to be disseminated or copied to anyone without our

consent. It is to be used solely for the purpose of making a determination on the provision of legal services and for no other

purpose. If we are not selected to represent the recipient of this document all information (whether in physical or electronic

form) which we have supplied to you or which you have compiled or derived from information we have given to you should be

destroyed or (in relation to electronic materials) deleted save to the extent the material is contained in electronic back up

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of this document does not create a client relationship with the recipient of this document or any organisation affiliated with

the recipient and if we are not selected to represent the recipient of the document we are therefore not precluded from acting

for another party in any matter in which the recipient or any affiliated organisation is involved (whether or not such matter is

the same as or related to one contemplated by this document) by virtue of any confidential information we receive during the

course of this selection process.

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INTRODUCTION 1

STAGE ONE – BEFORE MANDATE 2

STAGE TWO– MANDATE 6

STAGE THREE – BEFORE LAUNCH 9

STAGE FOUR – LAUNCH 11

STAGE FIVE – PRICING 12

STAGE SIX – CLOSING 14

GLOSSARY 18

CONTENTS

1 Debt Capital Markets | The Basics for Issuers (Asia Edition)

INTRODUCTION

The global financial crisis was without doubt a watershed, impacting companies and investors alike and bringing

with it sweeping changes to the regulation of banks. Among the many subtle changes in market dynamics brought

about by the crisis are those seen in the debt capital markets in Asia.

Companies that had traditionally relied on bank financing experienced directly the liquidity constraints brought

about by the credit crunch in 2008. As a result, many such companies became more willing to look at other

sources of financing available in the markets. This development has benefited the region’s debt capital markets,

which experienced a boost from a new breed of issuers – and once these issuers have entered the debt capital

markets and established a set of issuing documents, they seldom look back.

The global financial crisis has also impacted investors’ perception of risk. Many investors have scaled back their

aspirations for the return on their investments and opted to decrease their exposure to the equity capital markets

and increase the proportion of their investment portfolio allocated to the debt capital markets. These additional

investors in the debt capital markets create demand and enable issuers to price their issues at favourable rates

and tenors relative to bank financing.

From a regulatory perspective, banks have been subject to sweeping regulatory developments, including changes

in the amount of capital required to be set aside for loans made and the measurement of the risk associated with

those loans. Consequently, many banks have scaled back their lending, increased the pricing or the amount of

security they require, or become more selective in terms of companies or industries.

It is against this backdrop that we feel it is useful to distribute this publication, to provide companies that have not

yet had a flavour of the workings of the debt capital markets with a very brief introduction. For more seasoned

market participants, we hope this publication serves as a convenient reference.

If you have comments or questions, please feel free to get in touch with us.

Jeckle Chiu

Partner

Jason Elder

Registered Foreign

Consultant (New York)

Partner, Mayer Brown LLP

Thomas Kollar

Partner

Phill Smith

Partner

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STAGE ONE – BEFORE MANDATE

This section reflects our discussions with numerous potential issuers, and the considerations they have faced

when deciding how to structure their inaugural bond offering (or move into a new product class). We will discuss:

• Bond structures and common features;

• Offering structures – Rule 144A and Regulation S;

• Listings, ratings and ancillary decisions; and

• Credit support within the issuer group or from a parent or governmental entity.

The goal of this section is to simplify the various structural options – and to explain the terminology and pre-

execution structuring.

WHAT ARE THE DIFFERENT BOND STRUCTURES?

There are many different options when it comes to structuring debt instruments. Your investment bank advisers

can provide considerable information regarding the merits of the various options, but this overview has been

provided to familiarise you with the basic terminology.

The most basic differences among bonds relate to the way in which interest will be calculated, and how principal

will be repaid. After the basic commercial terms have been determined, creating the “right” instrument for your

company becomes a matter of selecting among the various specific features discussed below. When structuring a

bond, it is important to work closely with your investment banks to ensure the result will be familiar and

acceptable to the target investor base.

In Asia, common divisions can be made between secured and unsecured bonds, fixed or floating rate interest

mechanisms and the tenor of repayment. Investors expect to see other “standard” terms in the bond structure,

and we can work with you to explain what such terms mean and how they impact the commercial bargain.

Interest options:

• Fixed rate: Interest rate fixed at issue and remains the same throughout the life of the bonds.

• Floating rate: Interest rate typically expressed as a margin plus a floating benchmark rate, such as LIBOR,

HIBOR.

• Zero coupon: Also referred to as “zeros”, zero coupon bonds are issued at less than 100 percent of their

principal (or face) amount. At maturity, 100 percent of the principal amount will become due and payable,

thereby compensating investors for a return on investment during the life of the bonds.

• PIK: “Payment-in-kind” notes mean that interest accruing on the notes is added to the principal amount

outstanding, thereby increasing the bullet payment due at maturity. These instruments are used most

commonly in leveraged situations.

Specific features:

• CoCos: Contingent convertible bonds with a maturity date and mandatory interest payment obligations

that automatically become shares in the issued share capital of the issuer, usually a bank, if the issuer ’s core

capital falls below a prescribed level.

• Convertible bonds: Bonds convertible into shares of the issuer (or its parent) upon exercise of the

conversion right. For more information on this specific subset of debt capital markets product, please see

our publication entitled “Convertible Bonds – An Issuer’s Guide”.

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• Covenant packages: In relation to high yield bonds, limitations on incurring indebtedness, restricted

payments, liens, transactions with affiliates, sale and leaseback transactions, mergers, consolidations and

sales of assets, dividends, issuance and sales of equity interests in wholly-owned subsidiaries, guarantees

of indebtedness, business activities and anti-layering. We discuss the various aspects of the covenant

package below in greater detail.

• Credit enhancement: Credit support designed to lower the issuer ’s cost of funding and to attract a

wider class of investors. Credit enhancement can take many forms, including guarantees, security and

keepwell or L/C support.

• “Dim sum” bonds: Bonds denominated in offshore renminbi, whether settled in renminbi or another

currency marketed outside China.

• Exchangeable bonds: Bonds that are exchangeable for existing shares in the issued share capital of

another entity (normally a subsidiary or company in which the issuer of the exchangeable bond owns a

stake).

• Guaranteed bonds: If the issuer is a special purpose vehicle or finance subsidiary, the obligations of the

issuer will typically be guaranteed by its parent. In the case of a high-yield bond, the obligations of the issuer

may also be guaranteed by subsidiary guarantors who provide “upstream guarantees” supporting the

payment obligations of the issuer.

• High-yield bonds: High-yield bonds are bonds issued by issuers with a credit rating below investment

grade. Typically, high-yield investors expect a higher return on investment and issuer compliance with

an incurrence-based covenant package that is more extensive as compared to investment grade issuers.

Please see also our publication entitled “High-Yield Bonds – An Issuer’s Guide” for more information.

• L/C backed bonds: A letter of credit issued by a bank is drawn if the issuer is unable to make payments

on a timely basis. An L/C makes economic sense if the issuer ’s cost of funding in the debt capital markets is

reduced by more than the cost of the L/C. Some convertible bonds are also L/C backed bonds.

• Perpetual bonds: Subordinated bonds with a call option for the issuer but no maturity date which may be

issued to qualify as equity capital or regulatory capital thereby justifying the higher cost of funding.

• Secured bonds: A bond with collateral that secures the underlying payment obligation of the issuer.

For example, for PRC-based operating companies with offshore finance structures, the issuer (or its

subsidiaries) typically pledges its shareholdings in offshore companies or other assets to holders.

Providing a security package may increase investor appetite for the bonds, and may lower the issuer’s

borrowing costs – or it may make it possible to simply get a deal done at any cost.

• Subordinated bonds: A class of bond that, in the event of a liquidation, typically ranks after senior bonds

and secured bonds with an explicit subordination feature in the issuer’s capital structure.

WHAT IS THE DIFFERENCE BETWEEN A REGULATION S-ONLY OFFERING AND AN OFFERING WITH A

TRANCHE FOR RULE 144A INVESTORS?

• Regulation S: “Regulation S-only” indicates an offering to institutional investors outside the United

States. For this type of offering structure, the issuer will not be able to offer or sell to US accounts directly,

for example through a roadshow in the United States.

• Rule 144 A: Rule 14 4 A bonds can be offered to qualified institutional buyers in the United States.

Consistent with customary market practice, the offering document will contain information substantially

similar to that required for a registered offering in the United States. Rule 144A offerings will typically have

a Regulation S tranche for offshore sales.

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SUMMARY COMPARISON OF REGULATION S-ONLY AND RULE 144 A OFFERINGS

Regulation S-only Rule 144 A / Regulation S

Investor base Institutional investors and high net worth

individuals outside the United States

Qualified institutional buyers in the

United States and Regulation S investors

Disclosure

requirements

Offering memorandum with risk factors,

business description and recent audited

and interim financial statements

Same as Regulation S disclosure, but

typically more detailed disclosure

regarding the issuer’s business

operations, and inclusion of “MD&A

section” providing a narrative discussion

of the issuer’s financial results for the

most recent three years

Governing law English, Hong Kong or, to a lesser extent,

New York law

New York, English or, to a lesser extent,

Hong Kong law

Clearance and

settlement

Clearstream, Euroclear or, for dim sum

bonds, the CMU Service

The Depository Trust Company and

Euroclear/Clearstream

Regulator y

requirements

No filings if no offer to the public in any

jurisdiction except for stock exchange

listing requirements

Same as Regulation S

Execution timetable

(assuming no existing

disclosure)

4- 6 weeks 4-8 weeks

Legal due diligence Limited review of board minutes, material

contracts and any legal proceedings

Extensive review of board minutes,

material contracts, any legal proceedings

and other documentation

Legal opinions Issuer, guarantor and enforceability

opinions

Same as Regulation S + 10b- 5 disclosure

letter, Investment Company Act analysis

WHAT ARE MTN PROGRAMMES?

EMTN (Euro Medium Term Note) or GMTN (Global Medium Term Note) programmes are framework issuance

platforms listed on a stock exchange that are typically updated annually. They are designed to facilitate the rapid

and low-cost issuance of a wide range of debt instruments on a private placement or syndicated basis during a

12-month period by high-volume issuers.

SHOULD WE OBTAIN A RATING – AND IF SO, HOW MANY DO WE NEED?

The ratings process can add considerable value to the pricing element of the process by providing investors with

an estimated range of yield during the offering process. For high-yield issuers, two ratings are typically obtained,

particularly following the global financial crisis.

The ratings process – and dealing with the ratings agencies – will be coordinated by your investment bank

advisors, and will run in parallel with the preparation of the offering document and other materials.

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SHOULD WE OBTAIN A LISTING OF THE BONDS ON A STOCK EXCHANGE – OR AT ALL?

As some investors can only invest in bonds listed on a stock exchange, a listing on the SEHK or the SGX-ST or the

Irish Stock Exchange will help to widen the potential investor base. SEHK-listed companies benefit from a

streamlined vetting process in Hong Kong. We can provide additional guidance regarding the pros and cons of

different listing venues based on your specific circumstances.

SHOULD WE USE AN SPV TO ISSUE THE BONDS?

Many issuers prefer to issue guaranteed bonds via a special purpose vehicle to keep finance raising as a separate

activity in their corporate structure. If the issuer is a Listco, the further issues condition in the terms and

conditions of the bonds will typically permit the issuer to issue any equity or debt securities (including a Fungible

Issue) without the consent of the existing holders of such bonds. However, If the issuer is a SPV (incorporated

solely to issue one series of bonds), only a Fungible Issue of bonds may be made without the consent of the existing

holders of such bonds. Issuers incorporated as a company under Hong Kong law may be advised to use an SPV

incorporated in an offshore jurisdiction to avoid debating whether the bonds denominated in Hong Kong dollars

are ‘loan capital’ for the purposes of Hong Kong stamp duty applied to transfers of bonds required to be

registered in Hong Kong under the Companies Ordinance. Also, issuers may be advised to interpose an SPV as the

issuer of convertible bonds for stamp duty, or functional currency accounting reasons. However, bonds which are

subordinated to senior debt and provide the issuer with the option of deferring its obligation to pay interest may

not be able to achieve the desired status of a regulatory capital or classification as equity if an SPV is interposed as

the issuer.

WHAT IS A KEEPWELL DEED/DEED OF EQUITY INTEREST PURCHASE UNDERTAKING?

Keepwell agreements may take various forms and provide different degrees of comfort to bondholders. Some

may be drafted to be a non-legally binding letter of comfort, where the parent company merely acknowledges

that debt is being raised by its subsidiary, to ensure that the subsidiary would be able to service its debts without

an intention to create a legal relationship.

Others may be legally enforceable by a trustee for bondholders, and be in the form of a deed, but unlike a

guarantee, the parent company injects capital into its subsidiary to enable it to service its debt, instead of directly

repaying the creditor as primary obligor.

A deed of equity interest purchase undertaking with the trustee is an undertaking to purchase shares in its

subsidiaries following an event of default as an additional means of liquidity for the issuer.

PRC issuers adopting such credit enhancement structure do not require regulatory approval and the bond

proceeds may be used onshore or offshore whereas a guarantee by a PRC entity of an offshore bond issue must

be registered or the bond proceeds cannot be used onshore.

ParentCos/controlling shareholders may be asked to issue letters of comfort, guarantees, keepwell deeds and

equity purchase undertakings.

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STAGE TWO - MANDATE

WHO ARE THE USUAL PARTIES?

• Auditors: The issuer ’s (and guarantor ’s) auditors provide comfort letters to the JLMs at signing and

closing and participate in the due diligence and OC preparation processes.

• Calculation agent: The calculation agent (usually a bank) is usually only required where calculations of

interest or other payments are complex, for example, when calculating interest referenced to movement in

a stock market index.

• Clearing systems: Electronic systems, called clearing systems, allow bondholders to hold and trade

bonds in book entry form. These systems enable bonds to be traded by debiting and crediting accounts on

behalf of bondholders, into which securities or cash can be transferred electronically without the need for

physical delivery.

• Common depositary: A custodian who holds the global certificate for the clearing systems through

which the bonds are held and traded.

• Fiscal agent or trustee: Bond issues either have a fiscal agent structure or a trustee. See “Why do most

bond issues have a trustee?” below.

If a fiscal agent is appointed, it is the principal paying agent, and as such, makes payments of interest and

principal to the bondholders. It also has other administrative functions in relation to the issue of the bonds.

Individual bondholders can trigger repayment upon an event of default.

The trustee acts on behalf of bondholders as an intermediary between them and the issuer, representing

the bondholders’ interests throughout the life of the bonds. The trustee is usually a professional trust

company and enters into a trust deed (or an indenture) with the issuer. Only the trustee can declare an

event of default.

• Lawyers: The issuer (and guarantor) and the JLMs each instruct lawyers to draft the documents

and prepare legal opinions. The JLM ’s lawyers draft the contractual documents and the issuer ’s (and

guarantor ’s) lawyers comment on the drafts and prepare the OC. The trustee will also instruct a lawyer to

review the transaction documents and legal opinions on its behalf.

• Lead manager and managers: An issuer often looks to market its bonds to a wide number of unknown

investors, but often does not have direct access to them (especially if it is the first time it has done a bond

issue). Accordingly, the issuer mandates one or more investment banks (JLMs and bookrunners) pursuant

to a “mandate letter ” which contains the indicative terms of the bond issue and various indemnities.

The lead manager contacts other investment banks to form a syndicate, which agree to buy the bonds

and then sell them to investors, or to buy those that are not sold on a joint and several basis (this is called

underwriting the issue). The investment banks get a commission for agreeing to buy the bonds. The

investment banks in the syndicate are called managers or underwriters.

Private placements of bonds to a single subscriber consist of the issuer, an investment bank as the manager

and the investor as the subscriber.

• Listing agent (if the bonds are listed): The listing agent (usually the issuer ’s lawyer) advises the

issuer on the procedure for listing the bonds and submits the documents for listing to the relevant stock

exchange.

• Paying agents: Paying agents act as the agents of the issuer in making payments of interest and principal

to the bondholders throughout the life of the bonds.

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• Printers: Specialist financial printers revise drafts of the OC and announcements and print the OC.

• Process agent: A process agent is appointed in a particular jurisdiction when the parties to the

transaction agree to submit to the courts of that jurisdiction, for example, the courts of England and

Wales. The process agent agrees to accept service of court papers on behalf of the instructing party. One

is not required, for example, where the issuer is incorporated under Hong Kong law and only submits to the

courts of Hong Kong.

• Rating agent: The issuer might approach a rating agency (such as Fitch, Moody ’s or Standard & Poor ’s) to

assess the financial position and creditworthiness of the issuer and assign a grade (or rating) to the issuer

or its bond issue.

• Registrar: For bonds in registered (not bearer) form, a bank or trust company is appointed as an agent

of the issuer to maintain a register of the names and addresses of registered owners and any change

in ownership when bonds are sold. In practice, where the bonds are evidenced by a global certificate

registered in the name of a nominee of the common depositary, the registrar is idle.

• Settlement lead manager: The settlement lead manager facilitates completion of the formalities on the

closing date.

WHY DO MOST BOND ISSUES HAVE A TRUSTEE?

A trustee offers several advantages:

• Avoiding the need to call meetings: In the absence of a trustee, the issuer may have to convene a

bondholders’ meeting to agree even minor changes to the issue terms or to waive insignificant breaches

of bondholders’ covenant. Such a meeting can be difficult to arrange, expensive to hold, and the outcome

may be uncertain if the issuer has been unable to communicate with bondholders in advance. The

convening of a meeting can also have an adverse impact on the issuer ’s market standing and leave the

issuer vulnerable to the short term whims of aggressive bondholders.

• Crisis management: Perhaps the single most important role that a trustee can play is in crisis

management. Credit standing is a matter of market confidence. A trustee can act behind the scenes to

help the issuer overcome a potential event of default. A trustee can provide an accurate gauge of the

bondholders’ likely reaction to a proposed course of action.

• Events of default: A trustee may be able to prevent an event of default from triggering repayment of the

bonds if the effect is not materially prejudicial to bondholders. With a fiscal agent it is possible for bonds

to become repayable if a single opportunistic bondholder detects a minor event of default that cannot be

cured quickly, even if the damage caused to the borrower and the remaining bondholders is potentially

enormous (for example, through triggering cross-default provisions in other financing agreements).

• Flexibility: Covenant packages, negative pledges, events of default, provisions to protect conversion and

exchange rights, and the imposition of withholding tax – all of these can be inflexible and may restrict the

issuer ’s business without the exercise of discretion on the bondholders’ behalf by a trustee. Comparable

powers, if vested in a fiscal agent, will give rise to conflicts of interest.

• Oversight: Certain restrictive covenants, for instance, compliance with negative pledges and the

provisions restricting the disposal of the issuer ’s assets, can only operate effectively with a trustee.

• Security: For secured bonds and bonds with a negative pledge, a trustee can hold security on the

bondholders’ behalf – providing each bondholder with an individual security interest would be impractical.

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WHAT TYPES OF FEES DO INVESTMENT BANKS EARN?

• Combined management and underwriting commission: Such commission is expressed as a

percentage of the aggregate principal amount of the bonds, and paid to the JLMs, pro rata in accordance

with their respective commitments.

• Performance fee: This is an optional fee (also expressed as a percentage of the aggregate principal

amount of the bonds) and is usually split, allocated and paid to the JLMs at the determination of the issuer

and shall be deducted from the subscription moneys for the bonds.

• Private banking rebates: This acts as an incentive for the private banking arms of the investment bank to

source “buy and hold” private banking clients as investors. The rate may be 0.25 percent (plus or minus) of

the principal amount of the bonds purchased by such private banks.

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STAGE THREE - BEFORE LAUNCH

WHAT IS THE USUAL BOND DOCUMENTATION?

The principal documents include:

• Agency agreement: An agency agreement where the issuer appoints agents to carry out particular

agency functions on its behalf in respect of the bonds.

• Arrangement letter: An arrangement letter from the auditors addressed to the JLMs setting out the

terms of their engagement and the limit of their responsibilities.

• Deed of covenant: A deed of covenant where the issuer agrees, in the absence of a trustee, that the

records of the clearing systems may be relied upon as to who has an interest in the global certificate.

• DDQ: A due diligence questionnaire as the basis for the discussion where the JLMs conduct a due diligence

session with the management of the issuer.

• Financial information certificate: A financial information certificate signed by a director or chief

financial offices of the issuer confirming that there has been no material change in the turnover/profit /

asset /liabilities of the issuer since the last accounting period. This may be required in order to address the

lack of line item coverage given by the issuer ’s auditors in comfort letters.

• First comfort letter: A first comfort letter from the issuer ’s auditors to the JLMs confirming at the

signing that the JLMs may rely on the financial statements in the OC. It also sets out the limited non-audit

due diligence carried out for the period after the last financial statements and confirms that on this basis

there has been no material adverse change, and that certain financial information in the OC has been cross

checked to the audited financial statements, see “Tick and Tie”.

• Global certificate: A global certificate issued by the issuer and containing the issuer ’s promise to pay

interest and repay principal on the bonds. This is delivered to a custodian to hold for the clearing systems,

for example, Euroclear and Clearstream.

• Incumbency certificate: An incumbency certificate containing specimen signatures of the authorised

signatories of the issuer.

• Intercreditor agreement: An intercreditor agreement between various security providers and security

trustees where the same collateral is shared for the benefit of different bond issues by the issuer.

• Legal opinions: Legal opinions to the JLMs and the trustee from the lawyers advising them and from

lawyers in the jurisdiction in which the issuer (and the guarantor, if any) is incorporated.

• Listing documents: Listing documents for a listing of bonds on the Hong Kong Stock Exchange include

Form C2 for the issuer (or guarantor), Form A , formal notice, the waiver letter with respect to the

definition of professional investors, the SEHK checklist and the Par t XV SFO exemption.

• Mandate letter: A mandate letter from the issuer to an investment bank or banks authorising them to

arrange a bond issue.

• OC: The OC (in preliminary form, i.e. without pricing details) setting out the terms and conditions of the

bonds (or a description of the bonds where the bonds are governed by New York law and the subject of

an indenture) and the business, risks, S&S of the issuer together with its most recent audited financial

statements, plus interim results if applicable, furnished to prospective investors.

• Process agent: A process agent appointment letter is required where the issuer is incorporated in a

jurisdiction which is different from the jurisdiction of the courts in the submission to jurisdiction clauses.

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• Roadshow materials: The roadshow materials are in the form of Powerpoint slides to show potential

investors. The information presented must be consistent with the OC. Roadshow materials accessible with

a password via the Internet are called the “net roadshow ”.

• Subscription Agreement/Purchase Agreement: A Subscription Agreement/Purchase Agreement

setting out the terms upon which the JLMs agree to subscribe or procure subscribers for the bonds.

• Bringdown comfort letter: A second comfort letter updated at closing in similar terms to the first

comfort letter.

• Trust deed: A trust deed between a trustee and the issuer whereby the trustee is appointed to hold

the issuer ’s covenant to pay on trust for bondholders. Also known as an indenture where the bonds are

governed by New York law.

WHAT ARE THE USUAL TERMS AND CONDITIONS?

In addition to the terms relating to the calculation and payment of interest and repayment of principal, the terms

and conditions of unsubordinated, investment grade bonds will usually contain:

• Change of control investor put option: A change of control investor put option where the

bondholders have the right to put their bonds back to the issuer at say 101 percent of the principal if the

controlling shareholders cease to be able to control the composition of the board of directors of the issuer.

In some cases, this right arises when the change of control also results in a credit rating downgrade.

• Events of default: Events of default impact the issuer and its principal subsidiaries. Principal subsidiaries

are usually defined to mean subsidiaries with a 5 percent /10 percent total revenue/profit /asset when

compared to the total consolidated revenue/profit / asset of the issuer/guarantor. Upon an event of default,

the bonds may become immediately due and repayable.

• Make whole or preset premium issuer call option: A make whole or preset premium issuer call

option allowing the issuer to pay off the remaining bonds early. A make whole amount is a lump sum

payment derived from a formula based on the NPV of future coupon payments that will not be paid

because of the call. This differs from the early prepayment right in bank loans where the borrower is

typically free to prepay on any interest payment date without premium or penalty.

• Negative pledge clause: A typical capital markets negative pledge clause is only activated by the issue of

secured bonds in the future.

High yield bonds will contain a more extensive covenant package. For more information, please see our

publication entitled “High Yield Bonds – An Issuer’s Guide”.

ARE ANY CONSENTS AND APPROVALS NEEDED?

Issuers need to ensure no consents are required from third parties (for example, lenders of existing loans,

regulators) for the bond issue. Issuers need to obtain their board approval which includes, for example, approving

the issue of the bonds, entering of the transaction documents, roadshows, listing application and the content of

the OC. Subsidiary guarantors providing upstream guarantees may also require shareholder approval.

WHAT IS WALL CROSSING?

Wall-crossing is when the sell side of an investment bank talks to the buy side of an investment bank about a

potential bond issue before it is announced on BBG and prior to the roadshow with a view to the buy side gauging

investor interest in the deal, and if so, at what pricing and subject to what terms and conditions. Any inside

information disclosed to the buy side must be on the basis that any potential investor acknowledges it to be inside

information and that it must be kept confidential and that no trading in the shares of the company on the basis of

that information can take place.

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STAGE FOUR - LAUNCH

WHAT SIGNIFIES THE LAUNCH?

Launch is when the BBG announcement is released and the launch announcement (if required) is published. The

lead manager sends the e-red version of the OC to potential investors and invitations to attend a presentation or a

one-on-one meeting with the issuer at meetings usually held in Hong Kong , Singapore and London (depending on

the target investor base) and to present information about the issuer (NDR) and the potential bond issue (DR).

WHAT ARE THE DIFFERENCES BETWEEN AN NDR AND A DR?

An NDR is a non-deal roadshow where the issuer only provides information about itself, without disclosing any

information regarding the bond issue in meetings with investors prior to potential pricing of the bonds.

A DR is a roadshow marketing both the issuer and the indicative terms of the bond issue.

WHAT DO WE NEED TO TELL OUR SHAREHOLDERS IN A LAUNCH ANNOUNCEMENT?

The issuer needs to ascertain if there is any PSI in the OC. If so, the PSI must be disclosed to shareholders.

According to the SFC, law firms are not normally qualified to give advice regarding what should or should not be

disclosed for two reasons. First, to do so would involve an assessment of facts about which external lawyers are

not always fully informed; external parties could therefore run the risk of falling between the cracks when

providing such advice. Second, the directors and senior management of listed companies (the “controlling mind”

of a company, but not others) have to take responsibility and to consider all factors, including whether the

relevant information should be disclosed to the investing public, and whether the disclosure of such information

would be likely to move the share price. While external lawyers are able to provide guidance on what the legal

disclosure requirements are, they are handicapped when it comes to assisting a client in making a substantive

disclosure assessment, because they lack the controlling mind’s perspective.

If there is no PSI, there are two levels of market practice:

1. Do nothing , i.e. announcement: Only applicable if the issuer believes the information relating to the bond

issue is non-price-sensitive.

2. Publish an awareness announcement: Applicable if the bond issue is potentially price-sensitive or the issuer

believes good corporate governance requires that its shareholders be informed.

SHOULD WE BE CONCERNED ABOUT BLACK-OUT PERIODS?

The prohibitions under Clause 3 of Par t A , Appendix 10 (“Model Code for Securities Transactions by Directors of

Listed Issuers” ) of the Listing Rules are only binding on the directors of a listed company.

However, it is rare for bond issues to be launched in a black-out period due to the risk that material information

was withheld from investors. Also, investors like to invest on the basis of recently released financial information so

launches occur immediately after the release of results.

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STAGE FIVE - PRICING

WHAT HAPPENS BEFORE PRICING?

While bookbuilding is being undertaken by the bookrunner(s) (the receipt of buy orders for the bonds in certain

amounts at certain prices), the SA , the trust deed and the agency agreement will be finalised. The listing eligibility

letter confirming the bonds are eligible for listing (subject to pricing), as well as the waiver from the strict

definition of “professional investor ” in the Listing Rules to accommodate the wider definition under the SFO will

be granted by the SEHK.

WHAT CHANGES CAN BE MADE TO THE FINAL OC FROM THE POC?

Material changes made to the final OC, must be circulated to investors. Typographical errors need not be

recirculated.

WHAT HAPPENS AT PRICING, AND WHAT DOCUMENTS ARE REQUIRED TO BE SIGNED?

Following the roadshows and the bookbuilding exercise, the issuer and the JLMs then agree the interest rate, the

issue price, the issue date and the maturity date of the bonds. The SA is signed by the issuer and the managers. The

managers are now legally committed subject to conditions precedent and force majeure. The first comfort letter

and the arrangement letter are also signed and the final OC (containing the pricing terms) is despatched to

prospective investors. The process agent should also be appointed. The issuer ’s counsel makes a formal listing

application to the SEHK.

WHY IS THE ISSUE PRICE NOT ALWAYS 100 PERCENT?

If the bonds are being priced by reference to a spread over comparably dated UST, it may be necessary to agree to

an issue price below or above par to create a rounded coupon, for example, 5.25 percent which provides the

desired YTM of say 5.43 percent. Another explanation is because an issue price below par enables the bonds to be

distributed at par enabling the distributors to earn a turn in the process equal to the initial discount to par in

addition to any management and underwriting fee or private banking investor rebate.

See also “Zero coupon” bonds under “What are the different bond structures?” in Stage One.

WHAT DO WE NEED TO TELL OUR SHAREHOLERS?

A pricing announcement will be published by the issuer immediately after pricing and signing of the SA to inform

shareholders of the bond issue in the circumstances below.

The issuer will need to announce the details of any pledging of shares by the controlling shareholder as required

under paragraph 13 .17 of the Listing Rules and details of any covenants relating to specific performance of the

controlling shareholder as required under paragraph 13 .18 of the Listing Rules which may include a change of

control investor put option.

In addition, the issuer may announce details of the bond issue if the issue itself is PSI or if the issuer believes it is

good corporate governance to inform shareholders.

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The pricing announcement in respect of an issue of convertible bonds will usually contain a summary of the SA

(for example, terms of the subscription, conditions precedent, termination, shareholders lock up), principal terms

of the convertible bonds (including the principal amount, coupon, tenor, issue price, conversion period and

conversion price, call/put options), if listing is sought, the effect on the issuer ’s share capital upon conversion, use

of proceeds, reasons for the issue and if the issue is covered by the issuer ’s general mandate and any fund raising

activity by the issuer in the preceding 12 months.

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STAGE SIX - CLOSING

WHAT HAPPENS AT CLOSING?

After bringdown due diligence takes place, closing occurs on a delivery versus payment basis which involves

delivery of a global certificate to a common depositary as custodian for the clearing systems and the payment of

the net proceeds of an issue of bonds to the issuer.

WHAT CONTINUING PSI OBLIGATIONS ARISE FROM LISTING BONDS ON THE SEHK?

The principal continuing obligation of the directors of the issuer relates to the disclosure of price- sensitive

information, i.e., inside information which will impact on the trading price of the bonds.

However, if the issuer already announces price-sensitive information pursuant to its obligations as a SEHK listed

company, there should be only bond-related info (as listed below) to disclose:

• If aggregate redemptions or cancellations of the bonds exceed 10 percent and every subsequent 5 percent

interval;

• Repayment of the bond issue; or

• Any public disclosure made on another stock exchange about the issuer ’s debt securities.

ARE THERE ANY OTHER LISTING OBLIGATIONS?

The SEHK must be notified if any of the following occur:

• The existing trustee is being replaced or if the trust deed is amended;

• The issuer repurchases or redeems all of the bonds prior to the maturity date pursuant to a liability

management exercise (see below); or

• The bonds are listed on another stock exchange.

CAN THE ISSUER OR A SUBSIDIARY OF THE ISSUER PURCHASE AND HOLD ITS OUTSTANDING BONDS?

Bonds purchased by the issuer usually have to be cancelled immediately. Even if the terms and conditions of the

bonds allow a subsidiary to purchase and hold bonds as an investment, any acquisition by a subsidiary, even from

an independent third party, may constitute financial assistance and a connected party transaction under the

Listing Rules (see FAQ 20 of Series 9).

DO OUR DIRECTORS HAVE TO FILE DI FORMS AFTER PURCHASES AND SALES OF THE BONDS?

Yes. The directors of the issuer are expected to comply with their existing listing obligations as directors of a listed

company.

ARE THERE ANY DIFFERENCES IF WE HAVE APPLIED FOR PART XV EXEMPTION?

Part XV SFO Exemption only applies to a SPV issuer/listco guarantor structure.

The directors of the SPV issuer are exempted from complying with the disclosure obligation after trading of listed

bonds in their capacity as directors of the SPV issuer, given the exemption exempts the SPV issuer (as a listed

corporation), its substantial shareholders, directors and officers from compliance with the requirements under

Part XV of SFO in relation to the issue of the bonds.

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However, the directors of the SPV issuer are still required to submit DI forms after trading of listed bonds in their

capacity as directors of the guarantor if it is a listed company.

The SFC exemption only exempts the SPV issuer as a listed corporation, but not the guarantor as an existing listco

listed on the Stock Exchange, from Part XV SFO compliance. The listco guarantor is still expected to comply with

its existing listing obligations.

After consulting the market, the SFC concluded in March 2013 that the SFO needed to be revised to exclude listed

corporations (whose only listed securities are debt securities which are not convertible into equity securities)

from the disclosure of interests regime under Part XV of the SFO.

ANY LOCK-UP OF SHARES?

A lock-up of shares is more common in conjunction with an issue of convertible bonds where shares of existing

shareholders will be prevented from being sold for up to 90 days in order to facilitate an orderly marketing ,

distribution and trading of convertible bonds.

WHAT NOTIFICATIONS HAVE TO BE MADE TO THE TRUSTEE?

The issuer is required to notify the trustee upon:

• An event of default;

• Late/non-payment of interest;

• Redemption or repayment;

• Tax redemption;

• Change of tax jurisdiction;

• Change of authorised signatory;

• Becoming aware of material breach of obligation in respect of the bonds by the agents; or

• Sending notice to bondholders.

WHEN DOES THE ISSUER NEED TO DEAL WITH THE AGENTS/REGISTRAR?

The issuer needs to deal with the agents/registrar in connection with:

• Payment of principal and interest where the issuer pays the paying agent on or before the day on which

payment becomes due;

• Replacement of bond certificates with the replacement agent;

• Cancellation of bond certificates with the registrar;

• A redemption event;

• Event of default;

• Resignation of the existing agent; or

• Notices to bondholders via the clearing systems.

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mayer brown jsm 16

DO WE NEED TO PROVIDE COPIES OF AUDITED FINANCIAL STATEMENTS/ CORPORATE

COMMUNICATION TO ADDITIONAL PARTIES (FOR EXAMPLE, TRUSTEE), AS A RESULT OF THE BOND

ISSUE?

During the life of the bonds, the issuer is usually required to:

• Send copies of the issuer ’s annual financial statements to the trustee within four months of publication

and within three months for interim financial statements;

• Allow the trustee access to its books of account and upon the trustee’s request;

• Issue a certificate of compliance confirming no event of default has taken place; or

• Issue a certificate setting out the number of bonds of each series held by or for the benefit of the issuer.

DO ANY ACTIONS NEED TO BE TAKEN ONCE THE BONDS MATURE?

No action is required to be taken. The listing status of the bonds expires automatically on the maturity date.

WHAT IS A LIABILITY MANAGEMENT EXERCISE?

A liability management exercise is a post completion balance sheet restructuring resulting in, for example, a lower

cost of finance, longer maturity profile or less security which, among others, may involve:

• The exercise of a call option by the issuer and the redemption of outstanding bonds in accordance with

their terms and conditions;

• Repurchases of outstanding bonds in privately negotiated transactions between a willing seller and the

issuer as a willing buyer or via a tender offer to bondholders; or

• An offer to exchange existing bonds for a new issue of bonds.

IF THE TERMS AND CONDITIONS OF THE BONDS NEED TO BE RESTRUCTURED WITH APPROVAL OF

BONDHOLDERS, IS IT PERMISSIBLE TO PAY A CONSENT FEE TO BONDHOLDERS TO INCENTIVISE

THEM TO VOTE IN FAVOUR?

In Azevedo v. Imcopa Importacao, Exportacao E Industria De Oleos Ltd [2013] EWCA Civ 364 , the English Court of

Appeal held that it was acceptable for a company to offer a “carrot ” to bondholders to vote in favour of a

restructuring proposal. Imcopa (the issuer) proposed resolutions postponing the payment of interest that was

due under the bonds and offered a cash payment to bondholders who voted in favour of the resolution, in the

event that the resolution passed. Those that did not vote in favour of the resolution or did not vote on the

resolution at all were not entitled to receive the payment. The claimants voted against the resolutions and argued

that the offer and associated payments were unlawful as they were in breach of the pari passu principle, which was

explicitly required by the Trust Deed, or alternatively they were a bribe and so were unlawful under English law.

The court held that the pari passu obligation only applied to money in the hands of the Trustee and in this case the

money did not pass through the hands of the Trustee. The court further held that it is not inconsistent with English

company law for an offer of payment to be made to bondholders who vote in favour of a resolution, where

payment is available to all members of the class and provided that the basis of the payment is made clear in the

documents relating to the resolution. The court held that it is inappropriate to speak of bribery in this context as

the details of the consent fee were fully disclosed to all bondholders and therefore no bondholder was excluded

from receiving the consent fee.

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IF THE TERMS AND CONDITIONS OF THE BONDS NEED TO BE RESTRUCTURED WITH APPROVAL

OF BONDHOLDERS, IS IT PERMISSIBLE FOR A MAJORITY OF BONDHOLDERS TO IMPOSE THE

RESTRUCTURING TERMS ON OTHER BONDHOLDERS?

In Assénagon Asset Management S. A . v. Irish Bank Resolution Corporation Ltd [2012] EWHC 2090 (Ch), the

English High Court considered an exchange offer by an issuer to exchange existing bonds for new bonds. To

accept the exchange, bondholders were required to direct a proxy to vote in favour of the exchange and to amend

the terms of the original bonds to allow the issuer to redeem them for nominal consideration (€0.01 per €1,000 in

principal amount of the original bonds) – in the words of the court, “…a coercive threat which the issuer invites the

majority to levy against the minority ”.

The court held it was unlawful for a majority of bondholders to pass a resolution which would destroy the

minority ’s value of their bonds. This is an exception to the general principle that any validly passed resolution at a

meeting of bondholders is binding on all bondholders even if they vote against or if they are absent from or

unrepresented at the meeting.

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mayer brown jsm 18

GLOSSARY

ABB Accelerated book build deal

AFS Audited financial statements

AUP The agreed upon procedures set out in an auditor’s comfort letter which are undertaken to assure the

JLMs that the ‘circle up’ numbers set out in the offering circular have been correctly extracted from the

issuer’s financial statements, accounting records and schedules prepared by the issuer

Anchor Order A substantial order for bonds received from an investor during the book building process

Basis point One-hundredth of 1 percent i.e. 0.01%, also known as a bip and abbreviated as bp

B&D Billing and delivery in relation to the settlement arrangements for the closing of a bond issue hence, B&D

agent, also known as the settlement lead manager

BBG Bloomberg and, in the context of the commencement of a roadshow or bookbuilding, an announcement

on Bloomberg

Benchmark

Issue Size

$500 million (or the equivalent in the currency in which the bonds are denominated)

Blackout Period A self-imposed period (also known as a Quiet Period) that for many listed companies begins one month

before the announcement of its interim or year end results when access to the company ’s senior

executives is restricted and no meetings with investors are held

Cap table A table summarising the short-term and long-term debt finance owed, and shareholders’ equity, as at a

particular date comprising the capitalisation of the company

CoC A change in the identity of the controlling shareholder of an issuer which may result in a down grade of the

credit rating of the issuer’s bonds

CoC “Put” A right granted to holders of bonds to require the issuer to redeem the bonds before their scheduled

maturity date if a CoC occurs

Condensed financial

statements

An issuer’s interim financial statements in respect of an accounting period of less than one year which are

not as comprehensive as its audited financial statements in respect of a full year

DDQ Due diligence questionnaire

DI A disclosable interest in a Listco’s shares or bonds

Doc bank The JLM with overall responsibility for finalising the transaction-documents in respect of a bond issue

DR Deal roadshow

Dry Run After obtaining the current trading price of comparably dated UST (or the equivalent) and immediately

prior to the actual pricing of a new issue of bonds, one of the JLMs will read out the proposed terms to the

issuer (including the spread over comparably dated UST)

EBIT Earnings before interest and taxes

EBITDA Earnings before interest, taxes, depreciation and amortisation

F-pages Separately numbered pages of the OC reproducing the issuer’s (and the guarantor’s) most recent

financial statements

FPG Final pricing guidance

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Fungible Issue In the context of an already outstanding issue of bonds, a further issue of such bonds which is

consolidated with, and forms part of the same series as, the outstanding issue of bonds and which is

traded through the clearing systems with the same securities identification number and, where the

existing issue was a tap issue, the fungible issue, may also be referred to as a “re-tap”

G-spread The excess return which investors specify in the bookbuilding process in order to invest in an issue of

fixed rate bonds by the issuer to compensate for the additional risk investors perceive relative to

investing in comparably dated government bonds issued by, for example, the United States government

(UST in the case of US dollar denominated bonds)

Go/No go call A conference call involving the working group to provide a market update and to ensure all necessary pre

launch steps have been taken immediately prior to uploading a BBG announcement about the potential

deal

Hard Underwriting An undertaking by an investment bank to subscribe for bonds at a predetermined price irrespective of

market conditions at the time of the pricing the deal, also known as backstopping a deal

HIBOR Hong Kong Interbank Offered Rate

ICMA /FCA International Capital Markets Association/Financial Conduct Authority. The former provides

recommendations with respect to the syndication of bond issues in the primary market and, in

conjunction with the latter, rules relating to stabilising actions with respect to the trading of a bond issue

in the period immediately after launch

Interest Cover In relation to a financial period, the ratio between an issuer’s EBIT and interest expenses in that period – a

high ratio implies that the issuer will be able to service its obligation to pay interest on the bonds without

stress. Also known as debt service coverage ratio (DSCR).

Investment grade Issuers rated by a rating agency as investment grade who can issue “covenant lite” bonds

IPD Interest payment date

Issuer Call A right granted to the issuer to prepay bonds prior to their scheduled maturity date upon payment of a

make-whole redemption amount or in other circumstances such as when payments in respect of the

bonds become subject to withholding tax - a “Tax Call”

JGCs Joint global coordinators

JLMs Joint lead managers

L/C Letter of Credit

LIBOR London Interbank Offered Rate

Listco Listed company

Listing Rules Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (or the equivalent)

Live run A repeat of a dry run except that, after the pricing terms are read out by one of the JLMs, the issuer will be

asked if it agrees with the proposed terms

LTM In the context of a comparison of the results of operation for the financial year ended 31 December, the

last twelve months ended 30 June

MD&A An abbreviation for management ’s discussion and analysis of results of operation which appears in some

OCs including where the bonds are being offered pursuant to Rule 14 4 A

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mayer brown jsm 20

MS The mid swap rate is the average of the bid and asking prices of the relevant swap

MTN A medium term note programme facilitating the issuance of notes on a syndicated or non-syndicated

basis on short notice in response to market conditions

NDR Non-deal roadshow

NPV Net present value

OC Offering circular

OM Offering memorandum

OPE Out-of-pocket expenses which are usually not taken into account when calculating the net proceeds of a

bond offering for inclusion in the OC

Page pull A circulation, usually by the printer of the OC, of only the amended pages of the OC

Page turn A meeting of the working group to review an OC, page by page

ParentCo The parent company sometimes also referred to as the holding company (Holdco)

Publicity memo A memorandum addressed to directors and officers of an issuer containing do’s and don’ts in respect of

what can be said at a NDR

Printed Means, in the context of a bond issue, “issued”

Pro-forma financials Financial statements which have been adjusted to illustrate the effects of an acquisition of a target

company as if, in the case of an income statement, the acquisition was completed at the beginning of the

period to which the income statement relates

POC Preliminary offering circular, also called the red herring version or e-red or prelim OC

POE Privately owned enterprise

PSI Price-sensitive information, also known as inside information being information not generally known to

the persons who customarily deal or who are likely to deal in listed securities but would, if so known, be

likely to materially affect the price of such listed securities

Reg. S Regulation S under the U.S. Securities Act of 1933, as amended

Review In the context of the inclusion of an issuer’s interim financial statements in the OC, a review by the issuer’s

auditors in accordance with the Hong Kong Standard on Review Engagements 2410 (HKSRE2410 or its

equivalent in other jurisdictions such as a CSRE 2101 review of financial statements in accordance with

PRC accounting standards) which may be required by the JLMs as part of their due diligence defence - a

review is substantially less in scope than an audit

RMB Renminbi sometimes also referred to as CNH or CNY in the context of dim sum bonds

RSP An abbreviation for the road show presentation

Rule 144A Rule 14 4 A of the U.S. Securities Act of 1933, as amended

SA Subscription agreement

S&S The issuer’s competitive strengths and its business strategies

SCA Signing and closing agenda

SCM Signing and closing memorandum

SEHK The Stock Exchange of Hong Kong Limited

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SFO Securities and Futures Ordinance (Cap 571)

SGX–ST Singapore Exchange Securities Trading Limited

SOE State owned enterprise

Spot In the context of a price, the current price at which a particular asset, currency or commodity can be

bought or sold. Also used instead of point in the context of a decimal point

Spread The difference between yields of bonds with similar quality and different maturities, or of different

quality and the same maturity

SPV Special Purpose Vehicle, also known as a Special Purpose Company (SPC)

Sub investment grade

issuers

Below investment grade issuers, also known as high yield or junk bond issuers, who can only issue bonds

with extensive covenant packages or credit enhancement such as a standby L/C

Tap Issue In context of a debt issuance or medium term note programme, an issue or drawdown pursuant to the

terms of that programme

Teaser A summary description of the issuer ’s business and financials and indicative terms of the bonds sent to

investors in advance of roadshows to gauge their interest

T+5 The settlement date on which the issuer receives the net proceeds from an issue of bonds, typically, the

trade date on which an issue of bonds is priced plus five business days

Ts&Cs The terms and conditions of bonds

USD United States dollars

UST United States Treasury bonds

Wall crossing The act of making a person on the sell side an insider by providing them with an inside information about

an issuer and a potential bond issue on the basis that they will not use such information to profit from

trading in the issuer’s securities

Wetink An original signed signature page required by the arranger ’s counsel to follow after the emailed version

YTD Year to date

YTM Yield-to-maturity

Jeckle Chiu

Partner

+852 2843 2245

[email protected]

KEY MEMBERS OF OUR HONG KONG BASED DEBT CAPITAL MARKETS PRACTICE:

Thomas Kollar

Partner

+852 2843 4260

[email protected]

Jason Elder

Registered Foreign Consultant

(New York)

Partner, Mayer Brown LLP

+852 2843 2394

[email protected]

Phill Smith

Partner

+852 2843 2528

[email protected]

About Mayer Brown JSM

Mayer Brown JSM is part of Mayer Brown, a global legal services provider, advising clients across the Americas, Asia and Europe. Our geographic strength means we can off er local market knowledge combined with global reach.

We are noted for our commitment to client service and our ability to assist clients with their most complex and demanding legal and business challenges worldwide. We serve many of the world’s largest companies, including a signifi cant proportion of the Fortune 100, FTSE 100, DAX and Hang Seng Index companies and more than half of the world’s largest banks. We provide legal services in areas such as banking and fi nance; corporate and securities; litigation and dispute resolution; antitrust and competition; employment and benefi ts; environmental; fi nancial services regulatory and enforcement; government and global trade; intellectual property; real estate; tax; restructuring, bankruptcy and insolvency; and wealth management.

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