When a company, the ‘Issuer’ decides to raise capital through a bond issuance program, careful planning and preparation are essential for its success.
One crucial aspect of this process is the production of necessary documents that provide transparency, protection, and assurance to potential investors about the company and its state of affairs. In this article, we will explore the key documents that a company needs to produce when embarking on a bond issuance program.
10. Offer Memorandum (OM):
The Offer Memorandum (OM), also known as the Private Investment Document (PID) or Prospectus, is a comprehensive document that outlines the terms and conditions of the bond program, its offerings to investors and its lifetime. It provides detailed information about the issuer, its Company Financials, Board of Directors, Business model, Company and Industry specific risk factors, and the Purpose of the bond program and the capital being raised.
The Prospectus also provides information about the bond’s interest rates, maturity date, redemption provisions, and any associated guarantees or collateral being offered or put up by the Issuer. Because of all the information it is meant to provide, usually several pages long, it is a critical document for potential investors as it helps them make clear and informed decisions about investing in your program, or not.
9. Indenture:
The indenture is a legally binding agreement between the issuer (the company) and the bondholders. It defines the rights and obligations of both parties, including the terms of the bond, payment schedule, interest rates, and any additional provisions such as call or put options.
The indenture also outlines the steps to be taken in case of an ‘Issuer’ default or bankruptcy. It is a crucial document that provides security and protection to bondholders and establishes the contractual relationship between the issuer and the investors.
8. Trust Deed:
In some jurisdictions, a trust deed is used instead of an indenture. It serves a similar purpose by establishing the terms and conditions of the bond issuance and creating a going trust relationship between the issuer and the bondholders. The Trust Deed, typically drawn by a Legal Counsel, outlines the roles and responsibilities of the Trustee, who also acts as Custodian of the bondholders’ interests.
The Trust Deed ensures that the issuer adheres to the agreed-upon terms and protects the rights of the bondholders throughout the lifetime of the bond program.
7. Legal Opinions:
Legal opinions are provided by the ‘Issuer’s’ legal counsel to assure potential investors that the bond issuance complies with all applicable laws and regulations of the land and typical bond issuance programs. These opinions verify the legal validity of the bond offering, the enforceability of the indenture or trust deed, and the legality of any associated collateral or guarantees being offered by the ‘Issuer’.
Legal opinions enhance the credibility and transparency of the bond issuance, providing assurance to investors and mitigating legal risks of, in most cases, unnecessary and illegal lawsuits from bondholders to the ‘Issuer’.
6. Auditor’s Opinion:
An auditor’s opinion on bond issuance is important for several reasons. The auditor’s opinion provides assurance to investors regarding the accuracy and reliability of the financial information presented in the Prospectus.
It enhances investor confidence by validating that the financial statements and related disclosures are prepared in accordance with generally accepted accounting principles (GAAP) or the applicable financial reporting framework of the land.
The auditor’s opinion also helps investors assess the financial health and risk profile of the issuer and in many jurisdictions, bond issuers are required by law to have their financial statements audited by a trusted independent auditor or company.
Opinion from a known and trusted auditor, therefore, provides assurance that the issuer has followed the necessary regulatory and accounting standards in preparing and presenting the financial information related to the bond program and no material information is missing or misstated.
5. Financial Statements:
Accurate and up-to-date financial statements are crucial to gaining investor confidence and demonstrating the financial health and stability of the ‘Issuer’. These statements, including balance sheets, income statements, and cash flow statements, provide a clear picture of the company’s financial position, performance and profitability or otherwise, over a time period, and also the ‘Issuer’s’ ability to repay the bond obligations as at when due. Potential investors rely on these statements to assess the issuer’s creditworthiness and make clear and informed investment decisions.
4. Credit Rating Reports:
Credit rating reports are prepared by reputable rating agencies to evaluate the creditworthiness of the issuer and assign a ‘rating’ to the bond or the company, as the case might be. These reports assess the ‘Issuer’s’ financial strength, business prospects, industry analysis and prospects, and company-specific and industry-specific risk factors.
A high credit rating indicates a low credit risk and chances of a bond/loan default and can attract a wider range of investors and greatly lower the ‘Issuer’s’ borrowing costs. Including credit rating reports in the bond issuance documentation adds a high level of credibility and transparency to the issuance program, providing valuable information to investors.
3. Legal and Regulatory Filings:
The bond issuance program requires compliance with various legal and regulatory requirements. Companies must file necessary documentation with the appropriate regulatory authorities, such as the FMDQ Exchange in Nigeria or other equivalent agencies in other jurisdictions.
These filings typically include the Prospectus, financial statements, legal opinions, and other relevant information. Compliance with these regulations ensures transparency and protects both the issuer and the investors.
2. Tax Filing
Tax filings are also important regulatory filing documents to produce as it informs both the government and potential investors of your mindfulness of the tax codes of your business jurisdiction and your start-up’s outlook as an outstanding corporate citizen.
Though in truth, and in many jurisdictions, most start-ups are excluded from some types of tax implications, albeit for a specified period, it is usually good form if are you able to produce others that your business may not be excluded from to show a healthy going concern.
1. A Business Plan or Pitch Deck:
While the Prospectus or Offer Memorandum may have a great deal of information about the company, its industry, and its capital raising needs, because the PID is usually a voluminous one, ranging anywhere from 60 to even 250pages long, some potentially big investors, let’s call them ‘cash cows’, typically shy away from reading this much material because of the time it takes away from other tasks.
They, therefore, leave these tasks to other parties, sometimes not particularly interested in you or your offer. More reason a shortened version of your Business Plan or a Pitch Deck, preferably listed on your website has the added advantage of hitting the nail on the head and leaving an indelible mark where needed.
Also, for some other ‘cash cows’ that may require greater wooing than some, but lack the time to sit through a long investor meeting than most, a Pitch Deck is typically a great tool to use in winning them over without the need to say as much were you to say, hold a formal investor meeting or get-together to pitch your plans or ideas.
Done right, a Pitch Deck leaves them with a lot to think about, but only one clear and ultimate decision to make. Invest!
In conclusion, Issuing bonds to raise funding for your start–up can be a complex process, but it offers significant opportunities for companies seeking significant capital injection, particularly the kind unattached with the strings, seen or unseen, that may come with Venture Capitalist or Private Equity funding.
To ensure a successful bond issuance program however, it is crucial to work with a Business Adviser, or company, that can help you work with the necessary parties to produce the documents necessary for transparency, protection, and assurances to both you and potential investors.
From the PID and indenture to legal opinions, financial statements, auditor’s opinions, credit rating reports, regulatory filings, and Pitch Deck, each document serves a specific purpose in establishing trust, outlining terms, and essentially mitigating risks for both your company and your potential investors.
By meticulously preparing these essential documents and ensuring their accuracy, start-ups can position themselves for a successful bond program and attract a diverse pool of investors in both the long and short terms.
David Bristol-Alagbariya is a junior partner at McBrain & Company, a Business Advisory & Process Management company dedicated to helping start–ups and small companies scale into mega-brands. His areas of expertise include Business Law and Drafting Legal frameworks for start–up companies looking to raise funding from investors.
This article was written by Brain Essien for Nairametrics
He is a certified financial analyst and business process consultant, with expertise in business plan formulation and pitch deck design, brand management, digital marketing, crowd/private equity and seed fund brokerage.
