What is a Bond Prospectus?

You may have encountered a bond prospectus either as an investor or in the context of raising debt finance for your business. Bond prospectuses are often lengthy, complex documents that number hundreds of pages and are almost certainly not the stuff of light reading. However, a company intending to raise money through certain bond issuances may need to publish a prospectus in advance due to financial market regulations. This article will examine the purpose of bond prospectus, their contents, and when a company must issue a prospectus. 

What is a Bond Prospectus?

A prospectus is a legal document that companies intending to issue bonds must publish before the issuance. It is a legal requirement. In theory, prospectuses should contain sufficient information that prospective investors can evaluate to determine if they should purchase the bonds. 

Obligations to Prepare and Release a Bond Prospectus

According to FCA regulations, any company that wishes to issue transferable securities must publish a prospectus before the issuance. There are various kinds of prospectuses, including wholesale prospectuses and retail prospectuses. There are also admission particulars, offering circulars, and listing particulars. 

An issuer must prepare an approved prospectus if it intends to offer the bonds to either:

• the public; or 
• through admission to a regulated market, such as the London Stock Exchange. 

If an issuer intends to issue the bonds through a private placement, it may not need to prepare a prospectus. However, it will still have to issue an offering circular, listing particular or admission particular. The key differences relate to the extent of disclosure obligations on the issuers.  

Further Considerations

The FCA broadly defines transferable securities, but it includes bonds and shares. The law also broadly defines bonds. A layman’s definition of a bond is a certificate acknowledging a debt obligation traded in the capital markets. This excludes certain government bonds.

Bond prospectuses are complex documents. In nearly all cases, the law requires that companies issuing bonds instruct financial and legal advisers to help them publish the prospectus. In practice, the issuer will instruct a lead investment bank to help them through the process, which will assist in the due diligence necessary to prepare the prospectus. This lead investment bank, also called the “lead manager, ” will appoint a legal team. The bank’s legal adviser will work with the issuer to ensure the prospectus meets the regulatory requirements. 

Contents and Form of a Bond Prospectus

The prospectus must meet essential formal and content requirements. But at its most basic, it will include all the key commercial terms of the proposed bond issuance and other general terms. 

Commercial Terms

Some key commercial terms include:

• the total value of the bond programme and the currency of the bond notes;
• if the bonds are secured on the issuing company’s assets or guaranteed by an affiliated company; 
• the interest rate (coupon); and
• the length of the programme, meaning when the bonds mature. 

These above terms are commonly stated at the start of the prospectus. For instance, “£500m Senior Secured Notes 5% 2027” refers to:

• the total value of the entire issuance is £500m; 
• the notes are secured in some capacity to the issuer and its affiliated companies;
• the notes pay 5% interest per annum; and 
• they mature at some point in 2027. 

The prospectus then considers each of these essential terms in more detail. For instance, there will be a security section specifying what “senior secured” means. Likewise, it will detail how the 5% interest is assessed and when it is paid to noteholders.

Other Contents 

The prospectus will have various sections that detail information related to:

• the purpose and use of the bond proceeds; 
• information on the issuer’s business and corporate structure; 
• repayment schedules; 
• the rights and obligations of the bondholders; 
• a draft of the legal agreement that creates the bond issuance;
• the issuer’s existing capital structure, including any pre-existing debt and outstanding equity shares; 
• previous financial statements and accompanying accounting notes; 
• generic legal disclosure information; 
• which exemptions from certain disclosure obligations may apply and why; and 
• the legal and financial advisers involved in the issuance. 

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Key Takeaways 

Bond prospectuses form part of a company’s disclosure obligations. The law requires certain companies to prepare and publish if they intend to issue certain kinds of bonds. These prospectuses contain essential information about the proposed issuance, such as the commercial terms and financial and performance information investors can review to determine if they wish to participate in the programme. Legal disclosures and draft versions of the legal agreements will arise when the issuer issues the bonds. They are complex and lengthy documents.

If you need help understanding the difference between debt and equity finance, our experienced corporate lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today at 0808 196 8584 or visit our membership page.

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