Tag: μετατρέψιμες ομολογίες

We have already approached the concept and basic principles governing the Bond Loan as well as its issue. Bonds, also, both in their common form and their special (hybrid) categories (incl.: “Perpetual”, “Catastrophe”, “Reduced Coverage”). The possibility, lastly, of the Bond Lenders to capitalize, under conditions, their claims. However, there are some special categories of bonds with special interest: Convertible, Exchangeable and Profitable; this article is about them.

 

Bond loan categories

In the law on SAs (law 4548/2018) we find four categories of bond loans – corresponding to the bonds issued under each one. Specifically – those with: (a) common (art. 69), (b) exchangeable (art. 70), (c) convertible (art. 71) and (d) profitable bonds (art. 72). We looked into the common bond loan (with the common, i.e., bonds) in its basic form. It is, moreover, the one most commonly used. It represents a pure form of financing with foreign capital – as long as some hybrid element (referring to capital financing) does not intrude into its terms. The other categories of bond loans, however, constitute forms of intermediate financing. Let’s take that approach too.

 

Exchangeable bonds

Basic features

It is possible (art. 70 §1 Law 4548/2018) to issue a bond loan with exchangeable bonds. The bondholders retain, in this case, the right (option) to request, with their own declaration, the (partial or total) repayment of their bonds, based on what is defined in the loan agreement. This repayment is not carried out in monetary terms but by transferring to them other bonds or shares or other securities of the issuer or third parties.

A corresponding right of exchange may (also) be reserved in favor of the issuer.

At the same time, it is possible for the bond loan to stipulate that the exchange becomes mandatory at a certain time or when a certain event occurs. It is also possible for it (the exchange) to depend on some suspensory condition.

In the event that the issuer SA or a third party grants the right to exchange the (exchangeable) bonds, it is obliged to have and keep in its ownership free from any encumbrance (with the possible exception of ones existing in favor of the bondholders) the underlying bonds, (own) shares or other securities. This obligation extends, at the latest, until the time of payment/repayment of the loan (no pre-emptive right of existing shareholders is therefore established). The issuing SA, alternatively, is obliged to have drawn up a contract, which ensures the possibility of timely delivery, through a third party, of the bonds, shares or other securities in fulfillment of their relative obligation (art. 70 §2).

The bond loan with exchangeable bonds acquires a hybrid form, in which case the bonds will be exchanged for shares. The bond lender, in this case, will become its shareholder.

It should, however, be noted that the bond holder acquires shares that exist at the time of the exchange and are not then issued for the first time. On the other hand, the holder of convertible bonds (analyzed below) acquires SA shares that are issued for the first time when the bonds are converted (art. 71).

The terms of the convertible bond form part of its contract. However, their configuration depends (also) on the securities with which the exchange is imminent. When, e.g., the bondholders are to receive securities that are registered (ind.: shares), then, correspondingly, the exchangeable bonds should also be issued, compulsorily, as registered (art. 59 §5 section a’). When the exchangeable bonds are to be listed on a regulated market, the securities with which they are to be exchanged (incl.: shares) should either already be listed or be listed at the same time as them (art. 6 §7 n. 3371/2005).

The advantages

The possibility provided to the bondholder to claim the repayment of their bonds from the SA or (instead) to be request the transfer to them of other, agreed upon securities (incl.: bonds, shares of the SA or of third parties) can function as a means of attracting investors and facilitating the financing of the SA. When, respectively, the specific possibility is provided to the SA, the background is created for the optimal choice on its part (either paying off bonds or exchanging them for the agreed securities).

 

Convertible bonds

Basic features

It is possible, in accordance with what has already been mentioned, to issue a bond loan with convertible bonds (: convertible bonds- article 71 Law 4548/2018). They give the bond lenders the right to return their capital as well as interest. However, they provide, at the same time, the possibility of their (potential or mandatory) conversion into a predetermined number of shares. The bond lender of the issuing SA will then become its shareholder. This feature is also found, as mentioned above, in convertible bonds; however, in the case of the latter, the bond lender acquires existing (and not newly issued) shares of the issuer.

By converting convertible bonds, new shares are created. The issuance, therefore, of the bond loan will end up as a capitalization of liabilities through an increase in share capital. The amount of the loan that will be converted into capital will also constitute the contribution necessary for the increase.

Issuance

The issuance of the convertible bond loan follows the procedure of either the ordinary (Article 71 §1 para. a) or the extraordinary increase (Article 71 §1 para. b) of share capital.

In case of an ordinary issuance, the General Assembly takes the relevant decision with an increased quorum and majority. Such a decision constitutes an amendment to the statute (article 71). The Board of Directors of the SA is obliged until the end of the next month from the day of the exercise of the conversion right to ascertain the increase and to adjust the article of the statute referred to in the chapter, observing the formalities of publicity (art. 71 par. 4 sub. b).

In the case of an emergency bond loan issue with convertible bonds, the competent body for making a decision to issue convertible bonds can be either the Board of Directors or the General Assembly – subject to the provisiona of the articles of association and the law.

The decision on the issuance

The decision to issue the convertible bond loan by the competent body of the SA must include (71 §2, section b) the time and method of exercising the conversion right, the price or the reason for conversion or their range. Also: the time or period of exercise of the conversion right as well as any denominations that need to be filled. It is also possible to determine the type of exercise of the relevant right or the competent person to whom the relevant exercise of the conversion right should be addressed.

A potential content of the issuance decision can be “…the way to readjust the price or the conversion ratio, if events occur that may affect the value or marketability of the shares” (art. 71 §2 section b) Law 4548/2018). If there is no relevant provision, the relevant risk (e.g. on a bad business course of the SA) is borne by the respective bond holder.

The Board of Directors is defined as the competent body for defining the final price or the final adjustment ratio before issuing the loan – even if the Board of Directors determines them precisely.

Preemptive right

The existing shareholders have a right of preference in the case of the issuance of bonds with the right to convert into shares (art. 26 §1). However, such a right is expressly excluded at the time of conversion of the bonds into shares (art. 71 §4 in fine). A corresponding right is not reserved, however, to the already existing bond lenders, whether an increase in the SA’s share capital or the issuance of convertible bonds takes place – at least not without a relevant statutory provision.

The advantages

The (potential) opportunity given to the bondholder to retain their loan claims or to become a shareholder of the SA, can make the bond loan a means of attracting investors and facilitating the financing of the SA. When, respectively, the specific possibility is provided to the SA, the choice of the optimal option, based on its financial data, is facilitated.

 

Profitable bonds

Key features & issuance

The profitable bonds (participating bonds- article 72 law 4548/2018) have the effect of giving the bond lenders the right to receive either a percentage of the company’s profits (and, in fact, beyond the agreed interest) or another benefit linked to the company’s position.

The receipt of a percentage of the profits can take place before (and not only after) the minimum dividend is distributed to the (common or preferred) shareholders.

The competent body for the decision to issue profitable bonds is the General Assembly, which decides by simple quorum and majority. This seems normal, as through the exercise of the right to take a percentage of the profits from the bond lenders a significant influence is exerted on the profits of the shareholders. Thus, the shareholders are the ones who have to decide on a potential realization of such a reduction. Through an application by analogy of the extraordinary capital increase, it is possible to provide authorization to the Board of Directors, in order for the latter to proceed with an ” extraordinary ” issue of profitable bonds.

The right to receive a percentage of profits is also the element that classifies profitable bonds in intermediate financing. Through them, the bond lenders have claims that directly dependent on the results of the SA. Profitable bonds, despite their differences, are similar to preferred shares (non-voting) which, at the same time, provide the right to receive interest.

The advantages

Profitable bonds become attractive to investors as they imply the reduction or elimination of currency risks or reduced return on capital, since in times of profitable corporate years bondholders enjoy an additional investment benefit. At the same time, however, they become attractive for the SA as a lower burden (low interest rate) is achieved due to the additional claims/expectations they provide to the bondholders (: participation in profits).

 

Convertible, exchangeable and profitable bonds are not the most common in a bond loan. They are, accordingly, not common as a more specialized option for funding of the SA. However, as they offer attractive solutions both for (potential) investors and for the SA itself, they can be a means of attracting investment funds as well as an important alternative for the SA itself: an alternative capable of contributing not only to its survival but also to its development. –

Stavros Koumentakis
Managing Partner

 

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (October 30th, 2022).

 

Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.

We already looked into the securities issued by an SA – as a means of its (external) financing. We also pointed out that the relevant list is, in principle, restrictive (“numerus clausus”). Among the issued securities are the Bonds, in the context of the Bond loan issued – for the exploration of which the present article.

Bond Loan and Bonds

The bond loan

The bond loan (no. 59 to 74 n. 4548/2018) constitutes a basic form of long-term financing of the SA. According to the law (59 §1 ed. a), the loan issued by the SA and divided into bonds. Usually more bonds are issued – but it is possible to issue just one. The amount borrowed, through the bond loan, is divided into equal parts, each of which constitutes the nominal value of the bond in which it is incorporated. Bonds can be either nominal or anonymous (with the exception of those exchangeable into nominal securities or convertible into shares, which are always nominal – art. 59 §5).

Bonds, in their usual form, offer bondholders an interest rate, which is agreed to be fixed (: straight bonds) or floating (: floating rate bonds).

Debenture holders constitute a class of lenders of the SA.

Tangible/ paper and intangible bonds

The (tangible/ written) bond constitutes a security document (more precisely: debenture) and not just a document confirming or proving the claim of the b debenture holders. The latter (debenture holders) by paying the part of the loan that belongs to them, become, at the same time, the bearer of the corresponding bonds. Upon completion of the expiry time of each bond, the bearer is entitled to present it to the issuing company and the latter is obliged to pay them (:return) the amount stated in the bond.

Bonds can, however, be intangible. They are mandatorily intangible if they are listed on a regulated market (art. 39 law 2396/1996 and art. 58 §2 law 2533/1997, as replaced by art. 16 law 2954/2001). They are optionally dematerialized or immobilized when such is provided for in the terms of the bond loan (art. 59 §§5 ed. a’ and 6 Law 4548/2018).

Issuance and terms of the bond loan

The competent body of the SA for the issuance of the bond loan and the formulation of its terms is the Board of Directors (art. 59 §2 ed.΄ b). It is possible, however, to assign this specific power to the General Assembly by the statute of the SA. Especially, however, with regard to convertible and profitable bonds, the authority to issue them and decide on them always belongs to the General Assembly (art. 71 and 72).

The issuing SA, through its competent, each time, body, proceeds to freely shape the terms of the bond loan. The law, moreover, provides a wide, relevant leeway (article 69 §5). It is possible to subsequently modify them even with terms less favorable to the bondholders. However, in this case, a decision of the bondholders’ meeting is required, with a majority of two-thirds (2/3) of the nominal value of the bonds; in addition: the consent of the issuer.

The terms of the bond loan constitute the bond program, which must be made known in advance to the bondholders, in order for them to be able to choose (or not) to enter into it.

The “forgery” of the bond loan

A common bond loan is classified, as a method of borrowing, in debt financing. However, a typical example of falsification of its specific categorization is, indicatively, the issuance of hybrid forms of bonds: the above-mentioned exchangeable, convertible and profitable – for which see our article to follow.

The adulteration of the bond loan as a means of financing through the assumption of debt can, in addition, take place through terms (original or as amended) of the bond loan program.

Initial terms of the bond loan

The eternal bonds – perpetual bonds

Οι αιώνιες ομολογίες-perpetual bonds

It is possible for the SA to enter into a bond loan – without an express maturity. The SA issues, in this case, “eternal bonds” (perpetual bonds)- of an indefinite, i.e. duration. The SA reserves the right to never pay off the specific bonds or, alternatively, to pay them off at the time of its choice with the payment, in the meantime, of course, of the agreed interest (art. 60 §2 par. b’).

Through the conclusion of a bond loan with the issue of perpetual bonds, the SA receives capital as financing, which is made available to it for an indefinite period of time: the bond lender cannot claim its return. They perpetual bonds (and therefore their hybrid nature) simulate, in this context, the with financing through equity capital (therefore and, under conditions, they are treated as equity capital in accounting): the long-term disposal of assets for the benefit of the company indicates capital; the inability to claim a refund of the payments made by the bondholders refers to the non-return of the contributions by the shareholders. Bondholders, however, do not become (nor can they be considered as) shareholders of the SA.

Such a bond loan of indefinite duration cannot be terminated by ordinary termination (by meeting, i.e., a certain deadline and/or the existence of a specific reason): it is not consistent with its nature. However, the right of extraordinary termination (the condition of which, as a rule, is the existence of an important reason) cannot be excluded; moreover, it belongs to a contract of indefinite duration. However, a material reason is required. A reason, ie, the existence of which would render the continuation of the contract intolerable. As material reasons are understood to be those, the existence of which exceeds the ordinary investment risk and are expressly provided for, as a rule, in the bond program.

Financing through perpetual bonds gathers, as an intermediate form of financing, advantages for the issuer similar to financing with the same means (: expansion of equity capital) as well as to financing with foreign means (: no change in the company’s equity balances and interest discount from its income).

Correspondingly, however, this specific form of financing also holds advantages for investors. Due to the assumed (high) investment risk and the eternal commitment (and non-return) of their capital, the financial compensation collected by the bond lender (:interest) significantly exceeds, as a rule, the interest attributed to common bonds.

Catastrophe Bonds

Among the conditions that may be included in the bond loan is the possibility that the obligation to pay interest or return the capital to the bond lenders is conditional (60 §2 f. c΄). This refers to catastrophe bonds encountered in international practice. Their main content is the non-payment of interest or capital, in cases where a risk occurs (usually a natural disaster) for which there is no insurance coverage.

Catastrophe bonds also present considerable usefulness. Through them, the issuer covers an (uninsurable) risk while, at the same time, the bondholders rightly expect, precisely for this reason, a higher return.

Subordinated bonds

Another interesting category of bonds are the subordinated bonds (art. 60 §2 f. d΄). With their issuance, it is agreed that in case of liquidation or bankruptcy of the issuer, the bond lenders will be satisfied after the remaining creditors of the issuer or after a certain category of creditors. This, in practice, means that their owners are subject to a less favorable satisfaction regime than other corporate lenders – they resemble, therefore, the equity capital. This is why they are referred to as quasi-capital social or quasi-fonds propres or substitute funds.

The SA benefits from the issuance of subordinated bonds as it offers, through them, greater security to its privileged and common creditors. However, their holder – bond lender – also benefits as they rightfully expect a higher return.

It should be noted here that the term “junior bonds” is not more accurate than the term “subordinated bonds”. As already mentioned, before their satisfaction, according to the law, either all or a certain category of creditors precede. It is therefore possible to issue subordinated bonds, which will not be satisfied along with the last class/series of creditors (as is the case with last series bonds).

Conditions on modification of the bond loan

The debt-equity swap

The bond lenders may decide on the capitalization of the debt corresponding to their bond loan, if (art. 60 §8 f. d): (a) their meeting decides with a majority of two thirds (2/3) of the bonds and (b) the issuer gives its consent (art. 60 §8 f. d’ Law 4548/2018). The claims on both sides will be amortized; the bondholders will acquire shares of the SA: from creditors of the issuer they will turn into its shareholders.

The shares that the bond lenders will acquire may be either from the issuer’s own (if any) shares or new ones – derived from an increase in its share capital.

Debt capitalization and convertible bonds

The case of dept-equity swap (: ex post agreement between the issuer and the meeting of bondholders to convert debt into capital) should not be confused with the case of convertible bonds (according to Art. 71). The amount initially paid to take over the convertible bonds also corresponds to the amount of the contribution during the conversion. On the contrary, in the case of subsequent capitalization (dept-equity swap), the assumption of the bonds at the time of the issuance of the bond loan does not take place in light of the eventual conversion. In the case of debt-equity swap, the claims of the issuer and the bond lenders are set off on both sides (according to art. 20 §4). In the most correct view, the valuation will be carried out in the way that it would take place, if it was a question of contribution of a claim against a third party (according to Art. 17).

Other terms of mezzanine financing

In addition to the agreement on the capitalization of the bond loan, there may be other elements (article 60 §8) on the basis of which one could classify the bond loan as mezzanine financing. Indicative: in cases where the interest rate is set to zero – then the loan also applies to contributions (article 60 §8-point a) as well as the subordinated collateral (article 60 §8-point c), which we already approached above. The freedom of transactions (article 60 §8-f. i’) can work in this specific direction.

 

The bond loan is differentiated, significantly, in relation to a common loan. Its very flexible content can be adapted to the needs of the SA and also to offer significant benefits to the SA as a source of long-term external financing. However, it is possible to have significant benefits to the lender/holder of the bonds issued in its context. Due to its particularities and the increased, sometimes, assumed investment risk, the bond lender justifiably expects an increased return. Of particular interest, in the context of the bond loan, are the convertible, exchangeable and profitable bonds – for which, however, see our next article.

Stavros Koumentakis
Managing Partner

 

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (October 23rd, 2022).

 

Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.