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.