Bond issuances trend as companies look to capital markets to finance debt

In an article published in the Financial Times written by Joe Rennison on 15 June 2020, it was reported that top-rated US companies have issued almost as much debt in 2020 as they did in the whole year of 2019. In addition to syndicated and club lending and private equity financing, there has been a huge increase in bond issuances as companies look to the capital markets to finance or refinance their debt. In the article by Rennison, Rich Zogheb, head of debt capital markets at CITI stated that: “it has been remarkable the amount of volume that has come to the market … we keep waiting for investor demand to wane and for us to have a problem but we haven’t seen it.”

There are a number of good reasons to go to the capital markets. Bond issuances by companies can increase market reputation and recognition as it is an opportunity for the company’s profile to be raised once the bonds are listed on a recognizable stock exchange. From an investor’s standpoint, many investors are willing to invest in listed bonds as there is a perception that bonds are “safer” investments. The disclosure requirements under the various stock exchanges lend a level of credibility as the company’s financial information is disclosed in the offering memorandum/offering document. In turn, a bond issuer isn’t subject to the covenant package and operational restrictions that banks usually insist upon in credit facilities. In light of the COVID-19 pandemic, it may be that companies around the world feeling the economic impact have looked to the capital markets as a cheaper and easier way to borrow money than traditional bank lending. And it would seem that the bonds market is as enticing as ever; even though the economic landscape has been affected by the virus, Kaisa Group Holdings Limited in a June 2020 press release reported that its issuance of US$300 million 7.875% senior notes due 2021 received overwhelming responses from over 160 institutional investors. Boeing Co raised US$25 million in a bond offering in April 2020 in order to avoid taking aid from the United States federal government. Other companies that have gone to the debt capital markets since the onset of the pandemic include Carnival Corporation, Nike, Southwest Airlines, Procter & Gamble, and Visa. Convertible bond issuances in particular have proved popular, as issuers seek to lower the coupon rate on their debt and decrease their borrowing costs.

The British Virgin Islands (BVI) and the Cayman Islands have played host (in terms of jurisdiction of incorporation) to many of this year’s bond issuers, especially Asia-based companies. 2020 has seen Harneys act as: BVI and Cayman counsel to comprehensive investment group (and former defaulter) Kaisa Group Holdings Ltd, in relation to its issuance of US$300 million 7.875% senior notes due 2021 guaranteed by 29 BVI subsidiaries; BVI counsel to Chinese real estate developer Greenland Global Investments Limited in respect of its issuance of US$500 million 6.25 per cent notes, due 2022, to be issued under the US$8 billion Guaranteed Medium Term Note Programme and ultimately listed on the Hong Kong Stock Exchange and BVI counsel to the issuer on a US$275 million exchangeable bond issuance for CP Foods Capital Limited, a newly incorporated British Virgin Islands subsidiary of Thai-listed conglomerate Charoen Pokphand Foods Public Company Limited.

There are a number of reasons multi-nationals and giant conglomerates choose BVI and Cayman issuers:

• Speed and low cost of incorporation
• Flexible corporate laws
• Light but effective regulation
• Tax neutrality: interest and principal is paid free of withholding taxes; gains derived from the disposal of the notes are not subject to any capital gains, income or corporation tax in the BVI or the Cayman Islands.
• Political neutrality: the BVI and the Cayman Islands are stable and neutral microstates that operate as truly offshore financial centres.

Be it high-yield or convertible, listed or private placement, junk or investment-grade, note programme or bond issuance, Harneys is ready to help.