France: Initial Bond Offerings
Since July 2012, NYSE Euronext has developed for small and medium-size companies, listed or not, the public offering of bonds, to be listed on a regulated market (Euronext) or organised market (Alternext). That financial product is known as Initial Bond Offering (IBO), mirroring the American IPO (Initial Public Offering).
It opens to small and mid-sized companies.
The bond market of individual investors, with a relatively low issuing floor (Euro 5 million on Alternext).
1 - NATURE
The transaction consists in the issuance and placement of simple or complex bonds, to be listed on Euronext or Alternext.
Bonds already issued may be offered. In practice, the transactions performed so far have all focused on issuing of new securities.
Simple bonds, convertible, redeemable or exchangeable bonds might as well be issued. Access to capital may have an increased attractiveness for investors, as it is often the case for emissions of such securities by companies whose shares are already listed.
Admission to trading demand is addressed to the French financial market regulator, “Autorité des Marchés Financiers” (AMF), by a credit institution or an investment firm, which assumes with the issuer responsibility for the prospectus.
The financial intermediary offers securities to the public and to selected investors (professional clients or eligible counterparties under the MIFID law). The advantage of this type of operation lies precisely in the public offer of debt securities, offering to issuers a real alternative to bank financing, which are expensive and difficult to obtain.
"Access to capital" is perceived by investors as an additional remuneration, which combines the running of the company more than simple bonds. This is all the more interesting for issuers that disclosure requirements are slightly different depending on whether offered securities gives or not an access to capital.
The issuer concludes with the financial institution investment:
- a placement contract for the preparation of the prospectus and its submission to the AMF visa and for placement of securities with investors; and
- a financial service contract for securities’ service after issuance (coupons, information of the bondholders, market making).
The operation requires a two to three months delay, both on Euronext and Alternext.
2 – LEGAL REGIME - CORPORATE LAW
Only “société anonyme” (SA) and “société en commandite par actions” (SCA) have the ability to issue bonds for a public offer and admission to trading on a regulated or organized market. “Société par actions simplifiée” (SAS) and “société à responsabilité limitée” (SARL) may issue bonds, but neither offer them to the public nor admit them to trading.
The terms of the issue will depend on legal form of the issuer and whether securities give access to capital or not.
The issuance of simple bonds is normally decided by the executive body, Board of Directors (SA) or Manager (SCA). The articles may submit the issue to a decision of the Ordinary General Meeting (SA) or authorization of the Supervisory Board (SCA).
The Extraordinary General Meeting, only competent to authorize the possible capital increase (except in the case of delegations already given), decides on the securities giving access to capital, with a delegation to the Board of Directors and President (SA) or to the Manager (SCA).
The issuance is realized by a decision of the Manager or President, under delegation of the Board of Directors, after the placement period and immediately before delivery of the securities. In this way, issuance is realized according to the requests of subscribers. An "extension clause" allows the financial institution to increase the amount issued at the end of placement period, in response to a request from investors stronger than expected.
3 – SECURITIES REGIME
Market rules set the minimum amount of the bond issue to Euro 10 million (Euronext) or 5 million (Alternext). The nominal value must be a multiple of Euro 100.
Admission of securities is subject to the obligation of the issuer to obtain the AMF visa on an information document gathering necessary information on the issuer and the offered securities. This prospectus describes the issuer, its business and the offered securities.
It includes in its accounting part, the mandatory financial information on the issuer: balance sheet and income statement for the last two years, prepared in accordance with IFRS (Eurolist) or French accounting rules (Alternext), notes and auditor’s general and special reports on those accounts.
A rating agency, specializing in medium-sized companies and registered or certified by the European Securities and Markets Authority, establishes a bond rating.
The bidding procedure provides centralization of the orders, in a fixed price offer to the public in France, usually completed by a global placement with institutional investors, in the European Community and sometimes in North America.
Once the bonds are listed on Euronext or Alternext, the Company is required by permanent and periodic information obligations (semi-annual and annual publication of accounts and balance sheets). These requirements are less binding when the bonds are listed on Alternext and a little lighter than for issuers whose shares are listed.
4 – BENEFITS
The transaction enables SMEs to raise domestic savings, market to which they previously had little access, bond issues generally takes place by private placement to investors.
It has several advantages:
- The issue is decided by the executive body;
- Simple bonds do not lead to dilution of profits or risk of loss of control for the shareholders.
- Bonds are repayable in fine, with duration usually longer than the other sources of finance.
- Covenants are very small compared to bank loans (except pari passu clause).
- The financial communication campaign for placement and public information obligations during the bond issue gives the issuer a visible image with investors and savers but also with its customers and suppliers.
Investors subscribe to a theatrically liquid product, with an attractive return (the interest rate varies from 7 to 9%), with a known frequency (annual coupon even in the absence of distributable profits, unlike the dividend) and, for the same issuer, less risky than shares.
The transaction fees include mainly the communication campaign and remuneration of intermediaries (financial institutions, rating agencies, counsels, auditors). They generally rise to about 5-6% of the issue amount.
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