Exchangeable bonds are a form of equity linked note,
whereby equities are strictly linked with the bond issue.
bond will constitute an exchangeable bond if it grants the
holder the right to exchange the bond into equity
securities of a company other than the issuer.
the market there is another category of bonds (
convertible bonds) that grant the bondholder similar
rights, except that there is a specific difference between
convertible and exchangeable bonds.
bond is convertible, infact, if it converts into equities
of the same company i.e. the issuer.
appeal of convertible and exchangeable bonds is that they
give the bondholders the chance to benefit from any
increase in the value of the equity linked to the bonds.
Turning back to the exchangeable bonds, this brief note
describes the relevant parties, the relevant agreements
and summarises broadly the key features of exchangeable
relevant parties in an exchangeable bond offering are: an
issuer, a guarantor (if any), a bookrunner / lead manager,
co-lead managers ( if any), a listing agent, paying agents,
and typically a trustee, rather than a fiscal agent.
role of the issuer, the guarantor and the bookrunner /
lead manager is outlined in this section.
issuer could be either a holding company, an operating
company or a special purpose vehicle ( SPV).
Whether the issuer is a holding company, an operating
company or an SPV depends on the market and more
specifically upon the business advantages for the issuer,
for example in respect of tax treatment.
issuer can be either a limited company or a public limited
company, depending upon the jurisdiction of incoporation
of the issuer, and the location of the stock exchange
where a listing is sought.
an SPV is particularly favoured, typically a full
guarantee will be required to be given by a company of
substance or a third party in favour of the SPV.
Issuer in any case will remain prima facie solely
responsible for the payments on the exchangeable bonds
during the life of the latter.
issuer, moreover, is of course party to all the agreements
creating the exchangeable bonds.
guarantor of exchangeable bonds could be either a company
of the same group as the issuer or a third party.
request for a full guarantee is market practice where
credit support is desired for the issuer of the
exchangeable bonds i.e. to provide for the extension of
the liability to the guarantor for the obligations arising
under the exchangeable bonds.
guarantee broadly represents an undertaking by one party
to be answerable for the debts of another.
guarantor could have several, or joint, liability with the
issuer or joint and several liability with the issuer.
general, it will depend on the nature of the transaction,
but the practice is typically that there is joint
liability particularly if the guarantor is a company of
the same group i.e. a parent company giving a guarantee in
favour of an SPV or a wholly owned subsidiary of the same
request for a guarantor to guarantee the exchangeable
bonds will also depend upon the rating of the issuer.
the guarantor is key to the rating that will be given to
the issue of the exchangeable bonds, as a consequence it
is generally very high, provided that the guarantor's
rating is also high.
success of a transaction, therefore depends on many
factors including the quality of the assigned rating to
each exchangeable bond transaction.
role of a bookrunner / manager is twofold.
Firstly a single Bookrunner or Joint Bookrunners will be
primarly responsible for the distribution of the
exchangeable bonds i.e. to procure subscribers for the
exchangeable bonds in the market.
Secondly, their importance as a manager is particularly
relevant for the preparation of all the relevant
documentation i.e. the term sheet and the underlying
agreements, the structuring of the exchangeable bond
transaction and its launch and offering, including any
( duly agreed by all the relevant parties) contains the
summary of the details of each an exchangeable bond
term sheet is used in the market particularly for the
first valuation of the opportunity of a transaction.
relevant agreements in an exchangeable bond transaction
are: the offering circular, the terms and conditions of
the bonds, the subscription agreement, the lock up
agreement ( if any) and other technical agreements (such
as the trust deed, the agency agreement, the agreement
among the managers, including bookrunners).
This section underlines the content of each of the
offering circular, the terms and conditions of the
exchangeable bonds and the subscription agreement.
offering circular, or prospectus or offering memorandum,
contains all the information on the issuer and the
guarantor (if any), the exchangeable bonds and the
equities linked thereto and is prepared in connection with
the issue and the offering of an exchangeable bonds.
provides all the financial information (including the
audited financial statements)
and at the same time the business description (the
composition and a detailed description of the group and
its management) for both the issuer and any guarantor.
content of the information contained in the prospectus is
particularly important because each of the issuer and the
guarantor will be solely liable for the disclosure made in
This information is relevant for the potential investors
because they can assume that the information contained in
the prospectus is true, not misleading, accurate and
complete in all material respects.
terms and conditions of the exchangeable bonds describe in
detail all the relevant technical information (e.g. form,
denomination, subordination and security including any
guarantees, exchange rights, anti-dilution protection, any
limitation on capital distributions and dividends, early
redemption rights, events of default and offers and any
premium compensation payments to be made in connection
with takeovers) for the exchangeable bonds.
terms and conditions are included in the prospectus and
will reflect the actual terms and conditions of the issue
of the exchangeable bonds.
From a bondholder’s point of view, it is particularly
relevant to check the provisions related to the exchange
right for the exchangeable bonds, e.g. the period in which
the bonds can be exchanged, and the procedure for doing
Each bondholder can typically exchange his bonds for a pro
rata share of the exchange property at any time during a
specified exchange period.
terms and conditions will set out the formalities to be
followed by each a bondholder to exchange his bonds for
the pro rata share of the exchange property, which may be,
in certain circumstances, cash.
facilitate exchanges of the exchangeable bonds is one of
the primary roles of the Paying and Exchange Agent, the
other being the distribution of payments of interest and
redemption moneys on the exchangeable bonds, if any.
Events of default applicable to the exchangeable bonds
typically include that there is no cross default on other
financing, no material litigation, no adverse tax change,
no change in the status of any guarantee and no bankruptcy
of the issuer or the guarantor during the life of the
terms and conditions will also set out any early
redemption option exercisable by the issuer or the
Issuers often have the right to redeem the bonds on the
occurrence of certain events prior to their maturity date.
terms and conditions, finally, will also provide general
undertakings made by the issuer and the guarantor, if any,
and the mechanics in case of any breach thereof.
subscription agreement contains the agreement by the
managers to subscribe for the exchangeable bonds and the
agreement of the issuer to issue the bonds.
issuer and the guarantor will undertake to the managers to
issue the exchangeable bonds pursuant to the provisions of
the subscription agreement, in a fixed amount, subject to
increase pursuant to the exercise of any over allotment
option by the managers, on a predetermined date (Closing
Date) against the payment therefore by each of the
Each of the parties will execute all the relevant issue
documentation on or before this Closing Date.
Each manager will usually agree on a several, but not
to the issuer and the guarantor to procure a subscribers
for the bonds and / or failing which itself subscribe and
pay for its proportion the aggregate fixed amount of the
exchangeable bonds on the Closing Date at the issue price.
subscription agreement is usually signed by the issuer,
the guarantor and the bookrunners / managers.
also specifies in detail all the principal characteristics
of an exchangeable bond transaction such as the aggregate
principal amount of the exchangeable bonds to be issued,
the currency, the relevant stock exchange where the
exchangeable bonds are expected to be listed (e.g. the
Luxembourg Stock Exchange) and any indemnities given by
the issuer, the guarantor and / or the managers.
the relevant parties are expected to assume undertakings,
warranties and representations under this agreement.
Furthermore, both the issuer and the guarantor are
expected as a minimum to warrant and represent to the
managers as to their due incorporation, capacity,
authorisation to issue the exchangeable bonds and as to
the validity thereof.
Representations and warranties relating to the equities
linked to the exchangeable bonds may also be requested,
however the giving of such representations and warranties
are very controversial during the negotiation of each an
exchangeable bond transaction because of the potential
liability of the issuer and the guarantor in furnishing
issuer may agree to warrant the accurate extraction and
reproduction of the public information contained in the
prospectus related to the issuer of the equities linked to
the exchangeable bonds and the equities themselves.
subscription agreement also will include clauses providing
that the obligation of the managers to subscribe for the
exchangeable bonds will terminate if the representations
and warranties given do not remain true and accurate,
there is a material adverse change in the status of the
issuer and the guarantor or any force majeure (e.g. the
imposition of a banking moratorium, an acts of war etc.)
occurs between the signing of the subscription agreement
and the issue and subscription of the exchangeable bonds.
relation to the equity linked to the exchangeable bonds,
both the issuer and the guarantor, if any, will be
expected to have full ownership and legal title to the
equities delivered upon exchange.
This number of equities expected to be delivered per
aggregate principal amount of the exchangeable bonds upon
exchange is agreed by all the relevant parties on or prior
to the Closing Date.
managers will also expect to be indemnified, by both the
issuer and the guarantor, if any, against any loss,
liability, claims, damage arising out of any untrue
statement of a material fact contained in the prospectus.
Apart from the principal characteristics of an
exchangeable bond transaction as detailed above, it has to
be underlined that in general in Europe all the agreements
are governed by English law, even though either the issuer
or the guarantor could be incoporated in a jurisdiction
other than England e.g. Italy.
the case of an offering involving an Italian issuer or
guarantor, however, the approval and the consent of the
Bank of Italy in accordance with Article 129 of Decree No.
385 ( as amended from time to time) is required including
the implementing instructions of the latter, pursuant to
which the issue of exchangeable bonds in Italy is subject
to a prior notification to the Local Central Bank.
This approval has to be achieved before the launch of each
exchangeable bond transaction.
Moreover, both the issuer and the guarantor are expected
to be secure the listing of the exchangeable bonds on the
chosen stock exchange on or before the Closing Date.
market of the exchangeable bonds is growing in Italy.
main reason could depend, on the other things, upon the
crisis of the traditional equities market.
There are significant and recent examples of this category
of bonds in Italy: the issue of bonds exchangeable into
Assicurazioni Generali S.p.A shares launched by the Group
UniCredito Italiano S.p.A. on December 2003.
There are in this regard at least two further recent
transactions to be mentioned: the Caixa Finance B.V. bonds
exchangeable into ELE shares of EURO 847,600.00 dated July
2003 and the BMW Finance NV bonds exchangeable into RR
shares of EURO 560,500.00 dated December 2003.
conclusion, it would seem that exchangeable bond
transactions are currently highly appreciated in the