Bond Features
Bonds have safety features built-in and also, conditions that can benefit the bond issuer
Bond market terms and conditions include features that protect lenders from the unexpected. There are also some terms that give the bond issuer some flexibility too.
Think about a mortgage: as the borrower, you want it as cheap as possible, no penalties for paying it back early and no restrictions so you can rent it out if you so choose. The lender wants the opposite: a higher rate of interest, fees when you want to pay-back early and lots of restrictions.
As with everything, there's a middle-ground. Here are a few features to know about.
A change of control investor put
An investor change of control put is a good thing to have - we call it a bondholder protection. It protects you in the event that control of the business changes and the credit default risk worsens.
It allows you to sell the bonds back to the issuer at par (£100) or sometimes £101 plus owed interest.
Suppose the bond issuer is acquired by an entity that intends to increase the debt in the business. The price of the bonds could fall, but you would have the option of selling the bonds back to the issuer at £100 (or at whatever price is outlined in the bond terms and conditions).
An early redemption issuer call
Negative pledge
This is a benefit to the issuer because it allows the borrower to redeem bonds ahead of maturity. That said, investors are compensated and "made-whole". This usually results in investors being paid a price that can be way in excess of par.
Why do bond issuers do this? Usually it's because they can refinance the bond at a lower rate and it's worth paying the early redemption fee.
When bondholders lend to a borrower, they expect that the issuer will want to raise more debt as the business grows. Bondholders will want to know the conditions under which that will occur so they can manage the risk.
A negative pledge basically says that if the borrower issues a comparable bond but with better protections, the original bond will be given the same protections.
Julia Ernst
Partner
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Kevin Goldschmidt
Partner
I'm a paragraph. Click here to add your own text and edit me. I’m a great place for you to tell a story and let your users know a little more about you.