Issuing Corporate Bonds in the Nordic capital market - PwC · 2 Issuing Corporate Bonds in the Nordic capital market PricewaterhouseCoopers AS (“PwC”) is the author of this publication

Issuing Corporate Bonds in the Nordic capital market

www.pwc.no

June 2016

2 Issuing Corporate Bonds in the Nordic capital market

PricewaterhouseCoopers AS (“PwC”) is the author of this publication and has got the copyrights. Without written permission of PwC this publication may not be duplicated, copied, distributed or published. This publication has been prepared for information purposes and general guidance on matters of interest only, and does not constitute, or may not be interpreted as professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

1. Executive summary 3

2. The characteristics of the Nordic corporate bond market 6

A. The market for corporate bonds in Oslo 6

B. Lightdocumentation,veryefficientprocessandanactiveTrustee 7

C. Legal basis for bond issues in Norway 8

D. Offer documentation 9

3. Considerations prior to a bond issue 10

A. Bondfinancingversustraditionalbankfinancing 10

B. The ideal bond issuer 11

C. Thebenefitsanddrawbackswithlistedbonds 12

D. Goingforbonds:Specificissuestocontemplate 17

E. InvolveUSinvestors? 17

F. Usingthebondmarkettorefinanceexistingdebt 17

4. Bond covenants – protecting the bondholders 18

A. Covenant package 18

B. Testing of covenant structure 19

C. Ring-fencing 19

5. Steps of the bond issue process 20

A. Investment bank and mandate 21

B. Term sheet and offer documentation, pre-sounding 21

C. Launch of bond issue and road show 21

D. Closing and settlement 22

E. Possible listing on Oslo Børs or Nordic ABM 22

6. Listing of the bonds in Oslo 23

A. Listing requirements Oslo Børs – the main board 23

B. Listing requirements Nordic ABM - the alternative bond market 24

C. What is not required for listing on Oslo Børs nor Nordic ABM 24

D. Specificrequirementsforbondissuersthathaveorseekasecondarylisting 24

E. Guarantees–specificissuesforlistedbondissuers 24

F. Convertiblebonds–specificissuesforlistedbondissuers 25

7. Post-issuance:Issuer’songoingobligations 27

A. ComplyingwiththebondagreementandNT 27

B. Continuingobligationsforlistedissuers 27

C. Financial reporting for listed issuers 28

D. Reports on corporate governance and social responsibility 29

E. Inside information 30

F. Primary insiders 31

G. Investor relations with bondholders 31

8. Buy-back of bonds 32

9. Bond issuers in distress – some considerations 33

10. Conclusion 36

Attachment1:Termsanddefinitions 36

Attachment 2: Prospectus requirements and exemptions 42

Content

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1. Executive summary The Nordic bond market in Oslo is large and buoyant. Corporate bonds1 make up 25 % of the total bond volume, the rest is made up of the public sector and banks. About half the corporate bonds issued are considered investment grade, and the other half high yield bonds. Norwegian investment banks2 have historically been very successful in raising bond capital within the sectors of energy, shipping, property and seafood industry. The interest for the Nordic bond market from foreign companies is substantial and growing, as foreign companies andinvestorsalikehavefoundthebenefitsofthismarketquiteattractive.

Norwegian companies have traditionally favored bank financingasthishasingeneralbeenconsideredcheaper.However, with the rise of the bond market the companies have anadditionalsourceoffinancingattheirdisposal.Eachtypeoffinancinghasitsadvantagesanddrawbacks,assetoutinchapter 3 A below. The majority of Norwegian companies have little experience in the bond market. The aim of this publication is to provide guidance to Nordic and foreign companies whom are considering entering the bond market, whether through investment grade (IG) or high yield (HY) bonds.

The process of raising bond capital in Norway is characterized by standard documentation provided by Nordic Trustee3 (NT), documentation which is adapted for each bond issue. In contrast to an international-type bond offering there is no requirement for public rating, any due diligence or any comfort letter, the lack of which translates into a very speedy offering process of just a few weeks given a positive market sentiment. This also has the positive effect of lower transaction costs. However, should the bond issue involve US investors (in a typical 144A transaction), a comfort letter will be required and a public rating will often also be applicable.

1. Words in Italic in the executive summary are key points, and most of these are definedinattachment1.2. Throughout this publication the term investment bank is used, for the advisors assisting the company with placing the bond. In the Norwegian bond market underwriting is not used, hence “underwriter” is not applied. 3. Nordic Trustee ASA, previously known as Norsk Tillitsmann ASA, is a private body that usually represents the bondholders on the basis of the bond agreement. NT is by farthedominantactorinthemarketfortrusteeservicesinNorway.HereisNT’stemplate documentation: http://nordictrustee.com/documentation

The process of raising bond capital through investment banks in Oslo represents a relatively fast and straightforward gateway to Nordic, European and US investors.

This guide outlines the process for both Norwegian and foreign corporations considering bond issuances in the Nordic bond market.

For the benefit of foreign companies this guide also covers what is not required when raising bonds in the Nordic bond market, compared to an international-type bond issue.


The average bond issue is a bullet loan with a term of 4-5 years withafloatinginterestratebasedonthreemonthsNIBOR4 . The bond issues are usually in the range of NOK 500 to 1,200 million (equivalent to about 90 to 140 mill USD). The bond covenants are mainly maintenance covenants and to a lesser degree incurrence covenants. Often the bonds have call options and are hence callable, i.e. they can be redeemed early by the bond issuer. The Nordic bond market is accustomed to a wide range of covenants and security interests (collateral) which are tailored to each individual issue.

Offer documentation is primarily the term sheet (based on NT-standard), a company description, credit rating5, risk factors and financial information; all collated through the appointed investment bank. By subscribing to the term sheet the bond investors grant power of authority to the trustee (NT)tofinalizethebondagreementandrelateddocumentation when the offering process is closed. The end resultisanefficientworkflow.Thewayofferingsareusuallystructured means that neither any formal offer prospectus6 nor any other pre-approvals will be triggered by the launch of the offering.

Usually the bond investors will require the bonds to be listed on Oslo Børs or Nordic ABM, as investors (which are often institutional funds) regularly have mandates to invest only in listed bonds.

A listing on Oslo Børs requires the company to prepare a listing prospectus, which is to be reviewed by the NFSA7 . This process is usually brief and straightforward. The audited financialstatementsintheprospectushavetobepreparedinaccordance with IFRS8 for the previous two years (or one year for smaller companies – see section 6 A); this requirement is aligned with the similar listing requirements of Oslo Børs. Interim reports need not be audited when listing, unless the issuer has been incorporated in the year of issue. If the bond loan is guaranteed, the guarantors have to provide the same amount of information in the listing prospectus as the bond issueritself(notethattheGuarantor’sfinancialstatementsneednot be in accordance with IFRS, but still have to be audited). Convertible bondsposesomespecificissueswhicharecoveredinsection 6 F in this guide.

A listing will usually also require the company to set up an audit committee9 and comply with other, more technical listing requirements that are manageable. In contrast to a listing on Oslo Børs the alternative bond market Nordic ABM does not requirethatfinancialstatementsarepreparedinaccordancewith IFRS, nor is there a requirement for listing prospectus or any audit committee. (It should, however, be noted that an audit committee is in general required for Norwegian public limited companies - Norway: ASA). Both Oslo Børs and Nordic ABM are market places managed and monitored by Oslo Børs ASA.

Benefits and disadvantages for the bond issuer of listing the bonds in Oslo:

Main benefits:

• Many investors are mandated to invest only in bonds traded on a market place, hence a listing will attract more investors and capital

• ThelistingprocessinOsloisveryefficientcompared to foreign markets, a matter of couple of weeks and not months

• Listing requirements are fully consistent with EU prospectus rules

• OsloBørs’systemsprovidedetailedinformationof the trades in the secondary market – more than other exchanges

• The traded bonds represent a benchmark for the company’sfinancingcost(theyieldwillgiveanindication of the funding costs for the company)

• Low listing costs

Possible disadvantages:

• Costs related to IFRS conversion and listing

• The company will need to be more transparent and follow obligations to report relevant information to the markets

4. Norwegian Interbank Offered Rate5. The credit rating – a shadow rating - is prepared by the investment bank instead of a public rating. 6. Prospectus requirements and exemptions are set out in an attachment 2 to this publication.7.TheNorwegianFinancialSupervisoryAuthority–Finanstilsynet.8. IFRS – International Financial Reporting Standards, as approved by EU.9. Some exemptions from an audit committee exist. See section 6 A – listingrequirements Oslo børs – the main board.10. Other accounting languages (GAAPs) are acceptable, like US GAAP. Contact PwC or Oslo Børs for a list of generally accepted accounting principles equivalent with IFRS.

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Subsequent to listing, the bond issuer is required to report annual andsemi-annualfinancialfigures(bothforlistingonBørsorNordic ABM). The terms of the bond loan might, however, require quarterly reporting in addition. Half year/interim reporting can be unaudited. Guarantors of the bond issue might be required to reportfinancialfiguresonanongoingbasisaswiththebondissuer, but IFRS is not required for guarantors. Up-stream guarantors (subsidiaries guaranteeing for issuer) might be exempted from such ongoing reporting.

From a regulatory perspective, the major obstacle for many companies is to prepare IFRS10 accounts for listing on Oslo Børs (not required for Nordic ABM). When the bonds are listed and reportingroutinessetup,mostcompaniesfinditstraightforwardto comply with reporting requirements of Oslo Børs/Nordic ABM. All communication with advisors, Oslo Børs, NT and the NFSA canbeinEnglish.Theprospectus,financialstatementsandstockexchange notices can also be in English.

The Nordic trustee NT plays an active role when representing bondholders through monitoring the compliance of the bond issuer. Major changes to the bond loan have to be approved by 2/3 ofthebondholdersatabondholder’smeetingwhichiscalledbyNT. If the bond loan is listed on Oslo Børs or Nordic ABM, the stock exchange provides additional investor protection through market surveillance of the trading.

One of the main advantages of a Norwegian-type bond issue is the much less onerous documentation requirements than a foreign-type offering. One of the objectives of this publication has also been to set out what is not required for a bond issue in the Nordic bond market, compared to an international- type bond issue.

We would like to thank Nordic Trustee and Oslo Børs for their comments to this guide.

Oslo Børs

Bond issuer

Bondholder

Bondholder

Bondholder

Bondholder

Bondholder

Bondholder

Investmentbank

Nordic Trustee

Verdipapir-sentralen

Figure 1: Overview of key parties in bond issue process

The bond issuer and investment bank have no access to the bondholder register. However, the investment bank will have a good idea of who the major bond holders are, after making the initial bond issue to the bondholders and also being involved as broker in day-to-day trading of the bonds.

Bond holder register

STOP!


2. The characteristics of the Nordic corporate bond marketA. The market for corporate bonds in OsloThe Norwegian bond market has experienced substantial growthinrecentyears.Thisgrowthinpartreflectsthelendingconstraintsplacedonbankspostthefinancialcrisisin2008,allowing the bond market to become a viable alternative for companiesseekingdebtfinance.Thisisespeciallytruewiththemorecapitalintensivesectors,suchasoilfieldservices,oilandgas exploration and production (E&P) and shipping, which in exchangeforreadilyavailablefinance,offerbondinvestorsmore attractive returns. This recent transformation means the Nordic market is now attracting both foreign capital and companies for issuances that were previously the domain of London and New York.

Government and municipalities are the entities currently raising the majority of bond capital in the Nordic bond market, followedbyfinancialinstitutionsandcompanies.Whileitisnota requirement to list the bonds on a market place, many investment funds have listing as a requirement for investing in the bonds. The reason is that investors want the company to reportfinancialandotherinformationinatimelymanner.Further, a listing implies that the bonds are subject to market surveillance by Oslo Børs ASA, which carries out identical market surveillance for both Oslo Børs and Nordic ABM11.

Investment grade vs high yield bondsBonds are debt instruments in which an investor loans money to an entity for a maturity of minimum 12 months.

Corporate bonds – bonds issued by companies –canbeclassifiedintwodifferentcategories based on perceived risk.

Investment grade (IG) bonds are bonds with a relatively low risk of default.

High yield (HY) bonds are bonds issued by companies with a relatively higher risk of defaulting on the payments, hence the bonds are considered to have lower credit quality. The perceived higher risk means that the company has to pay a higher interest on these loans.

A portfolio of HY bonds might over time offer potentially higher returns than IG bonds, but the risk of a borrower defaulting is also much higher.

11. While only Oslo Børs is considered a regulated market place in line with EU requirements, Oslo Børs ASA has decided to perform the same level of surveillance for Nordic ABM.

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B. Light-touch efficient process and an active TrusteeThe Nordic bond market is characterized by light-touch documentation, based on standard bond loan agreements, term sheets and other documentation from Nordic Trustee ASA (NT)12. NT is the trustee managing the contractual rights the bond investors have towards the bond issuer, and playing a key role both when the bond capital is raised and after the bond issue. Nordic Trustee ASA is mainly owned by Nordic banks, life assurance companies and securities companies. NT is involved in most of the corporate bond issues in the Nordic market. The standard documentation from NT is adapted as necessary for each individual bond issuance. NT represents the bondholders and signs the bond loan on behalf of the bondholder community.NTmonitorsthecompany’scompliancewiththeloan’sprovisions(covenants,coupon,redemption,reportingand more) and can pursue legal action on behalf of the bondholders, including taking possession of collateral to safeguardthebondholders.NThassufficientpowerofauthority (dictated in the bond loan agreement) to decide minor issues about the bond. Major amendments to the loan agreement (like for instance an extension) have to be approved bytwo-thirdsofthebondholdersinabondholders’meeting.Such a resolution will bind all the bondholders. In times of distress,thebondissuercandiscusswithNTonaconfidentialbasis (if needed) possible amendments to the bond agreement, priortoanybondholders’meetingbeingcalledtoapprovethechanges.

Other key players in the process are the Norwegian investment banks, which will assist the company raise funds from investors. In contrast to international-type bond issuances, the Norwegian investment banks do not require comfort letters addressingthefinancialinformationoftheofferdocument,andno public rating or due diligence need be carried out. Furthermore, due to the way Norwegian investment banks structure the bond issuances no offer prospectus will be required. The light-touch documentation makes a bond issue in the Nordic capital market not only faster than a comparable international-type bond issue, but the transaction costs are also lower. This has the positive side-effect that Nordic investment bankscantakeonsmallerbondissueswhichbenefitalsosmaller companies.

While light-touch documentation might seem to provide less protection for the bondholders compared to an international type bond issue, the active role played by NT seems to a large degree to mitigate this13.

Comfort letter not required and no “135 days rule”In connection with international-type bond offerings the investment banks require comfort that the financialfigures(beyondthefinancialstatementsthat are already audited) in a comprehensive offer documentareverified.Hence,thecompany’sstatutoryauditorswillgothroughallfinancialfiguresintheofferdocumentation-allfiguresare“circledup” - and verify that these can be traced back to previouslyauditedfinancialstatements.Theauditorprovidesacomfortletterthatstatesthatthefiguresareinlinewiththeauditedfigures,andthattheauditors will still stand by the audit opinions of the financialstatementsenclosedtotheofferdocumentation.

For such international-type issues the auditors can generally issue comfort letters only on audited financialstatementsthatarelessthan135daysold(i.e.lessthan135daysfromthelatestfinancialstatements that were subject to an audit). Comfort letters and this so-called “135 days rule” are not applicable for issues in the Norwegian market.

If foreign investment banks are involved in the bond issuance, they may require that the bond offering is done in line with international practice (i.e. an international type offering) and hence require that a formal offer document with a comfort letter verifying thefinancialinformationareprepared.ThiswillespeciallybethecaseifUSinvestors(QualifiedInstitutional Buyers - QIBs) are targeted in the bond issue.

12. NT website: www.nordictrustee.com13.OnerecentexampleforNT’sactiverole:In2014thevesselowningcompanyOceanografiadefaultedonitsbondloan.NT,astrusteeforOceanografia’sbonds,declaredOceanografia’s$160millionofnotesindefault.NTtookcontrolofthevesselwhich was security for the bonds and brought it into international waters, resulting in no loss for the bondholders.

IndentureIndenture is the term used for the legal contract between the bond issuer and the bondholders in foreign-type bond issues. Indenture is not a term used for Nordic bond agreements/bond issues.

Inforeign-typebondissuestheindenturespecifiesallthe important features and terms for the bond issue, as maturity date, callable/convertible features, interestcalculationandpayments,financialcovenants regulating the issuer etc.


C. Legal basis for bond issues in NorwayBond issues are covered by the Norwegian Securities Trading Act (“NSA”), if the bonds in question can be “negotiable on the capital market”14 which most often is the case. In general, this act states that no one can employ unreasonable businessmethodswhenissuingandtradingfinancialinstruments.

Furthermore, section 3 of the NSA sets out additional, detailed requirements for bonds which are listed (or where listing has been applied for), on a Nordic regulated market. These rules cover aspects like inside information, price manipulation and more. The requirements are mirrored in bothOsloBørs’BondRulesandABMRules(seesection7forthe main ongoing obligations)15 .

Theofferdocumentationitselfisnotspecificallyregulated,unless when an offer prospectus in rare instances is triggered. Furthermore, the role of the Nordic Trustee is not regulated by any legal framework. NTs position as representing the bondholders is regulated by the standard agreements in place between the various parties in a bond issue.NT’spositionhasbeenconfirmedthroughseveralSupreme Court decisions in recent years.

It is furthermore a legal requirement that all investors holding the same class of bonds have to be treated equally16.

Issued bonds also have to be registered in Verdipapirsentralen, VPS – the Norwegian Central Securities Depository. The bond issuer has to enter into an agreement with a conventional bank, which will do the registration of the bonds and transactions with VPS. This bank will also act asapayingagent,i.e.managethecashflowofpaymentsandinterest between the bond issuer and the creditors.

Bond issuances based on standard documentation from NT will have Oslo as legal venue. This means the courts of Norway will have exclusive jurisdiction to settle any dispute which may arise out of, or in connection with, the bond issue.

This guide sets out a summary of the main legal requirementsforbondissuers.However,OsloBørs’Bondand ABM Rules should be consulted when listing of a bond is considered.

14. See section 2-2, second subsection point 2 in the Norwegian Securities Trading Act. The article ”Foretaksobligasjoner i Norge” in Revisjon og Regnskap no 4, 2013 by ArntzendeBescheadvokatfirmaprovidesadetaileddescriptionoflegalbasisandrelated issues regarding corporate bonds. 15.TheBondandABMRules(asspecifiedbyOsloBørs)setoutthelistingrequirementsof bonds on Oslo Børs or Nordic ABM (see section 6 for the listing requirements). The listingrequirementsareOsloBørs’ownrules.16. The equal treatment of investors is set out in the Norwegian Security Trading Act section 5-14 and Oslo Børs own rules, ref point 3.1.1 (in the Bond and the ABM rules)

Rating of bond issuer – public versus shadow ratingInternationalbondratingfirms,suchasStandard&Poor’s,Moody’sandFitchusedifferentdesignationstoidentifyabond’screditqualityrating.Designationsfrom‘AAA’and‘AA’(highcreditquality)and‘A’and‘BBB’(mediumcreditquality)areusuallyconsideredinvestmentgrade,whilecreditratingslike‘BB’,‘B’,‘CCC’areconsideredlowcreditquality,andarecommonly referred to as high yield.

Toprovidearating,theratingfirmhastocarryoutafinancialandlegalduediligenceofthecorporation,and such a process is costly. In the Norwegian bond market, the bond issuers rarely do such a public rating, meaning that few bond issuers listed in Oslo havepublicratingsbyS&P,Moody’sorFitch.

Instead of a public rating, the investment bank assisting the company (its credit analyst teams) provides a shadow rating of the issuer, based on available, public information about the company. The credit analysts do this along the same principles as the rating agencies, but at no extra cost for the issuer.

A bond rating – whether it is a public or shadow rating –isafunctionofthecompany’sbusinessandfinancialrisk. The business risk is dependent on factors like competitive position, country risk, benchmarking withpeercompaniesetc.Thefinancialriskisdependentonthebond’slocationinthecapitalstructure and the value of the assets.

D. Offer documentationTheofferdocumentationitselfisnotspecificallyregulatedbyNorwegian regulations, but is based on market practice. The term offering memorandum (or offer documentation) is typically used in a bond offering instead of the term prospectus. This is to make clear that the bonds are offered in a transaction that relies on certain exemptions from the legal prospectus requirements. Prospectus requirements and exemptions are set out in attachment 2.

The bond investors will base their investment decisions on offer documentation, which primarily includes the term sheet for the issue, an issuer description, credit rating (i.e. the shadow rating prepared by the investment bank), risk factors andfinancialinformation,plusthesubscriptionform.Usuallythe face value of each bond is more than 100,000 euro, which means that there will be no requirement for an offer prospectus.

The term sheet is a key part of the offer documentation, as it sets out the basic terms (interest, maturity, any security) for the bond issue, and any unique features/covenants. The term sheet is based on an NT-template which later will be the basis for the detailed, legal bond loan documents.

When subscribing to the bond issue the investor gives NT the powerofauthoritytofinalize–afterclosing–thebondagreement (which will be on the NT standard). Thus, the term sheet is prepared and presented to the investors at the launch of the bond issue, while the formal loan agreement (and other relevantdocumentation)willbefinalizedbyNTaftertheclosing.Thisprovidesforanefficientworkflow.

ShouldthecompanyinvolveUSinvestors(QualifiedInstitutional Buyer – QIB) the bond issue will be more comparable to an international type bond offering, which often requires a comfort letter.

Example of term sheet informationKey information from an actual term sheet presented to potential investors:

“The bond agreement governing the Bond Issue (the Bond Agreement) will be entered into by the Issuer andtheTrusteeactingastheBondholders’representative,andshallbebasedontheTrustee’sNorwegian standard. The Bond Agreement will regulatetheBondholders’rightsandobligationswithrespect to the Bonds. If any discrepancy should occur between this Term Sheet and the Bond Agreement, then the Bond Agreement shall prevail. Each subscriber in the Bonds is deemed to have granted authoritytotheTrusteetofinalizetheBondAgreement. Although minor adjustments compared to the terms described in this Term Sheet may occur, the provisions in the Bond Agreement will be substantially consistent with those set forth in this Term Sheet.”

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Face value, identical to nominal or par valueThe face value of the bond is the nominal value of the bond, as stated by the issuer. The face value/nominal value will be the amount paid to the holder at maturity, given the issuer does not default. The face value is also known as par value.


3. Considerations prior to a bond issue

Nordic companies have traditionally turned to banks for financing.Awell-establishedrelationshipbetweenthecompanyandthelocalbankhaveprovedbeneficiaryforbothparties. The banks have provided competitive terms and been able to respond quickly to the companies if the loan terms had to be amended, like extending loan maturity in times of distress.Thefinancialcrisisof2008,however,changedthepicture as the banks were forced to restrict their lending and the companies in turn switched to other capital sources for financing,likethebondmarket.Thisillustratesthepointofhavingseveralsourcesoffinancingtotapintoonwhenthecapital markets are in distress, a point which will be discussed later.

Approaching just one conventional bank might seem easier than launching a bond, which will involve investment banks, NT, the NFSA and Oslo Børs (if the bonds are listed). On the other hand, a bank loan that will be syndicated would as well be demanding to get in place, as the various banks may have

Bond financing

• Fewer covenants (negotiable)

• Documentation based on tested standards

• Maintenance covenants, but trend is more incurrence tests

• Funds usually received in one lump-sum, full redemption by end of maturity (bullet)

• Early redemption strictly regulated (put or call options) in bond loan agreement

• Maturities of typically 4-5 years(but trend that maturity is increasing, not uncommon with 7-10 years)

• A bond issue will involve many parties, bondholders are not known

• Prospectus might be required (primarily for listing of bonds)

• Resources will be needed for follow-up (IR) of bondholders

• The company will get a higher public profile

• A listed bond provides a benchmark for cost of capital and any subsequent financing

• Any restructuring/amendments of bond after draw down: Involves NT and unknown bondholders, of which 2/3 to agree.

• Bond financing can be obtained when bank financing cannot take on additional, higher risk (high yield)

• Bonds can be repurchased if the right opportunity arises.

Bank financing

• Often a more comprehensive covenant package (negotiable).

• Maintenance covenants

• More flexible draw-down terms and repayments; when it suits company

• Maturities of about 5 years, but can be longer

• Company only needs to deal with the bank (however, a syndicated loan means several banks and more coordination) when raising the facility

• IFRS not required for financial statements

• Prospectus not required

• Lower public profile for company

• The loan covenants can be kept more confidential, while bond agreement normally has to be public

• Any follow-up (IR) of bank not required

• Any restructuring/waivers of loan after draw down: Usually easier to deal with just one bank.

• Syndicated loans can make any waivers/ amendments difficult.

• A bank loan may be lower priced, this can be due to the bank also having other business with the company. Or it could just be a reflection of the bank having better security (different risk profile).

A. Bond financing versus traditional bank financingdifferent capital restraints. Should any waivers/amendments to the loan be needed later, all the syndicated banks will need to be involved in the negotiations.

With the strong rise of the bond market in recent years, Nordic companiesnowhaveanadditionalsourceoffinancingtotapinto. This is valuable both in terms of diversifying the sources of financing,butalsothatbondfinancingofferaslightlydifferenttypeoffinancing.Hence,belowacomparisonofbankandbondfinancingissetout.

For bank facilities as well as bond loans maintenance covenants are currently the norm, but for bonds the trend is moving towards more incurrence covenants17 . What the bond market requiresofcovenantsistosomeextentareflectionoftheprevailing market conditions. Generally speaking, when investor demand for return is high, the covenants in new issues tendtobemoreflexible.Opposite;whencapitalisrestrictedthelenders are more in a position to set the terms.

17.Thetwocategoriesofmaintenanceandincurrence covenants are described further in section 4.

Figure 2: Comparison of bank vs. bond financing

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B. The ideal bond issuer

What input is required for investment banks?

A. Strong balance sheet an advantage

B. Current capital structure to be considered

C. Positive existing cash flow (CF) usually required*

• Are there assets that can be used as collateral for bond loan? > Yes = lower spread (ie lower margin on top of NIBOR) > No = higher spread (ie higher margin on top of NIBOR)

• Any existing loans: Maturity dates to be taken into account• Loan terms existing financing to be factored in• Priority on assets to be assessed

Bond issue has to be more than NOK 100 mill.forinvestmentbanktofinditworthwhile,ideally more than NOK 300-500 mill. The reasons being that transaction costs will be disproportionately higher for smaller offerings, andforsmallerissuesitwillalsobedifficulttodevelop a secondary market for trading.

*)Notalwaysiffuturepositivecashflowcanbesupported**) The Net interest Bearing Debt to EBITDA Ratio is a measurement of leverage, calculated as company s interest-bearing liabilities (ie loans) minus cash or cash equivalents, divided by its EBITDA. EBITDA is considered by someinvestorstobeanapproximationtocashflow(whichisarguable),andthat the net debt to EBITDA ratio is a measure of years of repayment (also arguable).

“Business case” has to be presented to investment bank

• Balance sheet

• Cash flow (CF)

• Presentation of company• Any existing loans: Maturity dates to be taken into account• NIBD/EBITDA often applied to consider debt servicing capacity**

Bondinvestorswillprimarilyfocusonanissuer’screditratingandmetrics(i.e.leverageandfinancialratios).Inmakingtheirinvestment decision the investors will consider many of the same factorsasequityinvestors,likethecompany’sstrategyandgrowth prospects, which are elements also considered in a rating of the bond issuer.

The following will characterize an ideal bond candidate: • a stable and resilient business model• anestablishedfinancialtrackrecord• a market-leading position and good growth prospects• established in an industry like energy, shipping, property

or seafood • an experienced management team with a proven

track record• a sound balance sheet• a healthy cash generation, plus the potential of future

debt-deleveraging • financingneedsofatpreferablyminimum300NOKmillion

It will also be of relevance whether the proceeds of the offering aretobeusedforacquisitions,refinancingofexistingloansorgeneral corporate purposes, and what security that can be

offered.Ifthecompanyiscurrentlynotgeneratinganycashflow,itmightstillbeabletoraisebondfinancingifthecash-generatingassets will be in production shortly, but the terms will be less favourable (i.e. higher coupon).

First stop for a company contemplating a bond issue will be an investment bank, which will assist the company raise the bond capital. The investment bank has placing power, i.e. the power to place the issue in due time with a large number of potential investors. The Norwegian investment banks are mainly specialized within the shipping, property, seafood or energy sectors.

The overview below sets out the typical considerations the investmentbankwillmake,whenassessingthefinancialmetricsof the company at the start of the process. The pricing and terms of the bond issue will to some degree be subject to negotiations between the issuer and the investment bank. The company and theCFOwillwantasmuchflexibilitywiththebondloanaspossible (i.e. few covenants/no collateral), while the investment bank knows what the investors prefer, i.e. what terms of the bond issues that are marketable. In the end the covenant package mustallowtheissuertopreserveitsoperatingandfinancialflexibilitysothatitcanexecutethebusinessplanandthatitscompetitive position is not compromised.

Figure 3: The figure gives examples of relevant financial ratios


Size of the issueThe company will usually have a good idea of what amount of capital it will need for the planned transaction or investment. While 100 mill NOK is considered as the lower limit for any bond issue (when taking transaction costs into account), debt issues below 300 mill NOK will in the Nordic capital market usually attract little interest from investors as such smaller issues will mean fewer investors and hence less trading, and therefore low liquidity in the secondary market. Furthermore, some investment funds do not have mandates to invest in smaller bond issues. Typical for the Nordic capital market are bond offerings in the range of 500 to 1,200 million NOK, equivalenttoabout75to180millUSD.However,issuesaremade both below and above this range.

Currency of bond issueBond issues listed on Oslo Børs or Nordic ABM can be in NOK, SEK, DKK, EUR, GBP or USD.

Hence, the bond issuer can take advantage of lower credit spreads for instance in the Swedish capital market. For the company’sowninternalpurposesthebondloancanthenbeswapped to NOK or USD, while the bond issue remains listed in SEK.

The advantages of having the bonds listed and traded on a secondary market are numerous. First and foremost the market bridges the long-term capital requirements of the company with the investors short-term needs to be able to invest and dispose of the bonds on a daily basis. One key consideration for any investors would be how liquid the investment is. With the possibility of trading the investment in a secondary market, investors would be much more likely to invest in the bond issue in the primary market.

The more liquid the bonds are for the bondholder, the less discount will there be on the bond price. Any liquidity discount will represent a cost for the bond issuer, since the company has to price the bond issue higher when issuing bonds that are not listed. Hence, the more the company can do

D. Going for bonds: Specific issues to contemplate

C. The benefits and drawbacks with listed bonds

Capital structureHowthebondfinancingfitsinwiththecompany’sexisting capital structure has consequences for priceand terms of the bond issue. The capital structure is how a company(orgroup)financesitsoperationsandgrowthbyusing different sources of funds, in order to minimize funding costs. The company should consider what (if any) security can be provided, which could provide lower interest costs. Usually the best collateral has already been used as security for senior secured debt, while bond debt usually is added on next.

Bondfinancingwilloftenrankbehindsecureddebtwithrespect to security. Subordination (meaning that the loan ranks below other loans with regard to claims on assets or earnings) will allow the bond issuer to take on additional debt more cost-effectively. High-yield bonds will typically be financingthatcomesontopofexistingdebt,withless/nosecurity and hence with a high interest rate (coupon).

A way to achieve a lower interest costs can be to issue convertible bonds, as the bondholders will be compensated with conversion rights in addition to the coupon. With conversion rights the bondholders can take part in any upside oftheshares.(Convertiblesposesomespecificissuesandarecovered in section 6 F).

to facilitate trading of the bonds through a listing, the better terms (lower costs) can be achieved for the bond issue.

Listed bonds are subject to reporting requirements and market monitoring, meaning that there should be no asymmetric information. This also translates into lower issue costs, as the bond investors would know they are not left out regarding key information.

An additional advantage will be that active bond trading in the secondary market provides the company with a benchmarkforitsfinancingcosts.

The main drawbacks are the resources the company have to spend on reporting and compliance, as well as the investor and media focus a listing will attract. Another drawback may be that vulture funds can buy up bonds and position themselvesaheadofanimpending,financialrestructuring.

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As is apparent above, it will be important to take into account thecompany’sexistingfinancing,asthematurityoftheexistingdebtwillhaveconsequencesforthebondfinancing.Furthermore, any loans already in place will have covenants whichhavetobetakenintoaccountwhennewbondfinancingis considered.

Financial modeling can be applied to see how the various elementsoffinancingfitstogether,alsotakingintoaccountthefinancialcovenantsoftherespectiveseniordebt,juniordebt,convertible bonds and any future investment plans, transactions and so forth.

Who should be the bond issuer?For listed companies, the bond issuing entity will often be the listed company itself. For private companies however, the identity of the issuer is not so clear. Given the purpose of the bond, the overall capital structure of the company (or group) and any existing senior bank debt, the bond issuer could alternatively be the ultimate parent company, an intermediate holding (or operating) company or a lower-level operating company.

Usually senior debt is linked to and secured by the operating company(ies) at the lower levels of the group structure. The reason is that he senior debt will be closer to the assets, meaning this type of debt has better security and can provide lower interest costs. While high yield bonds on the other hand

are commonly issued by the parent holding company, with less security as the senior debt already has been granted the best security in the operational companies/assets.

When the bonds are issued by the parent company, the bondholders have no direct access to the assets or cash of the operating companies (unless guarantees are provided). Often such bonds are secured with share pledges in the operating subsidiaries. In a bankruptcy of the operating subsidiary, the bondholder’sclaimasshareholdersinthesubsidiarywouldbejunior. In other words, these claims will be subordinated to claims of all the creditors of the subsidiary; not only any bank debt, but also unsecured debt, trade creditors and so forth. This so-called structural subordination means the bondholders will rank low in a default.

Security – to improve pricing termsAny collateral/assets that may be used as security, can improve the terms of the bonds. Assets can be used as collateral, or shares in subsidiaries can be pledged as security. Alternatively, covenants can express that no assets should be pledged without the consent of the bondholders – which is referred to as a negative pledge.

As mentioned above, the best available security will already have been used for senior bank facilities. However, bonds are often ideal to increase the leverage further, which is especially the case with high yield bonds.

Senior secured debt

Pri

ori

ty o

f pa

ymen

ts in

liq

uid

ati

on

Senior debt

Junior/subordinated debt

Hybrids

Shares

Lowest interest cost, as loan has collateral.Lowest

risk

Highest risk

Relatively low interest cost, due to priority before

subordinated debt

Relatively higher interest, as debt is not secured

and subordinated other debt

Often lower interest than junior/ subordinate, as

option to be converted to shares is included

Carries no interest. Dividend paid from any

distributable profit

Capital structure of company (or group) Interest cost (coupon) for company (or group)Risk of default

Figure 4: “Debt” can either be bank financing or bonds, or a mix. “Hybrids” can typically be convertible loans or convertible bonds.


Guarantees – an alternative way to provide security and improve termsTo enhance the creditworthiness of the issuer and provide better terms, occasionally bonds will be guaranteed by the bondissuer’ssubsidiaries(so-calledup-streamguarantees).This will in effect bring the bondholders closer to the physical assets of the group and thereby avoid structural subordination. If the bond loan is guaranteed by a parent company of the bond issuer, this will constitute a down-stream guarantee.

In the Nordic bond market mainly two types of guarantees are utilised, it is therefore relevant to set out the differences – in general terms – between the two types below.

“Påkravsgaranti” – on-demand guaranteeThis type of guarantee is unconditional and independent of the underlying conditions. It is not necessary to prove any breach of contract and the guarantor must pay when a creditor demands payment. The guarantor cannot raise objections from the underlying relationship, i.e. it cannot raise any objections that the debitor might have used initially for not paying. Instead the guarantor will have to request the debtor to refund the amount, if the guarantor believes there was no basis for the guarantee to apply. Such a guarantee is also referred to as a pay now – argue later guarantee.

“Selvskyldner garanti”- guarantee In order to demand payment from the guarantor under this type of guarantee, the creditor has to prove that the claim he wants covered have already been defaulted by the issuer. What more differentiates this guarantee from the “påkravsgaranti” set out above, is that the guarantor may dispute the claim with the same objections the borrower had initially with paying the lender, for instance that the claim has already been off-set by other transactions, or similar issues. In short, with this type of guarantee the guarantor is as liable as if he where the debtor, but the guarantor may also raise the debtor’sobjectionstodisputetheclaim.

Type of guarantee should be clearly set outThe bond agreement should clearly state what type of guarantee that has been provided, also setting out the Norwegian text påkravsgaranti or selvskyldnergaranti as the distinction can have important consequences for the guarantors if the bond issuer later defaults18.

Note that a guarantee might require the guarantor to report its financialstatementsinlinewiththeissuer(ifthebondsarelisted), and therefore adds an element of complexity to the bond issue. This is covered in section 6, subsection Gurantees –specificissuesbelow.

0

20

40

60

80

100

120

2016 2017 2018 2019 2020 2021 2022

Year

2023 2024 2025 2026 2027 2028 2029 2030 2030-2114

Figure 5: Maturity profile HY bonds as of February 2016. Source: Alfred Berg, Stamdata and Nordic Trustee

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Call and put options – to add flexibility to the bondApotentialdrawbackwithbondfinancingisthattheissuermight not need the entire bond capital up-front. The company mayfinditmoreadvantageouswithabankloanwhichgradually is drawn up as the funds are required, for example with a vessel under construction. A bank loan can also be repaid more easily, while a bond loan might not be redeemed early if there are no conditions for this in the loan agreement.

To allow early redemption the bond agreement may include options for bond issuer to redeem the bond loan prior to the maturity (call options). A bond with call options – i.e. a callable bond loan and denoted with a C in the loan reference – is very common in the Nordic market. The call option will addneededflexibilitytothebondwhilestillkeepingtheloanaslongtermfinancing.Ifopportunitiesarisetheissuercanrepaythebondloanwithanyexcessliquidity,orrefinanceitwith a loan carrying lower interest costs19 . The use of call optionsforthebondissuerwillnormallycarryafinancialpenalty, meaning that the issuer would need to redeem the bonds for slightly more than the face value of the bond. The reason is that the bond investors initially based their investmentdecisionsonabondloanwithaspecifiedmaturity–whenthisiscutshortthefinancialvalueforthebondholderhas changed.

The agreement might also occasionally include options for the bondholders for early repayment (put options).

The use of call and put options will be strictly regulated in the bond agreement.

Different sources of debt complementing each otherIn recent years a growing trend has been that companies are fundedwithbothbondandbankfinancing.Thedifferentsources of funding can complement each other, especially as bondissuerscantakeonhigherrisk-thanbankfinancing-withunsecuredhighyieldbondfinancing.

Preparing a track-record to deal with asymmetric information?Nordiccompanieshavetraditionallybeenfinancedbythelocal banks. In contrast to these banks the bond investors are not familiar with the company. To overcome the issue of asymmetric information a company - new to the bond market - may do a limited bond issue. Servicing this bond will over

time create a favorable track-record. The company will - for futurebondissues–thenbenefitfromlowerborrowingcostsasinvestors are now familiar with the company. A positive side-effect will be that any subsequent bond issues are much faster, as much of the paperwork has already been prepared. This alternative can be considered if the company wants to diversifyitssourcesoffinancing,whichhasbeenespeciallyrelevant when banks have restricted their lending. An additional advantage will be that the bond trading in the secondary market provides the company with a benchmark for itsfinancingcosts.

Still, in the current low-interest environment with investors hunting higher returns, many companies new to the bond market have nonetheless been able to raise funds on favorable terms.

Maturity, floating and fixed interest of bondsThe company should consider the maturity of the bond loan (in theNordicmarkettheaveragematurityprofileisusually3-5years, but the trend is longer maturities). Usually the bonds raisedarewithfloatinginterest(FloatingRateNote-FRNinshort),butinterestcaneasilybeswappedintofixedinterestrates. This is often the case for companies wanting to lock in a low interest rate or to achieve predictability of future interest costs. Funds raised in NOK can also be swapped into USD.

18. The difference of the guarantees came up in the Thule legal case. 19. Of course, the company will as well have the possibility to repurchase its bonds in the market place, and that way indirectly redeem the bond loan. This is covered in section 8 Buy-back of bonds below.

Coupon vs yield

Couponisthebondinterestratefixedatissuance.Forafloatinginterestbondthiswillnormallybeamarginon the 3 months NIBOR interest.

After issuance the bond will most likely trade at a price above or below par value, while the periodically paid coupon still is NIBOR plus a margin. An investor purchasing the bond (with a price above/below par) in the secondary market will therefore have a different, calculated return on his investment than just the coupon. If the bond is purchased for a price below par (at a discount), the calculated return on the investment will be relatively higher than the coupon. This is the “yield to maturity”; an annualized estimate of what an investor will receive if the bond is held to its maturity date.


Convertible bonds Toincreasetheinvestors’appetiteforabondissue(ofteninsituations where the company already is highly leveraged), some companies issue convertible bonds. Convertible bonds are bonds that can be converted into a predetermined amount (as set out in the initial bond loan agreement) of shares at certain times during its life, usually at the discretion of the bondholder given that the share price has moved in the favorable direction. Such a bond will be a hybrid product of debt and equity.

Convertible rights are often included with the bonds to “sweeten the deal”, i.e. to attract more investor interest. Bondholders are normally concerned with the downside of the company, but with convertible bonds the bondholders will also be able to take part in any upside of the shares. The effect is that the coupon on the bonds will be lower than what it otherwise would have been. On the other hand existing shareholders might not be too enthusiastic about the possibility of any future dilution. Issuing such bonds can thereforeoftenbeconsideredasa“lastresort”offinancingwhen other sources are unavailable. Alternatively, the use of convertibles can in some circumstances be interpreted as a sign that the board of the company believes that there might not be much further upside in the shares, and that convertible bondscanprovidecheapfinancingwithoutanydilutionissues.

Convertiblebondshaveaspecifiedconversion premium; this is the amount (as stated in the bond agreement) by which the price of the underlying shares has to increase before bond holders can require the bonds be converted into shares. Often convertible bonds are callable as well, meaning that while bond holders have a call option to convert to shares, the bond issuer also has an option to call the loan. However, bond holders would normally not invest in a callable, convertible bond unless there is a period of time during which the bond may not be redeemed (called), and this period is referred to as the call protection period. Hence, convertible bonds which are callableusuallycomeswithspecifiedtermsforthecallprotection period.

Convertible bonds represent some unique compliance issues, which are therefore covered in a separate section (see section 6,andthesubsectionConvertiblebonds–specificissues).

Coupon, margin and covenant packageThecouponwillforfloatinginterestbondloansusuallybeamargin on the 3 months NIBOR20 rate. The coupon and the associatedcovenantpackagewillbeareflectionofallfactorsset out above plus investor demand.

20. Norwegian Interbank Offered RateNIBOR is the collective term for Norwegian money market rates at different maturities,andreflectstheinterestratelevellendersrequireforunsecuredmoneymarket lending in NOK.

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Mostbondissuesaredrivenbythecorporations’needforadditional funding. The bond market is only to a lesser degree usedforrefinancingofexistingdebt.

Favorablemarketconditionsorastrengtheningofacompany’screditratingmayleadtotherefinancingofcorporatedebt.Twokeyfactorsforacompanytoconsiderinrefinancingaretherefore decreases in the general interest rate level or improvementsinthecompany’screditquality.

E. Involve US investors?

F. Using the bond market to refinance existing debt

The company might consider involving US investors in the bond issue, as this will expand the universe of potential investors and hence the possibility of higher pricing/better terms. It should be noted that US security regulations require securities offered to US investors to be registered with the US Security and Exchange Commission (SEC). One important exemption is if the issue is done in accordance with the so-called Rule 144A in the US requirements, if so the offering does not need to be registered with the SEC. Main requirement for this “safe haven”

isthattheUSinvestorsareQIBs,i.e.qualifiedinstitutionalinvestors. Bond offerings through the Nordic capital market involving US investors, will therefore be done on the basis of a 144A exemption, which will be set out clearly in the detailed offer document. Such bond offerings will usually also require a comfortletterfromthecompany’sstatutoryauditorsandhencebe more costly.

Thecompanycouldalsobuybackbondsaspartofrefinancingits debt, see section 8 for buy-back of bonds.

The company might also be in a position where it is not able to serviceitscurrentfinancing,whichcanforcethecompanytorestructure its debts. Chapter 9 sets out some aspects to considerwhenabondfinancinghastoberenegotiated,whichisusually a more complicated process than renegotiating a loan facility.


4. Bond covenants – protecting the bondholdersA. Covenant packageThe purpose of bond covenants is to prevent the issuer from becoming over-leveraged, protect the position of the bondholders in the capital structure and preserve the assets of the issuer (or the group, if relevant).

The covenant package therefore may limit the ability of the issuer (or the overall group) to: • incur additional debt• pay dividends• divest assets • grant security interests on the assets • issue additional guarantees • enterintotransactionswithaffiliates• do any mergers or acquisitions• change the ownership structure of the issuer (or group)

To control the bond issuer in these dimensions, two categories offinancialcovenantsareapplied;maintenanceandincurrence covenants.

Maintenance covenantsA maintenance covenant requires the bond issuer to maintain acertainleveloffinancialperformance(measuredwithkeyfinancialratios)toavoiddefault.Maintenancecovenantsaretested regularly - often as frequently as every three months - and are common for highly leveraged companies. These are the kind of covenants traditionally set out in bank loans, but are also common for bond issues in the Nordic capital market (in contrast to foreign bond issues).

TheNIBD/EBITDAratio(seefigure3above)andtheinterestcoverage ratios are typical maintenance covenants. Another important covenant is the liquidity covenant, where the issuer (or group) undertakes at all times to maintain a certain minimum of free cash. Other similar ratios exist as well. Maintenancecovenantsarespecificallytailoredforeachbond issuer.

After the bond issue the company will have to periodically provideNTwithitsfinancialstatementsplusa“compliancereport”confirmingthatthefinancialcovenants(ratios)arefulfilled,inlinewiththereportingdatesinthebondagreement. The company will need to have systems in place tomonitorandforecastthefinancialdevelopmentofthecompany along these dimensions.

Incurrence covenantsIn contrast to maintenance covenants incurrence covenants are only measured when the bond issuer undertakes some specificactions.Suchcovenantscanbethatthecompanyarenot allowed to pay dividends, incur additional debt, do mergers or enter into transactions with related parties unless the relevant incurrence tests are met.

In international type bond issues incurrence covenants are used more frequently than maintenance convenants. Many CFO’swouldfinditeasiertodealwithincurrencecovenants,as the company will not need to constantly monitor whether thefinancialratiosaremaintained.Ontheotherhandincurrence covenants provide less protection for the bondholders, as they are only tested when the bond issuer actuallyundertakesspecificactions.

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B. Testing of covenant structure

C. Ring-fencing

The bond agreement can potentially dictate corporate actions for years to come. While the investment bank has had a key role in setting up the initial terms of the deal, it is still important that senior management of the issuer is closely involved in the process of testing the covenant structure. This is especially important with more complex structures, as any outside experts cannotbeexpectedtoforeseewhatlevelofflexibilitythecompany needs over the term of the loan. Some time must therefore be devoted by management to assess whether reasonable, foreseeable transactions and activities the company might engage in are allowed under the proposed bond terms.Some areas that could be examined in relation to the possible, new covenant structure include:

• Any future, planned acquisitions and investments• Anticipatedfundsflowbetweentheissuerand

affiliatedcompanies• Related party transactions and dividends• Other debts that might be incurred• Change of business strategy

Of course, it is important to align the new bond terms with covenants and other provisions in the existing debt facilities. Anyflexibilitywithcovenantsinabondloanmightnotbesouseful if covenants with existing loans are stricter.

A different way of protecting the bondholders in addition to covenants, is the concept of ring-fencing. Ring-fencing is a way to structure the bond agreement so that a portion of a company’sassetsorprofitsarefinanciallyseparated(withoutnecessarily being operated as a separate entity) to protect assets (orprofits)infavorofthebondholderswhichhavetheseassetsas collateral. In essence, it is an asset protection scheme.

Financial modelling

PwCcanassistcompaniespreparefinancialmodelswhich are important when raising debt and later when the CFO needs to monitor how the debt structure/financingdevelopsovertime,andinorderto make sure the company is in compliance with financialcovenants..


5. Steps of the bond issue processRaising bond capital involves several steps. For a company that has issued bonds in the past some of the steps will be reduced or not relevant. Below a presentation of the basic steps is set out.

Figure 6: The process can take 4 - 5 weeks – or substantially less if the issuers has listed bonds in the past (These steps may also come in a different order).

Mandate given

Documentation drafted

Pre-sounding Launch date Road Show Closing Settlement Prospectus Listing

The company’s business model is assessed by the bank (see section 3). Engagement letter signed between issuer and investment bank.

Pre-sounding among a few investors. Main terms finalised. Presentations prepared.

CFO/management and investment bank on road show to investors, giving presentations and term sheet distributed.

Distribution of bonds. Investment bank handles payments from investors. Funds transferred to bond issuer when NT has issued “release letter”.

Bond possibly listed on Oslo Børs or on Nordic ABM.

Term sheet drafted.Trustee starts preparing bond loan documentation (based on NT standard).

Deal is announced, book is opened.

Book is closed. Final pricing determined and announced. All documents are signed.

If listing on Oslo Børs: Prospectus prepared and approved by FT.

(if listing is required)

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A. Investment bank and mandate

C. Launch of bond issue and road show

B. Term sheet and offer documentation, pre-sounding

When the company has decided to pursue a bond issue, the process usually starts with contacting one or more investment banks.

The investment bank will consider the business model of the company,especiallythebalancesheetandthecashflowthatwill be used to service the bond loan. See section 3 for further details.

The bank will also help prepare presentations needed when the company meets the potential investors. The investment bank will as well let its credit analysts (after having been made an insider – if relevant) prepare a credit rating21, which will give investors guidance in relation to the pricing. Shadow rating will often be prepared.

An engagement letter will then be signed, giving the investment bank a mandate for following up the bond issue.

Given a positive pre-sounding and an approved terms sheet, the company (if it is listed on Oslo Børs or Nordic ABM) launches its offer with a public announcement22 .

The management of the company and the investment banks will embark on a road show, where the company and the investment bank meet potential investors and present the offer and a price range, to test the interest of the bond issue. One crucial part of the road show is also to familiarize the investors with the company and its industry.

The bond investors – if interested - will subscribe to the bond issue based on the offer documentation, but the subscribed amounts will depend on the price range of the issue.

Alternatively – launching and closing the same dayMany bond issues for companies listed on Oslo Børs are launched in the morning and closed later in the afternoon. The investment bank is able to do this as it has used the pre-soundingphasetogetsufficientpre-acceptancesfrompotential bondholders, so the transaction can be closed within the span of hours.

This approach is, however, mainly available only for listed companies, where much information about the issuer is already available in the markets and the company often is a repeat issuer. It is not without reason that bond issues done by listed companies are usually successful, as the investment bankswillfirstlaunchthedealwhentheyarecomfortablethat the bond issue will go through.

The next step is that a term sheet is prepared by the investment bank, usually based on the standard set out by NT and terms based on discussions (and to some degree negotiations) with the company.

The investment bank has an established network with investors that might subscribe in bond offerings (the bank has “placing power”), including large institutional investors like insurance companies or investment funds. The bank often will seek initial feedback from a small number of these investors, representative oftheissuer’stargetedinvestorbase(pre-sounding).Thiswillhelp the investment bank assessing the depth of demand and formulating appropriate initial price guidance, and so help guide the terms of the transaction ahead of a public announcement. (The potential investors who are pre-sounded may be made “insiders” if the company is already a listed company and the new financingisconsidered“insideinformation”).

Often the pre-sounding has not been fully favorable, and the company and the investment bank need to go back and re-adjust the terms of the issue.

Whenatthispointthetermsheethasbeenfinalized,itwouldbedifficultlaterinthebondprocesstogobackandadjusttheterms.However,thepriceisstillnotfixed.Atthisstageapricerangewillbe given, and the demand from the bond investors - when the issue is launched - will eventually decide the price upon closing.

21. A so-called shadow rating, see section 222. See http://www.newsweb.no/newsweb/search.do?messageId=345844 for an example of a notice setting out a “new contemplated bond issue”, and the notice the following day “Successful placement of new Senior unsecured bond” http://www.newsweb.no/newsweb/search.do?messageId=345995


D. Closing and settlement

E. Possible listing on Oslo Børs or Nordic ABM

When enough investors have subscribed to the bond issue, it will be clear from the high (or low) demand what price (coupon) is associated with the bond issue. The investment bankwilladviseonthespecificpricingofthebond,andtheboard of the company will usually approve it23 .

Next, a public announcement will be made of the bond issue and the pricing24 .

TheformalbondloanagreementisthenfinalizedbyNT,onthe basis of the standard Nordic Trustee agreement. NT will also prepare any documentation regarding collateral and security provided in the bond issue, if relevant.

After distribution the bond issuers pay their funds to the investment bank (on an escrow account), which keeps the funds in escrow until all conditions are met. When all the paperwork is deemed satisfactory by NT, NT issues a release letter to the paying agent (the bank) whereby the funds are released to the company.

Note that transactions can be structured so that funds are raisedbeforethetransaction(whichistobefinancedbythebonds) is carried out by the company. An example can be bondsraisedtofinanceapurchaseofvessels.Whenthetransaction is closed the funds are released from escrow and used as settlement by the bond issuer in the transaction.

While there are no requirements that bonds have to be listed on a market place per se, many bondholders still set this as a condition for investing. This eventuality should be contemplated early on in the process.

In contrast to listing of shares – where the investors would like to trade their shares immediately after the capital issue – bond investorsusuallyacceptthatlistingistotakeplacefirstafterweeks or even months. The deadline for listing of the bonds willbespecifiedinthebondagreement.

The section below goes in detail about the advantages and drawbacks of listing the bonds, and the listing requirements.

23. For listing on Oslo Børs/Nordic ABM a board resolution is a listing requirement. Forconvertiblebondsashareholder’smeetinghastobeheldtoapproveanyissue– this is because the convertible loan has the potential of diluting the shareholders.24. See previous note for example of announcement.

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A. Listing requirements Oslo Børs – the main board

6. Listing of the bonds in Oslo

The two major hurdles: Listing prospectus and IFRS The way offerings are usually structured in the Nordic bond market, no offer prospectus25 will be triggered by the launch of the offering. While Oslo Børs strictly speaking not has IFRS as a listing requirement per se, it is indirectly required as the prospectusrulesrequiresfinancialstatementstobeinaccordancewith IFRS (or IFRS equivalent GAAPS).

However, if the bond loan is to be listed on Oslo Børs a listing prospectus has nonetheless to be prepared by the company/advisors and approved by the NFSA. The audited, consolidated financialstatementstobeincludedintheprospectushavetobeprepared under IFRS26, for two years (or less if the company has been in existence for less than two years), alternatively one year for small and medium sized companies27. Note that the parent company’sfinancialstatementdoesnotneedtobeinlinewithIFRS,giventhatconsolidatedfiguresarereportedinIFRS.Iftheissuer has been incorporated after the last yearend, audited interimfinancialfigureshavetobepreparedandenclosedtothe prospectus.

It should be noted that preparing a listing prospectus for bonds is usually a lot easier than preparing a prospectus for listing/offer of shares. While a prospectus for shares might involve up to a couple of months of work, a listing prospectus for bonds will just take a fewweeks(giventhatfinancialaccountsareinlinewithIFRSandnoadditionalfinancialstatementshavetobeprepared/audited).

It is advisable to agree with NFSA early on in the process the extent of financial statements to be included in the prospectus, if the transaction is complex, involves foreign issuers, guarantors and/or several levels of companies/bond issuers and more. Such pre-clearance can avoid surprises coming up late in the process.

Requirement for an audit committee – only on Oslo Børs In general bond issuers seeking a listing of bonds on Oslo Børs must establish an audit committee or equivalent corporate body28. This is also a requirement for foreign bond issuers, unless it is registered in another EEA country and already has established an audit committee or equivalent corporate body in line with the requirements in the country where the borrower is registered.It should be noted that if the borrower is a Norwegian public

Costs of a bond issue

The investment bank will usually get a fee of 1-5 % of the bond proceeds (usually a success fee).

If the bond loan is listed on Oslo Børs costs for a listing prospectus would be incurred, plus listing fees on Oslo Børs. (Listing on Oslo ABM would not incur any listing prospectus).

Such a process would also incur some additional costs from legal advisors and the company auditors, but far lower than an international type bond offering.

limited liability company (Norway: ASA), it must establish an audit committee with the duties and composition mentioned in the Public Limited Liability Companies Act, Sections 6-41 to and including 6-43 regardless of whether it lists bonds or not.

Atleastonememberistobeindependentandproficientinaccounting or auditing. For a bond issuer that is only a Norwegian private company (Norway: AS) the independent member does not need to be part of the company board, but can be only a member of the audit committee.

An audit committee is not required for a Norwegian public limited company if two of the three following criteria are met: An average of less than 250 employees last year, total assets of less than 300 millionNOKbyendofthefinancialyearandanetturn-overofless than 350 million NOK29.

Furthermore, an audit committee is not required if the bye-laws state that the entire board is the audit committee, given that management is not represented on the Board and at least one memberisindependentandproficientinaccountingorauditing.

If the company believes that an exemption from having an audit committee applies, this should be discussed with Oslo Børs or PwC. An audit committee is not a requirement for listing on Nordic ABM.

25. Prospectus requirements and exemptions are set out in an attachment 2 to this publication.26. Other accounting languages (GAAPs) are acceptable, like US GAAP. Contact PwC or Oslo Børs for a list of generally accepted accounting principles equivalent with IFRS. SME companies which issue bonds of face value of 100,000 euro or more, can in some circumstances apply Norwegian GRS in the listing prospectus, and report in line with IFRS later when reporting to Oslo Børs commences.27.Thislistingrequirementisequivalentwiththeprospectusrulesforfinancialstatements to be included in the listing prospectus28. See section 2.5 in the Bond Rules. 29.Figuresbasedonconsolidatedfiguresifthebondissuerisagroup.


Foreign companies For foreign companies there are some extra, minor technicalities that have to be addressed, but no additional major listing requirements30. In other words, the same listing requirements that are set out above for Norwegian companies apply as well in general for foreign companies. However, it should be noted that for companies incorporated in countries outside the EEA area the auditors must be registered with the NFSA register31 of so-called third country auditors before listing.

Thefinancialstatements,listingprospectusandallcommunication with advisors, NT, Oslo Børs and NFSA can be in English. However, Norwegian issuers with bonds with face value less than EUR 100,000 must apply for an exemption from the requirement to report in Norwegian, in order to report in English.

Reports on corporate governance and social responsibility: Not required for listingReports on corporate governance and social responsibility are a reporting requirement (see chapter 6) subsequent to listing, but such reports are not a listing requirement. In other word, these reports do not need to be prepared nor included as part of the listing prospectus. Such reports will only be required when the companyfilesthefirstannualreportafterlisting.

Application for listingWhen the prospectus has been approved by the NFSA, the preparation of application for listing of the bonds to Oslo Børs is a straight-forward process, as the more technical listing criteria are easily dealt with32. The listing application can usually be approved by Oslo Børs within days.

B. Listing requirements Nordic ABM - the alternative bond market

C. What is not required for listing on Oslo Børs nor Nordic ABM

D. Specific requirements for bond issuers that have or seek a secondary (dual) listing

What is set out above for listing on Oslo Børs, applies as well for Nordic and foreign bond issuers applying for listing on Nordic ABM, with the differences that:

• there is no requirement for a listing prospectus (and hence no involvement from the NFSA)

• theauditedfinancialstatementsdonotneedtobeinlinewith IFRS

Instead of a listing prospectus the company will need to prepare a listing document that will be reviewed by Nordic ABM before it is made public, preparing sch a document is quite straight-forward.

Below is a list of various items not required for listing on Oslo Børs nor Nordic ABM.

- Not a requirement to be a public limited company There is no requirement that the company needs to be a public limited company (Norway: ASA) when listing bonds.

- Gender requirement in the board of directors not required for foreign companiesThe gender requirement of 40 per cent is only relevant if the company is a Nordic public limited company (Norway: ASA).

- Due diligence is not required Due diligence is not a requirement for listing of bonds on Oslo Børs (in contrast to listing of shares).

- Public rating not a requirementA rating of the bond issuer is not required for listing on Oslo Børs. The investment bank will, however, still do a shadow rating.

- No limited review of interim financial statementsWhileyearendfinancialstatementshavetobeaudited,thereisnorequirementthatquarterlyorhalf-yearfinancialstatements have to be audited, neither as part of any listing prospectus nor as part of ongoing reporting after listing. The only exception is if the bond issuer has been incorporatedafteryearend,ifsotheinterimfinancialstatement usually has to be audited.

Specificlistingandcontinuingrequirementsapplyforforeign and Nordic bond issuers that have a secondary listing of the bonds or are applying for a secondary listing for the bonds. These more technical requirements are not covered here, please refer to section 4 in Oslo Børs/ABM rules.

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E. Guarantees – specific issues for listed bond issuers

F. Convertible bonds – specific issues for listed bond issuersGuarantees provided to the bond issuer can pose a problem for

the listing of the bonds. This is because guarantors are required to provide the same information as the bond issuer in the prospectus and after listing, and some guarantors might not be able to provide such reporting. The reason for these requirements is that the bondholders need to see how the guarantorsaredoingfinanciallyandwhethertheyareabletostand by the guarantee(s) if the bond issuer should fail.

It should be noted that Oslo Børs can require the guarantor, priortotheborrower’sbondsbeingadmittedtolisting,toenterinto a statement of acceptance that regulates in detail the guarantor’sresponsibilitiesanddutiesinrespectofOsloBørs.This also applies if the loan acquires a new guarantor during the term of the loan and the new guarantor has not previously given such a statement. This means that the guarantor will be bound by the same rules as the borrower.

While all guarantors33havetoenclosetheirfinancialstatementsto the prospectus, so-called up-stream guarantors will usually notberequiredtoreporttheirfinancialstatementsonanongoingbasisafterlisting.Thereasonisthattheseguarantor’sfinancialstandingwillbereflectedintheoverallconsolidatedfinancialstatementsofthegroup.

Thefinancialstatementsforguarantorsdonotneedtobeinaccordance with IFRS, but they must be prepared in a form consistent with what will be used after listing. (I.e. if the guarantorhaspreparedfinancialstatementsinlinewithN-GAAPforthelastfinancialyear,andwillprepareNGAAPafterlisting,itwillbesufficientwithN-GAAPfortheguarantor’sfinancialstatementsintheprospectus).ItshouldalsobenotedthattheNFSArequirestheguarantor’sfinancialstatementsforthelastfinancialyeartobeaudited.

As guarantees introduce substantial uncertainty of what will be required of financial reports to the bond prospectus, it should be agreed with NFSA as early as possible what specific financial statements that will be included to the prospectus, and with Oslo Børs what the Exchange will require of financial reporting from the guarantors after listing of the bonds.

The rationale for convertible bondsConvertible bonds are bonds that can be converted into a predetermined amount (as set out in the initial bond loan agreement) of shares at certain times during its life, usually at the discretion of the bondholder. So in contrast to an ordinary bond a convertible bond has embedded a stock option.

Forconvertiblestherearesomespecificfactorsthebondissuer should consider, these are set out below.

Listing of convertible bonds – not always possibleConvertible bonds can usually only be listed on Oslo Børs or Nordic ABM if shares of the same class are either already listed on Oslo Børs/Nordic ABM (or have applied for/listed on another recognised and regulated market)34.

Oslo Børs might grant exemptions from this requirement.

Investment mandatesThe investment mandates of some funds might only cover bonds, and any shares that might result from conversion of bonds will be a complicating factor.

Registration of convertible bondsFor Norwegian companies the convertible bond loan have to be registered in the Registry of Business Enterprises (Foretaksregisteret)35.

Approving convertible bonds - shareholders meetingWhileboardapprovalissufficientforabondissue,ashareholder’smeetinghastobeheldtoapproveanyissueofconvertible bonds for Norwegian companies36.

Notification requirement for primary insiders and disclosure of acquisitions of convertible bondsThere is in general no requirement for the primary insiders to report trades of ordinary bonds to Oslo Børs. However, for convertible bonds the primary insiders have to report the trades (just like if the bonds had been shares)37, if the shares of the bond issuer are listed on Oslo Børs or Oslo Axess.

30.However,forbondissuersthathaveorseekasecondarylistingspecificrequirements and continuing obligations apply.31.Broadlyspeakingauditfirmsauditingissuersfromnon-EEAcountries.32. For the full set of listing requirements see Bond Rules and ABM Rules: http://www.oslobors.no/ob_eng/Oslo-Boers/Regulations/The-Issuer-Rules. Bond issuers should contact Oslo Børs or PwC for any questions regarding listing criteria.33. Typically subsidiaries guaranteeing for the bond issuer34.Seesection2.3.4toOsloBørs’BondRulesandtheABMRules35. See section 11 in the Norwegian Public Limited Companies Act. 36. Section 11 in in the Norwegian Public Limited Companies Act.


Furthermore, any acquisition of convertible bonds that passes certainthresholdshastobeimmediatelynotifiedtotheissuerand Oslo Børs (equivalent to similar disclosure requirements forshares–Norway:flagging)bythebuyer/seller.

Conversion of bond loan to shares – no prospectusAny conversion of a bond loan to shares will normally not trigger a requirement for a prospectus38, given that the shares originating from the conversion are of the same class as the shares already admitted to trading on the same regulated market place.

Accounting treatmentAs the convertible bonds are so-called “Embedded derivatives”, accounting rules (IAS 32 and IFRS 9) require the company to decompose the bond instrument into debt and equity,whichmakestheaccountingtreatmentmoredifficultand can have consequences for leverage ratios. This falls beyond the scope of this publication.

TaxConvertiblebondswillposesomespecifictaxissues,whichisbeyond the scope of this publication.

37.Seesection4-2,secondsubsectionintheNorwegianSecurities Trading Act.38. See EU prospectus directive 4.2 g

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A. Complying with the bond loan agreement and NT

7. Post-issuance: Issuer’s ongoing obligations

After the bond funds have been raised, the bond issuer is under a contractual obligation to follow up on the bond loan agreement. NT will monitor that the company reports its financialreportsinlinewithwhatissetoutinthebondloanagreement, furthermore that the loan is serviced and covenants complied with. NT will – based on its role as Trustee - be in a position to take required legal action if this is deemed necessary to protect the interests of the bondholders.

If the bonds are unlisted, the bond agreement will nonetheless requirethecompanytoreportinformation(financialstatements etc) to the bondholders, via NT.

B. Continuing obligations for listed issuersIf the bond loan is listed on Oslo Børs or Nordic ABM, the companywouldalsoneedtocomplywiththeExchange’sso-called “continuing obligations” for bond issuers. These requirements are quite similar whether the company is listed on OsloBørsorOsloAxess.Whenthebondsfirstarelistedandthereportingroutinessetup,mostcompaniesfinditrathereasytofollow the reporting requirements from Oslo Børs.

If the company is already listed with its shares, the company would be following the “continuing obligations” for equities, and the additional reporting requirements for bonds are uncomplicated to deal with.

Below a brief summary of the main requirements is set out. For thefullsetofreportingrequirementsseeOsloBørs’website39.

Publication

Financial reporting, inside information and other relevant information have to be distributed through Newsweb. In addition, such information has to be made public, usually through News Point or through a third party information provider. (Newsweb and Newspoint are systems managed by Oslo Børs).

After such distribution the information also has to be madeavailableonthecompany’sownwebsite.

39. The full set of reporting requirements can be found here (see Bond Rules and ABM Rules): http://www.oslobors.no/ob_eng/Oslo-Boers/Regulations/The-Issuer-Rules


C. Financial reporting for listed issuers

Financial reporting requirementsBondissuershavetoreportperiodicfinancialinformationtoits investors, through stock exchange notices on Oslo Børs. It might be advisable to agree with Oslo Børs – prior to listing - whatisrequiredintermsoffinancialreporting.Especiallyifguarantors are involved; these might have to report their own financialstatementsinlinewiththebondissuers’reporting(see more about “Guarantees” in section 6, subsection Guarantees–specificissues).AllreportingcanbeinEnglish.

Thedeadlinesforthefinancialreportingrequirementsarethesame for companies listed on Oslo Børs or Nordic ABM40. The bond issuer is required to report annual and half-year financialstatements.Interimreporting(forquarters1,3and4) is not required; however the bond loan agreement will often specify additional reporting. Currently the trend appears to be that bond investors require the company to report quarterly.

Thehalf-yearlyfinancialreportshallbemadepublicassoonas possible after board approval after the end of the relevant period, but at the latest two months thereafter.If the issuer prepares an interim report for a period shorter than six months, this report shall be made public no later than the time at which the report is made publicly available in another manner.

Theannualfinancialreportshallbemadepublicimmediatelyit has been approved by the board of directors or equivalent corporate body, and at the latest four months after the end of thefinancialyear.(OsloBørsmaygrantanexemptionfromthe requirement of release immediately after board approval, while there are no exemptions from the four months deadline, nor the two months deadline for half-year reporting for bondholders listed on Oslo Børs.).

Allfinancialreportshavetobekeptavailabletothepublicforatleastfiveyears.

Bond issuers listed on Oslo Børs with home state in another EUcountrywill,however,needtoreportfinancialreportsinline with their domestic rules for listed companies. (In EU lingo; these companies will have Norway only as host-state, and their home-state in another EU country means that the home-state regulations will take precedence over Norwegian rules).

The above reporting requirements will be for consolidated figures.Annualreportingofparentcompanystatementsisrequired as well for companies with Norway as home-state (ie for Norwegian companies and third country issuers).

IFRS required for bond issuers on Oslo Børs ForbondissuerslistedonOsloBørstheconsolidatedfinancialstatements will have to be in accordance with IFRS. The parentcompany’sfinancialstatement(intheannualfinancialreporting) does not need to be in line with IFRS, given that consolidatedfiguresarereportedinIFRS(orinIFRSequivalent GAAPs41).

Accounting language for issuers listed on Nordic ABMCompanies with bonds listed on Nordic ABM do not need to follow IFRS, neither for consolidated nor for the parent company statement.

GuarantorsGuarantors of the bond issue usually have to report their financialstatementsjustasthebondissuers,astheinvestorsneedtoknowhowtheguarantorsaredoingfinancially.However, so-called up-stream guarantors – typically subsidiaries guaranteeing for the bond issuer – will normally notberequiredtoreporttheirfinancialstatementsastheseare consolidated with the parent company. See section 6 for Guarantees.

40. Section 3.4 in the Bond and ABM Rules. 41. Other accounting languages (GAAPs) are acceptable, like US GAAP. Contact PwC or Oslo Børs for a list of generally accepted accounting principles equivalent with IFRS.

D. Reports on corporate governance and social responsibility Report on corporate governance Norwegian and foreign bond issuers with bonds listed42 on Oslo Børs will annually need to prepare a report on its principles and practice in respect of corporate governance43, either in its annual report or a document referred to in the annual report. As a minimum, the report has to cover the following:

1. Adescriptionofthemainelementsoftheborrower’ssystems for internal control and risk management in respectofthefinancialreportingprocessand,iftheborrowerisrequiredtoproducefinancialaccountsandproduces consolidated accounts, the equivalent description ofthegroup’ssystemsinthisrespect,

2. The provisions in the articles of association that regulate the appointment and replacement of members of the board of directors,

3. Any provisions in the articles of association and any resolve that the borrower shall buy back or issue own shares or equitycertificates.

Third country44 issuers with Norway as home-state can apply for exemption from these requirements, if it prepares a report equivalent to Norwegian requirements in its home-state45.

A report on corporate governance is not required for bond issuers listed on Nordic ABM.

Report on social responsibility For Norwegian or foreign companies with bonds listed on Oslo Børs46 areportonthecompany’ssocialresponsibilityisrequiredaspartoftheannualfinancialreports(oraspartofanyotherpublicly available document).

If the company does not have such a report, this fact has to be disclosed.

A report on social responsibility is not required for companies listed on Nordic ABM.

It should be noted, however, that all Nowegian public companies (Norway: ASA) have to report on social responsibility regardless of whether these have bonds listed or not.

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42. Note that this is a requirement when the bonds have been listed, i.e. it is not a listing requirement per se. 43. See section 3-3b in the Accounting Act and section 3.10 in the Bond Rules.44. Broadly speaking issuers from non-EEA countries. If such a company issues a prospectus in Norway or lists the bonds on Oslo Børs, Norway will become its “home state” in the EU area (given that it has not any prospectus/listing in another EEA country already).

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45. See section 4.3.2.3 in the Bond Rules.46. See sections 3-3c and 1-5 in the Accounting Act.


Inadditiontothefinancialreportingassetoutabove,listedissuers have to follow the other “continuing obligations” as set out by Oslo Børs. These obligations cover a range of requirements, below are the most important of these set out. The rules of disclosing inside information apply to the company from the time of applying for listing on Oslo Børs. ForlistingonABMtherulesapplyfromthefirstdayoflisting.

All companies listed on Oslo Børs or Nordic ABM – (Norwegian as well as foreign47) are required to “without delay and on his own initiative publicly disclose inside information which concerns the issuer directly”. Furthermore, the information should in addition be made availableontheissuer’sinternetsiteafterpublication.

Inside information refers to precise information about the bonds, the issuer of the bonds or other matters that likely may influencethepriceofthebondsorrelatedfinancialinstruments appreciably and which is not publicly available or commonly known in the market. For bonds such information will typically be new debt issues, loan redemption, refinancing,complianceissuesandsoforth.Whethertheevent is considered “inside information” has to be assessed on a case-by-case basis.

The requirement to disclose inside information applies to issuerswhosefinancialinstrumentsarelisted,orforwhichadmission to listing has been requested, on Oslo Børs or Nordic ABM48.

In some situations the company may delay the public disclosure of inside information such as not to prejudice its legitimate interests, provided that such omission does not mislead the public and provided that the issuer ensures the confidentialityofthatinformation.

Hence, the company can delay the disclosure if the three criteria all are met.

In situations with “delayed disclosure” the company would needtoinformOsloBørs(onaconfidentialbasis)thatthereisinside information, Oslo Børs will then take steps to monitor the trading more closely. Furthermore, the company will need to keep lists with insiders.

It should also be noted that the company must not disclose inside information to any unauthorised individuals. Inside information will have to be handled with due care to avoid leaks and any misuse. Finally, the company must have routines in place to ensure that inside information is kept confidential.

E. Inside information

47.ThisisarequirementregardlessofwhetherthecompanyhasNorwayas“home”or “host state”, in EU parlance. See section 5-2 in the Norwegian Securities Trading Act. 48. See section 3.2.1 in the Bond and ABM Rules.

Legitimate interests

The main criterion for delayed disclosure is whether the company has “legitimate interests”.

Legitimate interests may typically relate to:

1. Negotiations in course, or related elements, where the outcome or normal pattern of those negotiations would be likely to be affected by public disclosure. In particular,intheeventthatthefinancialviabilityofthe issuer is in grave and imminent danger, although not within the scope of the applicable insolvency law, public disclosure of information may be delayed for a limited period where such a public disclosure would seriously jeopardise the interest of existing and potential shareholders by undermining the conclusionofspecificnegotiationsdesignedtoensurethelong-termfinancialrecoveryoftheissuer.

2. Decisions taken or contracts made which need the approval of another body of the issuer in order to become effective due to the organisation of the issuer, provided that public disclosure of the pending decision or contract together with the simultaneous announcementthatfinalapprovalisstillpendingwould jeopardize the correct assessment of the information by the public.

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F. Primary insiders

G. Investor relations with bondholders

For a bond issuer with bonds listed on Oslo Børs the primary insidersofthecompanyhavespecificobligationssetoutintheNorwegian Securities Trading Act.

In contrast to ordinary insiders (which are deemed as such since the company has occasionally shared inside information with them – see section above), primary insiders are key individuals in the companies that on a regular basis are exposed to inside information.Hence,theseindividualsarespecificallysetoutintheNorwegianSecuritiesTradingAct,andarespecifiedas follows:

Member of the board, senior employee, member of the control committee, auditor, deputy member, observer, board secretary and company secretary to the board.

This also applies to senior employees and board members of a company in the same group who can normally be expected to have access to inside information.

Theprimaryinsidershaveaspecificobligationtocheck49 if there is any inside information, before they subscribe, purchase,sellorexchangefinancialinstrumentsissuedbythecompany. The same goes for entering into, purchase, sale or exchange of option or futures/forward contracts or correspondingrightsconnectedtofinancialinstrumentsissuedby the company.50

Primary insiders are generally not allowed to enter into any transactions (as set out above) if inside information exists51. Furthermore, the primary insiders are not allowed to incite others to do such transactions if there is inside information.

While primary insiders for companies with listed shares are required to report share transactions to the stock exchange, there is no requirement for primary insiders to report trades of ordinary bonds52 to Oslo Børs/the markets. However, if the bonds are convertible bonds and the shares of the company are listed, the primary insider still have an obligation to report the trade, as the bonds can be converted to shares.

There is no obligation for the company to have a list of primary insiders at Oslo Børs (in contrast to a company with shares listed on Oslo Børs).

Bond issuers should consider following up the bondholders with investor relations work - beyond what is required in termsoffinancialreportingassetoutabove.Inrecentyears a growing trend has been to focus more on investor relations work for the bond market. Often this is done to pave the way for future bond issuances, especially for repeat issuers.

Many issuers, especially in volatile times, focus on ensuring investor familiarity with their businesses in order to take advantage of any short and unpredictable issuance windows that might come up. This may include holding investor meetingsthat,unliketransaction-specificmeetings (“dealroadshows”),arenotintendedtomarketaspecifictransaction. Still, such investor meetings may nonetheless provide useful investor feedback that can encourage further bond issues.

Furthermore, there is no requirement to report large acquisitions of bonds that passes certain thresholds (Norway: flagging),unlessthebondsareconvertible,seesection6,Convertible bonds.

What is set out above refers to listing of bonds on Oslo Børs. Also the Nordic ABM rules state that it is not allowed for any person with inside information of the bonds to trade53. Furthermore, if a company has convertible bonds listed on Nordic ABM and shares listed on a regulated market (i.e. Oslo Børs or Oslo Axess), all the requirements as set out above also applies for primary insiders to a bond issuer on Nordic ABM.

49. In Norwegian; undersøkelsesplikt50. See section 3-6 in the Securities Trading Act.51. However, the normal exercise of any option or forward/futures contracts previously entered into upon the expiry of such contracts is exempted from the ban on trading with inside information52. There is no obligation to disclose trades in bonds, unless the bonds are convertible53. See section 3 in the Nordic ABM rules


8. Buy-back of bondsBuy-back of bonds will often be relevant , especially for issuers with listed bonds. The trading on Oslo Børs or Nordic ABM will give an indication of the price of the bonds. If the bonds trade below par it might make sense to repurchase the bonds, either as excess liquidity is available, or to lower future interest costs. A buy-back program can also be relevant in relationtochangesinthecompany’scapitalstructureormarket conditions, or to redeem a bond loan with problematic covenants ahead of a restructuring.

An alternative view is that a buy-back program may be considered a better commercial opportunity than investing in thecompany’sbusiness.

Buy-backs is especially relevant when the general interest levelisrisingandthebondshavefixedinterest,asahigherinterest rate level will lead to commensurately declining bond prices and makes a buy-back an interesting proposition. On theotherhand,theinterestcostonafixed-interestbondwill- with increasing market rates - provide the company with a veryfavorablefinancing.

Equal treatmentAswithallinteractionwiththecompany’sinvestors,anybuy-back transactions have to be based on equal treatment of the investors.

Buy-back programsBuyback of bonds can raise the issue of whether it is manipulation of the bond prices in the market, as the NorwegianSecuritiesTradingActspecificallymakesthisillegal.54 However, buy-back programs carried out in accordance with EU55 rules will not violate the market manipulation rules. The decision to start a buy-back program may also constitute inside information.

Bond issuers contemplating a buy-back are advised to discuss this with Oslo Børs prior to launch of any buy-back program.

Offer of buy-backsIn addition to a program of buy-backs – as outlined above – the company can go for an outright offer of all the bonds. In contrast to a share offering there are no requirements for the bond issuer to give an offer to all of the bondholders. However, where an acquisition of convertible bonds must be considered to be in reality an acquisition of the shares, Oslo Børs may impose a mandatory bid obligation on the party that through the acquisition will get control of more than 1/3 of the votes of a stock exchange listed company. 56

In some circumstances an offer might also trigger a requirement for an offer prospectus.

Bond issuers are advised to discuss any general offer of buy-backs with Oslo Børs prior to any offer being launched.

54. See section 3-8 in the Norwegian Securities Trading Act.55. See EEA Agreement Annex IX No 29 (Commission Regulation (EC) No 2273/2003)onbuy-backprogrammesandstabilisationoffinancialinstruments,withmodificationsasfollowfromAnnexIX,protocolItotheAgreementandtheAgreement in general. It is not clear whether Oslo Børs applies these EU requirements. 56. Section 6-11 to the Securities Trading Regulations.

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Acompanymightfinditselfinasituationwhereitcannotcomply with the terms of the bond agreement. This can be anything from minor, temporary issues to more severe situationswherethecompany-duetoalackofsufficientcashflow-cannotpayinterestsand/orrepaythebondloanassetoutin the bond loan agreement.

With a bank facility the approach would have been straightforward; the management would sit down with the bank and discuss the options. In contrast a bond issuer would needtofirstapproachNTtodiscussthesituation.NTwouldthen deal with the bond holders, as the Trustee represents all thebondholdersandthebondholderregisterisconfidential.

DiscussionswithNTcanbedoneonaconfidentialbasis(withinthe legal frames of inside information and delayed disclosure for listed bonds). The company should involve its legal advisors to make sure that it does not overstep any legal requirements in such a process.

Each case is different. Below three scenarios are set out, reaching from the simple issues to very complex restructurings.

1) Only minor non-compliance from bond issuer: Can be dealt with by NTMinor non-compliance may be dealt with by NT without involving the bondholders, as the bond agreement usually providessufficientpowerofauthoritytoNTonbehalfofthebondholders.

2) Major changes to bond agreement like extension of maturity: 2/3 of bondholders to agreeThecompanymightbeinapositionwherethecashflowisnotsufficienttoservicethedebt,andmoretimeisneeded(longermaturity) than initially agreed in the bond agreement. This will constitute a major breach of the bond loan covenants and is therefore a serious matter. Nonetheless, it should be kept in mind that most likely the bondholders would not want to take over the assets, and/or stand to lose from any liquidation of the company. At least initially it will therefore usually be in the interest of both the company and bondholders to keep the business going. Such substantial changes (like extending the maturity) require 2/3 of the bondholders to approve the amendedbondloaninabondholders’meeting.

9. Bond issuers in distress – some considerations

Example of a stock exchange notice for bondholders’ meeting (3 October 2011)

The Company announces that it has summoned a Bondholders’MeetingregardingtheCompany’sproposaltoextendthematuritydateoftheCompany’sNOK182.5million bond loan by 12 months. In return the bondholders will receive early repayment of parts of the bond loan.

ABondholders’Meetingiscalledfor11October2011 to vote for the proposed changes to the Loan Agreement. The company informs that the proposal is supported by the largest bondholders.

(....)SecuritiesASactsastheCompany’sfinancialadvisor in connection with the proposal.


3) Full debt restructuring required: Interests of shareholders and bondholders are splittingThecasemightbethatthecompany’scashflowwillnotbesufficienttopayinterest/repaythebondloan,neitherintheshort or long term. Basically the company might have taken on too much debt, or has a permanent loss of income.

Asextendingthematuritywillnotbesufficientforthecompany, more serious steps have to be taken. This would usually be a reduction in the debt via a “haircut”57 and/or conversion of bond capital to equity, in addition to other measures like extended maturity of the loan/adjusted covenants etc. All of this in order to give the company enough room to again be able to service the adjusted debt.

A haircut will be a percentage reduction of the nominal value of the bond loan, i.e. the creditors will be repaid less than the initial face value, enabling the issuer to repay the reduced debt. It should be noted that if the company has been in distress for a period, the bonds will likely have been traded at a discount to the face value. (This can be seen as the market having taken a de-facto haircut already). Hence, many new bond investors may now in reality have a lower acquisition cost so that a haircut will be easier to accept. Furthermore, the investment bank that initially placed the bonds and has followed up on the trading, will know the prices and implicitly the acquisition costs for many bondholders. This information is valuable when considering whether a possible solution is acceptable for the bondholders.

By conversion to equity (debt-for-equity) the bondholders will get the opportunity to recoup at least some of their investments via a future upside in the shares. The shareholders will as a consequence become seriously diluted. Often it is also a prerequisite for the bondholders to accept a restructuring that the shareholders contribute with new equity, to recapitalise the company.

Aggravating the situation is that the interests of shareholders and bondholders may now be splitting. Initially the assumption was that the shareholders and bondholders had thesameinterestofkeepingthecompanyafloat(seetheprevious section), but as things get worse the priorities of shareholders and bondholders may change. Furthermore, if there are bonds issued with different securities, also interests of different classes of bondholders will diverge. The reason is that for bonds fully secured with collateral in the issuer, there are no reason for the bondholders to get anything less than a full return. These bond investors have less or no incentive to keep the company intact unless there is substantial doubt about the market value of the collateral, and they may require the assets to be divested to pay off the debt. While for other bond classes without security - and for shareholders - it will

stillmakesensetokeepthecompanyafloatinthehopeofrecovering a future upside.

All the interests of the various stakeholders have to be factored in. When an outline of solution has been made, the company can pre-sound it to key bondholders and get sufficientpre-acceptance(ideallymorethan2/3)aheadofthebondholders’meeting.Thechallengewiththisapproachis,however, to identify the bondholders, as the list of bondholdersisconfidential.58

The company can get around this situation by contacting the investment bank, which initially raised the bond capital. The bank would have been key both in contacting/placing initial bond offer, and in the subsequent trading of the bonds. This means the bank will have a good overview of the identity of the main bondholders.

The investment bank can therefore play a key role both on advising on the restructuring, and by pre-sounding a possible solutionwithaselectnumberofidentifiedbondholders–oftenonaconfidentialbasis.Thisworkmightbedonewiththe understanding of NT. NT can also pay a more active role if needed.

Bondholders should at some stage consider whether their interests are best served with the involvement of NT only, or if a special legal counsel should be mandated to take care of the bondholders’interestsastheremightbeseveralbondclasses(withdifferentcollateral)andconflictinginterestsinvolved.

58.Thatthelistofbondholdersiskeptconfidentialisinlinewithinternationalpractice, to avoid the company reaching separate agreements with selected bondholders.

Example of outcome of bondholders’ meeting (11 October 2011)

Reference is made to Stock Exchange Announcement dated 3 October. The Company announces that the BondholderstodayvotedagainsttheCompany’sproposaltoextendthematuritydateoftheCompany’sNOK182.5million bond loan by 12 months. In return the Bondholders would have received early repayment of parts of the bond loan. The bond loan matures in May 2012. The Company received 60 per cent support for its proposalversustherequired66.7percent.Basedontheoutcomeoftoday’smeetingtheCompanywillevaluatewhetherthereisbasisforproposingarefineddeal.

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Handling of inside informationIf the bonds are listed (on Oslo Børs or Nordic ABM) and/or the company’ssharesarelisted,thecompanywouldneedtoconsider if the criteria for delayed disclosure is in place when discussions are made with NT, the investment bank and with pre-soundingofkeybondholders(seesection7foradiscussionof inside information). If delayed disclosure is the alternative chosen by the company, Oslo Børs will need to be informed about the process, and a list of insiders to be prepared and maintained. All involved parties (investment bank, NT, key bondholders that are contacted) will have to be made insiders when they are contacted, meaning that the discussions are confidentialandthatisillegaltotradebondsfortheseparties as long as inside information exist.

The bondholder’s meetingNextanoticesummoningabondholder’smeetingwillbeissuedand the inside information released to the market – if it has not beenreleasedalready.Asufficientmajorityofthebondholders(2/3) in the bondholders meeting will need to vote in favor of the restructuring to bind the entire bondholder community. Such a bond meeting will often take place in the opening hours of the trading, so it is advisable that the company contacts Oslo Børs ahead of the meeting as the trading of the bonds might be suspended while the bondholders decide on the restructuring. As would be apparent from the example of stock exchange notice set out separately in this section, the outcome of a bond holder’smeetingcannotbetakenforgranted.

Insomecasesitwillbebeneficiarytosetupabondholdercommittee with key bondholders, negotiating on behalf of all bondholderswiththecompanytofindasolution.Thismightalso involve the bondholders own legal counsel.

It should be noted that the Norwegian legal framework requires that all investors holding the same class of bonds have to be treated equally, both during the normal course of operations by thecompany,butalsoinsituationsoffinancialdistress.59

Shareholders might have to approve the restructuringFinally, a restructuring which involves shareholders rights beyond only affecting bondholders rights, will need a shareholder’sapprovalonashareholder’sextraordinarygeneralmeeting. Shareholders have to approve the restructuring with usuallyaqualifiedmajority,whichisthatatleasttwothirdsofboth the votes cast and of the share capital represented at the general meeting have to approve the changes (which often are reduction of share capital, change of bye-laws etc). Hence, also theshareholder’sinterestshavetobefactoredinduringthereorganizationprocessiftheshareholderswillhavethefinalword on the restructuring.

From investment grade to high yield

Distressed securities trade at substantial discounts to their face value and are therefore considered to be below investment grade. Bonds that previously were investment grade can be traded as high yield bonds, which is a de-facto downgrading by the market. Such bonds are internationally often referred to as “fallen angels”.

Example of stock exchange notice for shareholders’ approval

Reference is made to previous announcements concerning the proposal for restructuring of the Company.

Further to the summons letters of 12 February 2014, bondholders’meetings(…)havetodaybeenheldtoconsider the restructuring proposal. The Company is pleasedtoreportthatthebondholders’meetingsfor allthreebondloansresolvedtoapprovetheCompany’sproposalwithsufficientqualifiedmajorities.

“The Company has been in urgent need of a solution, and the Board is very pleased to have been able to obtain consensus among the bondholders for the proposal. We now hope that the shareholders also unite behind the solution,” says the Chairman of the Company.As per previous announcements, the proposed restructuring remains dependent on approval by a qualifiedmajorityofshareholders.Theshareholders will consider the proposal in an extraordinary general meetingtobeheldtomorrow,(….)at12:00CET.

59. The equal treatment of investors is set out in the Norwegian Security Trading Act section 5-14 and Oslo Børs own rules, ref point 3.1.1 (in the Bond and the ABM rules)60. Source: Attorney at Law, Cand. Jur. (Norway) Camilla Merrick, Taft Stettinius & Hollister LLP

Chapter 11 reorganizationNorwegian companies with assets or operations in the U.S. may consider reorganizing under U.S. Chapter 11 bankruptcy laws as opposed to Norwegian insolvency laws since U.S. bankruptcy laws tend to be more debtor-friendly. For example, Chapter 11 preventscreditorsfromsuingorseizingdebtor’sassets(whichfacilitates continued operations during the reorganization), and it also allows the court to impose and enforce a restructuring plan despite dissenting creditors. One Norwegian company thatchosetofileforbankruptcyandreorganizeunderChapter11 was PGS ASA in 2003. However, a Chapter 11 reorganization is highly complex and Norwegian companies (and Board members) must still comply with the Norwegian Public Limited Liability Companies Act.60


10. ConclusionBondfinancinghasmanyuniquefeaturesandcomplementsthetraditionalbankfinancing.Whilehighyieldbondsoftencomeontopofconventionalbankfinancing,investmentgradebonds can be the main source of company funding.

The CFO will need to constantly assess which type (or combination) of equity, bank and/or bond capital that can

AmortizationsThe paying off of debt with regular installments over a period of time. Typical for bank debt, but not for bond loans (see Bullet loans).

BondsA debt instrument in which an investor loans money to an entity (corporateorpublic)forminimum12monthsatafixedorfloatinginterestrate.

Bond agreement The agreement entered into between the bond issuer (the borrower) and the Trustee. The agreement regulates the bond issuers’rightsandobligationsinrelationswiththeissue,andgrants the Trustee authority to act on behalf of all the Bondholders to the extent provided for in the agreement. When bonds are subscribed / purchased, the bondholder has accepted the bond agreement and is bound by the terms of the agreement.

Bondholders meetingMeetingofbondholders.TheBondholder’sMeetingrepresentsthesupremeauthorityofthebondholders’communityinallmatters regarding the bonds. Resolutions passed by the bondholders at the meeting are binding and prevail for all bonds. For important decisions a majority of at least 2/3 of the votes for such resolutions is required.

Below is a list of terms often used for bond issues in the Nordic capital market set out.

Bullet loans A type of loan where the entire face value of the loan is paid in one lump-sum at the maturity date. Bullet bond are non-callable (see Call option and Amortizations).

Call optionAn option for the bond issue to redeem the bond loan in whole or in parts prior to maturity. The requirements for such redemption are set out in detail in the bond agreement. Bond issues with call options are referred to as “callable”, and are denoted with a C in the loan reference.

Call protection periodThe period of time during which the bond may not be redeemed (called).

Carve-outAspecifiedexceptioninabondcovenant,theuseofwhich(bythebondissuer)mayreducethebondcovenant’svalueforthebondholders.

CollateralSpecificassetsthathavebeenpledgedtosecurethebonds.I.e.these assets can be sold if necessary to pay the bondholders.

Comfort letterAdocumentpreparedbytheauditfirmtotheinvestmentbanksinanoffering,assuringthatthefinancialfiguresintheprospectus or offering memorandum are in line with previously auditedfiguresandthattheauditorsstandbytheirauditopinionsforthefinancialstatementsenclosed.

Attachment 1: Terms and definitions

providethebestoverallfinancingforhiscompany,basedonavailable collateral, covenant package and pricing.

Finally, with the current high volatility of the capital markets, any company with long-term funding requirements should be readytotapintooneortheothertypesoffinancingasopportunities arise, whether it is equity, bank or bond financing.

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Continuing obligationsVarious reporting and other requirements a company with bonds or shares listed on Oslo Børs, Oslo Axess or Nordic ABM has to comply with upon listing on of the shares or bonds.

Convertible bondsBonds that can be converted into a predetermined amount (as set out in the initial bond loan agreement) of shares at certain times during its life, usually at the discretion of the bondholder.

Corporate bondsBondsissuedbycompanies.Cantypicallybeclassifiedintwodifferent categories based on perceived risk, either Investment Grade (IG) bonds with a relatively low risk of default, or High yield (HY) bonds with a relatively higher risk of defaulting on the payments.

Corporate governanceThe set of rules, policies and processes by which a company is directed and controlled. Involves balancing the various interests of the many stakeholders of the company, like investors, management, customers, suppliers, banks and the community.

CouponRate of interest applicable to the bond when it is issued. Can be eitherfixedorfloatinginterestrate.

CovenantsContractualobligationsspecifiedinthebondagreementthatthe bond Issuer agree to undertake as long as the agreement is inplace.Canbedividedintofinancialandnon-financial.Financial covenants can be either maintenance or incurrence covenants.Non-financialcovenantscantypicallybereportingrequirements.

Covered bondAbondwhichgivesinvestorsrecoursetoaspecifiedpooloftheissuer’sassets.(Norwegian;obligasjonermedfortrinnsrett).Only specialized credit institutions can raise loans by issuing covered bonds.

Conversion premiumTheamount(asspecifiedinthebondagreement)bywhichtheprice of the underlying shares has to increase before bond holders can require the bonds be converted into shares.

Cross defaultA covenant in some bond agreements that puts the bond issuer in default if the issuer defaults on another debt agreement. Often a ceiling is set for the default on the other debt agreements, meaning that minor defaults do not trigger cross default.

DefaultThe failure by the bond issuer to pay interest or principal when these have fallen due, or the company is not complying with other key covenants in the bond agreement.

DefeasanceA provision in the bond agreement that explicitly allows the borrowerathisoptiontosetsufficientasidecash(orotherassetslikegovernmentbonds)insuchamountsthatitwillbesufficientfor the payment of principal (discharge) and interest on the outstanding bonds. This provision allows the bond issuer to substitutecashforincome-producingcollateraltofulfillthebondagreement.

EBITDAAcompany’sEarningsBeforeInterest,Taxes,DepreciationandAmortization. EBITDA is an indicator often used when investorsmonitoracompany’sfinancialperformance.

EBITAcompany’sEarningsBeforeInterestandTaxes.EBITisanindicatorofacompany’sprofitability.

Engagement letterFor bond issues: A written agreement between the company and theinvestmentbanktohelpraisebondfinancinginexchangeforcompensation, setting out the scope of the engagement.

EncumbranceIn general a claim another party has against a bond issuers property (like mortgage, pledge, lien).

Fixed interestTheinterestpaidtothebondholders(coupon)isbasedonafixed,predetermined interest rate explicitly stated in the bond agreement. The interest is usually paid with quarterly interest payments.

Floating rate - FRNThe interest paid to the bondholders (coupon) is based on a floatingreferencerateinthecapitalmarket,typically3monthNIBOR + a margin explicitly stated in the bond agreement. The interest is usually paid with quarterly interest payments. Such bond loans are denoted “FRN”.

GuarantorsEntities (typically parent company or subsidiaries) that guarantee to the Bond Trustee (on behalf of the bondholders), the performance by the bond issuer of its obligations under the bond agreements.


GuaranteeFor a true guarantee (Norwegian; selvskyldnergaranti) the claim cannot be enforced until a breach has occurred of the underlying contract, in contrast to an on-demand (Norwegian: Påkravsgaranti). See on-demand guarantee below.

High yieldBonds issued by companies with a relatively higher risk of defaulting on the payments, hence the bonds are considered to have lower credit quality than Investment Grade bonds. Often referred to as.

IndentureIndenture is the term used for the legal contract between the bond issuer and the bondholders in foreign-type bond issues. Indenture is not a term used for Nordic bond agreements/bond issues.Inforeign-typebondissuestheindenturespecifiesalltheimportant features and terms for the bond issue, as maturity date, callable/convertible features, interest calculation and payments,financialcovenantsregulatingtheissueretc.

Investment gradeBonds issued by companies with a relatively low risk of default, with higher credit quality than High Yield bonds.

Incurrence covenantsCovenants in the bond agreement that forbids the bond issuer to dospecific(corporate)actions,likemergers,payingdividendsetc. Incurrence covenants comes into play when the company carriesoutaspecificevent,suchaswhenaborrowerwishestotake out more debt.

IFRSInternational Financial Reporting Standards (IFRS).

Junior bondsA bond loan that is either unsecured or has a lower priority than another debt claim (senior debt) on the same asset or property. Often junior bond debt is unsecured debt, i.e. there is no collateral behind the debt.

Legal venueThe jurisdiction (i.e. courts and legal framework) that according to the bond agreement can exclusively settle any dispute which may arise out of or in connection with the bond issue. For Norwegian bond issues this will most often be the courts of Norway.

LienA security interest for bondholders in one or several assets, in exchangeforsecureddebtfinancing.Thebondholdershavealegal right to sell these assets of a bond issuer who fails to comply with the bond agreement.

Listing requirementsTherequirementsthebondissuerhastofulfillinorderforthecompany to have its bonds listed on Oslo Børs or Nordic ABM.

Maintenance covenantsCovenants set out in the bond agreement, and which require thebondissuertomaintainacertainleveloffinancialperformance(measuredwithkeyfinancialratios)toavoiddefaulting.

ManagersThe advisors to the bond issuer in relation to raising and pricing of the bond loan. Typically this will be investment banks, which have experience with the market and placing power with its clients. Joint lead managers will be the mangers in charge of these advisors, if there are several managers.

MaturityThe period of time for which the bond loan remains outstanding.

MarginThe percentage points to be added (or deducted – if the margin is negative) to the reference rate for a bond loan with floatinginterest.ThereferencerateismostoftenNIBOR.

Negative pledgeA covenant included in a bond agreement to restrict the bond issuer from allocating or allowing further security over its assets. With such covenant the bond issuer cannot pledge any of its assets. This is to ensure that the bondholders will not get less security after the bonds have been issued.

NFSAThe Norwegian Financial Supervisory Authority - Finanstilsynet.

NIBORThe Norwegian Interbank Offered Rate. NIBOR is the collective term for Norwegian money market rates at different maturities,andreflectstheinterestratelevellendersrequirefor unsecured money market lending in NOK.

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Nordic ABMA market place managed by Oslo Børs. Not a regulated market in terms of the MIFID directive, but listing requirements and going obligations are rules set by Oslo Børs (in consultation with market participants) and which the bond issuers have to comply with upon listing. Oslo Børs exercises the same level of trading surveillance as for the regulated market “Oslo Børs”.

Nordic TrusteeThe trustee managing the contractual rights the bondholders have towards the bond issuer. NT represents all the bondholders when the bonds are issued and on an ongoing basis after the bond issue. Formerly known as “Norsk Tillitsmann ASA”.

Norsk TillitsmannNordic Truste, formerly known as Norsk Tillitsmann.

Offer memorandumThe offer documentation prepared in relation to a bond issue by the company and the investment banks, and which technically is notaprospectusasaprospectuswillhavetofulfillcertaincriteria and be reviewed by the NFSA.

On-demand guaranteeFor an on-demand guarantee (Norwegian; påkravsgaranti) the liability of the issuer to pay does not depend on breach of the underlying contract, which is a key distinction from an ordinary Guarantee (Norwegian; selvskyldnergaranti), see Guarantee above.

Open bond issueA bond loan where the bond issuer has issued less than the borrowing limit, and through further tap issues (see Tap Issue) or will reach the borrowing limit.

OptionFor bond agreements: A covenant which gives the owner of the option the right, but not the obligation, to require redemption of the bonds or conversion of bonds into shares. See Call and Put options.

Oslo BørsOsloBørsASAoffersNorway’sonlyregulatedmarketsforsecurities trading. The regulated markets are “Oslo Børs”, the main board for shares and bonds and “Oslo Axess” which is the junior market. In addition Oslo Børs ASA manages the market places Nordic ABM for bonds and market places for other financialinstruments.

Par valueThe face value of each bond.

Paying AgentA bank which accepts payments from the issuer of a security and then distributes the payments to the holders of the security. Is also acting as registrar for the bonds in the Securities Register.

Pari passuRefers to bonds that have equal rights of payment or equal seniority. Is a Latin phrase which literally means “with an equal step” or “on equal footing”. Typically a bond agreement will state that “the Bonds rank pari passu between each other”.

Placing power(Informal). The investment banks have a network of investors that have been involved in previous transactions. Hence, the banks have the power to place a new bond issue with a large number of potential investors, these will in due time be contacted for the bond issue.

Pre-sounding(Informal). The manager (investment bank) of a prospective bond issue will usually seek initial feedback of the terms of the issue from a small number of potential investors, representative oftheissuer’stargetedinvestorbase.

ProspectusThe document that has to be prepared and reviewed by NFSA when bonds are offered to the public (offer prospectus) or listed on a regulated market place (listing prospectus). When such document is not legally considered to be a prospectus, the term offering memorandum (or offering documentation) is used for the bond issue.

Public ratingRatingissuedpubliclybyinternationalbondratingfirms,suchasStandard&Poor’s,Moody’sandFitch,onthecreditqualityofaspecificbondissue.Contraststoshadowrating,whichiswhattypically Nowegian investment banks will prepare for bond issues in the Nordic capital market. Not a requirement for bond issues in the Nordic capital market.

Put optionA right for the bondholders for redemption of the bond loan in whole or in parts prior to maturity. The requirements for such redemption are set out in detail in the bond agreement.


PåkravsgarantiNorwegian term, see On-demand guarantee.

QIBAQualifiedInstitutionalBuyer.QIBsareUSinvestorsallowedto participate in the market for securities under Rule 144A, whichisanexemptionfromtheSEC’sregistrationrequirements for securities.

Release letterLetter from Nordic Trustee that proceeds of the Bond issue from an Escrow Account can be released, given that the Trustee has received various documentation (documentation and resolutions) from the bond issuer and guarantors (if applicable).

RegistrarFinancial instruments have to be registered at VPS, the Norwegian Central Securities Depository. The assignment itself of registering the instruments and transactions will, however, be done by a bank working for both VPS and the bond issuer. The bond issuer will have to enter into an registrar agreement with a bank for this assignment. The bank will also act as a Paying Agent.

Ring-fencingRing-fencingiswhenaportionofacompany’sassets(orprofits)areseparatedfinanciallywithoutnecessarilybeingoperatedasa separate entity. This is done in order to protect assets (or profits)forthebenefitofaclassofbondholders.

Rule 144AAccording to US security regulations the main rule is that any securities offered to US investors have to be registered with the US Security and Exchange Commission. One exemption is if the issue is done in accordance with Rule 144A, then such registration is not required. Main requirement is that the investorsareQIBs,i.e.qualifiedinstitutionalinvestors.

SelvskyldnergarantiNorwegian term, see Guarantee above.

Share pledgeShares used by the bond issuer as security for the payment under the bond agreement.

Shadow ratingRating issued by Norwegian investment banks for bond issues in the Nordic capital market, with no additional costs for the bond issuer. Contrasts to a public rating prepared for international-type bond issues by rating agencies as Fitch, Standard&Poor’s,Moody’s.

Security InterestAre the rights - created by the bond agreement - of the bondholders over certain assets, to secure the performance of the bond issuer. The security interest in a bond issue will be set out in precise detail in the bond agreement.

Securities Register Bond issues have to be registered in a securities register, which is the VPS, the Norwegian Central Securities Depository. A Registrar (see this) will do the actual work of registering the bonds and transactions.

Senior bondsBonds that will have priority over other unsecured or otherwise more “junior” debt owed by the bond issuer. Senior debt is usually secured by collateral and as such carries lower risk and a relatively low interest rate.

Structural subordinationIf a bond loan is issued by a parent company, that bond will be structurally subordinated to a lender who loaned money directly to a subsidiary operating company, which is lower in the group structure. The implications will be that the bondholders will not have access to the assets of the operating subsidiaryuntilafterallofthesubsidiary’screditorshavebeenpaid and any remaining assets have been distributed up to the parent company as an equity holder. (Given that no guarantees have been provided by the subsidiaries to the parent).

Subordinated bondsBonds which rank after other debts (like senior bonds) if the bond issuer falls into liquidation or bankruptcy. Referred to as “subordinate”becausethebondholder’sclaimshavesubordinate status in relationship to the normal debt. As such it carries a relatively higher interest than senior bonds.

Tap issueA procedure that allows bond issuers to sell additional bonds based on the documentation from a past issue. Whether any subsequenttapissuesareallowedwillbespecificallysetoutinthe initial agreement, and the total bond issue will be restricted by the borrowing limit set out in the agreement. Bonds in the tap issue will be issued at their original face value, coupon rate and maturity (i.e. with the same rank as the previous bonds issued in the initial bond issue); but sold at the prevailing market price. Tap issues provides the bond issuer with more flexibilityandcostswithanewissue.

Third country auditorsBroadlyspeakingauditfirmsauditingissuersfromnon-EEAcountries.

Third country issuersBroadly speaking issuers from non-EEA countries.

UnderwriterAn underwriter is usually an investment bank that a company hirestoplaceanewissueoffinancialinstrumentswithinvestors.Internationally the investment bank might have guaranteed – underwritten – the issue, meaning there is a risk that the bank would end up with much of the instruments itself. For the Nordic bond market there is neither any need for nor any tradition to guarantee – underwrite - any bond issue, hence the use of the phrase “underwriter” would be misguided for the Nordic bond market.

VPSVerdipapirsentralen – the Norwegian Central Securities Depository.

VPS Account managerSame as Registrar, see this.

YieldThe return an investor will realize on a bond. While the coupon is the return – expressed in percentage - on the face value of the bond, the yield is calculated based on the interest paid (the coupon) and the current market value of the bond. If the bond trades below the initial issue price, it will be trading at a discount, and the implicit, calculated yield will be higher than the coupon. The yield can be calculated as “current yield” (which is the coupon as a percentage of the current market price of the bond),and“yieldtomaturity”(anestimateofthebondholder’sannualised return if the bond is held to its maturity date).

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Bond issues in the Nordic capital markets are structured to make use of exemptions from prospectus requirements. Hence, it is uncommon that any offer prospectus is triggered when a bond issue is launched. A listing prospectus is, however, required when the bonds later will be listed on Oslo Børs. For listing on Nordic ABM no prospectus is required. The NFSA will review and approve prospectuses. Below are the prospectus requirements and exemptions set out.

Prospectus – offer and listingA prospectus can be triggered in two circumstances60 for bond issuers;

I) Where an offer to subscribe for (or purchase) bonds is addressed to 150 or more persons in the Nordic securities market, and involves an amount of at least EUR 1,000,000 calculated over a 12 month period (an “offer prospectus”), or

II) if the bond is to be listed on a regulated market, i.e. Oslo Børs (a “listing prospectus”). The content of an offer or a listing prospectus is very much the same.

Notethatabuy-backprogramofthecompany’sownbondscan- in some instances - be considered as purchase triggering a requirement for an offer prospectus.

Exemptions from prospectus requirementsThere are several exemptions from making an offer prospectus. The main one is when the securities offered are issued in minimum lots of EUR 100,000 in terms of nominal value or subscription price61. This is the exemption mainly used for bond issues in the Nordic market, which means that the main bulk of corporate bonds traded on Oslo Børs or Nordic ABM have a face value of minimum EUR 100,000. (The trading of bonds is therefore primarily between institutional funds, only a small part of the trading is considered to be “retail”). Alternatively, the offer is made to professional investors62.

Even though no offer prospectus has been required, a listing prospectus will be needed upon listing on Oslo Børs, as Oslo Børs is a regulated market. In Nordic ABM is not considered to be a regulated market place, hence there is no requirement for prospectus for listing on Nordic ABM.

Attachment 2: Prospectus requirements and exemptionsWhat is required in the prospectusThe format and content of an offer and listing prospectus are basically the same. A prospectus is primarily made up of two parts; one which sets out all relevant information about the company and one part with information about the transaction/bond issue. The prospectus can also be split in three different documents, the registration document (the company information), the security note (setting out the transaction) and a summary. (Splitting the prospectus in three parts may be relevant if the company wants to re-use the registration document when raising new bond issues later).

The security note needs to set out the main criteria of the loan, likethesize,maturitydates,floatingorfixedinterest,datesforinterest payments, who is the trustee (most often NT), the margin, any collateral, if there are put or call options and any extraordinary covenants of the bond loan, and any guarantors, if the issue is guaranteed.

Aconfirmationfromthepersonsresponsiblefortheprospectushas to be included; that “the information contained in the prospectus is, to the best of their knowledge, in accordance with the facts and contains no omission likely to affect its import”. The bond agreement will be included with the security note.

Theregistrationdocumentneedstoaddressspecificriskfactorsand relevant information about the issuer. Financial statements havetobeincluded.Usuallyauditedfiguresforthelasttwofinancialyears(orlessiftheissuerhasnotexistedtwoyears)havetobeincluded.Theconsolidatedfinancialstatementswillhave to be in accordance with IFRS, while the parent company financialstatementdoesnotneedtobeinlinewithIFRS.Forsmallormediumsizedcompaniesasdefinedbytherequirements(“SME”inshort)onlyoneyearofIFRSfiguresisrequired.

Some prospectus requirements which are relevant for share issues, are not relevant for bond prospectuses:

- No complex financial historyIn contrast to prospectuses for shares, there is no requirement forso-calledcomplexfinancialhistory.Thismeansthatthe

60.Seesections7-2and7-3respectivelyintheNorwegianSecuritiesTradingAct61.SeetheNorwegianSecuritiesTradingAct,section7-4,firstsubsectionpoint10.62.SeetheNorwegianSecuritiesTradingAct,section7-4,firstsubsectionpoint8.

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PwC Capital Markets, Accounting Advisory Services and PwC Risk

companydoesnotneedtogobackandreworkpreviousyear’sfiguresorprovidefinancialinformationforentitiesotherthantheissuer (given that there are no Guarantors). This can be done on a voluntary basis, however.

- No pro forma figuresFurthermore, there is no requirement for the company to prepare so-calledproformafigureswhenthebondissuerhascarriedoutorplansamajortransactionwhichoftenistobefinancedwiththebondissue.(Aproformafigureset-upisoftenarequirementforshare offerings when large transactions are done). Still, investment banksmightrequireproformafiguresonavoluntarybasisasthiscanmakeiteasiertoraisecapital.Preparingproformafigures–ona voluntary basis – is therefore permissible, if so the pro forma requirementshavetobefollowedandtheauditor’sproformastatement included.

- Prospectus and bond loan agreement made publicWhen the prospectus has been approved by the NFSA and the bonds listed on Oslo Børs, the prospectus and the bond loan agreement will bemadepubliconOsloBørs’website(onthecompany’stickercode).

Different check lists

WhensubmittingthefirstdraftofaprospectustotheNFSA,ithastobeaccompaniedbyspecificchecklist(s) to make sure that all relevant information is included.

Different checklists exist for the registration and security note, depending on whether the bonds have a face value of more or less than 100,000 euro per bond.

If the company is deemed to be a “small or medium sized company”, a checklist with fewer prospectus requirements is to be used.

A checklist for any Guarantor(s) has as well to be submitted, as these have to provide the same amount of information as the bond issuer itself. See section 6, subsectionGuarantors–specificissuesforlistedbondissuers.

See NFSA for prospectus requirements: http://www.finanstilsynet.no/en/Listed-issuers-prospectuses/Prospectuses/Regulations/Laws-and-regulations/

Per Fossan-WaageDirector+47 952 60 [email protected]

Kjersti Aksnes GjesdahlDirector+47 415 58 225 [email protected]

Owen LewisPartner+47 952 60 [email protected]

Contact:

© 2016 PwC. All rights reserved. In this context, “PwC” refers to PricewaterhouseCoopers AS, Advokatfirmaet PricewaterhouseCoopers AS, PricewaterhouseCoopers Accounting AS and PricewaterhouseCoopers Skatterådgivere AS which are member firms of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

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Issuing Corporate Bonds in the Nordic capital market - PwC · 2 Issuing Corporate Bonds in the Nordic capital market PricewaterhouseCoopers AS (“PwC”) is the author of this publication