INTRODUCTION
In capital markets law, companies may utilize securities, derivative instruments, and similar capital market instruments to meet their financing needs. Bonds, a type of debt instrument, are securities issued by companies as debtors and sold to investors to obtain medium and long-term funding.
This article will provide general information on bonds and discuss the processes related to the bond issuance by private sector companies.
A. BOND ISSUANCE
Bonds may be issued domestically to be sold through or without public offering, or to be sold abroad. Domestic sales without public offering may be performed in the form of sales to persons defined as “qualified investors” under our capital markets legislation or through private placement, provided that the unit nominal value is minimum TRY 100,000. For the domestic issuance and public offering of bonds, it is necessary to prepare an issuance certificate and/or prospectus, and obtain approval for these documents from the Capital Markets Board (“Board”).
1. Issue Limit
Bonds may be sold in tenors with different conditions up to the issue ceiling approved by the Board, provided to be within the issue limits calculated according to the principles set forth in the Board’s Communiqué on Debt Securities numbered VII-128.8 (“Communiqué”). In bond issuances, it is also possible to fulfil additional sale within the issue ceiling, provided that the total amount offered for sale does not exceed 50% of the total issue ceiling.
Separate issue ceilings are obtained from the Board for domestic and foreign issuances. For domestic issuances, the issue ceiling is determined over Turkish Lira, whereas for cross border issuances, the issue ceiling is determined over either Turkish Lira or foreign currency, and sales may be made in a currency different than the one for which the issue ceiling was granted.
2. Resolution of Authorized Body
The company issuing bonds must pass a resolution by the authorized body as specified in the law and the company’s articles of association, and this resolution must determine the type and terms and conditions of the bonds to be issued. Unless otherwise stipulated in the articles of association, the resolution is made by the general assembly of the company. However, this authority may be delegated to the board of directors for a maximum of 15 months in accordance with Article 505 of the Turkish Commercial Code No. 6102. The Capital Markets Law No. 6362 and the Communiqué also allow the delegation of the issuance authority to the board of directors through the articles of association for all issuers. In practice, the board of directors is generally authorized through the articles of association.
3. Application Documents
For bond issuances, an application must be submitted to the Board at the latest within one year following the date of the resolution of authorized body. The documents that issuers must submit to the Board depending on the type of application are specified in the annexes of the Communiqué. Accordingly, both a prospectus and an issuance certificate must be prepared for sales through a public offering, while only an issuance certificate is required for sales without a public offering.
In public offerings to be made during the period of validity of the prospectus, applications to the Board for approval shall be filed with the necessary documents at least 5 business days before the date on which the sale of each tenor has been planned. In the case of domestic issuance without public offering, issuers may fulfil the sale transaction by filing an application with the Central Registry Agency (“CRA”) before the sale of each tenor within the issue ceiling provided by the Board, after the issue document approved by the Board is granted to issuer, without requirement of any other proceedings within the Board.
4. Registered Issuance and Notification to the CRA
Since bonds are capital market instruments, they are not printed physically but are tracked electronically in a dematerialized form at the CRA. The rights related to the bonds are followed up on the basis of beneficiaries. With respect to debt instruments to be issued abroad, information on the issuance and the ISIN code are conveyed to the CRA following the conduct of the issuance.
B. PRINCIPLES RELATING TO BONDS
1. Maturity and Interest
The maturity of bonds, which provide medium and long-term funding, is set at a minimum of 365 days in the Communiqué. Bonds contain the undertaking of repayment of its nominal value to the investor either on the maturity date or in instalments within the maturity term and may be sold on a discount, with premium, and/or with coupon payments. Discount bonds are issued at a price lower than their nominal value; premium bonds are issued at a price higher than their nominal value. Whereas coupon bonds provide periodic interest payments to the investor during the maturity period.
In determining the start of the maturity period, the first day the bonds are transferred to the investors’ accounts is taken as the basis. Principles regarding interest rate to be paid for bonds and payment conditions are designated by issuers. It is fundamental that components such as interest and maturity remain unchanged, with the exception of legal requirements and actual impossibilities. Nonetheless, changes to conditions in relation to debt securities issued domestically are possible with respect to investors who have provided written consent to such changes. In case where a change to conditions in a domestic public offering is intended, relevant principles are determined by the Board.
2. Buy Back
Bonds issued, may be bought back by issuers, and during the maturity period, may sell, hold or, provided that necessary procedures are performed with CRA before the maturity date, cancel the bonds bought back. With respect to buy backs, and in transactions conducted outside the exchange, exercise prices for repurchase and sale are disclosed at the internet website of the issuer.
3. Principles and Prohibitions for the Issuer
The issuer must ensure that no inequality among investors is created when making changes to the issuance terms, such as maturity and interest, or when bonds are bought back. Additionally, if it is determined that these transactions are conducted in order to avoid performance of requirements arising from capital markets legislation, the Board is authorized to implement certain measures.
4. Dividend Distribution to Bonds
The Communiqué stipulates that issuers may pay dividend to bonds. To provide this, there must be a provision in the issuer’s articles of association or specific legislations. Issuers may pay dividend to bonds in addition to or, if the dividend exceeds the interest, instead of interest; or without stipulating any interest. If the issuer is a publicly-held corporation, the dividend share to be paid to bonds with respect to publicly held corporations may not reduce the dividend amount for shareholders designated in the articles of association or dividend distribution policy of the issuer. Dividend to be paid to bonds are distributed following the issuer’s general assembly approval on annual financial statements prepared under the regulations of the Board on financial statement and reporting by corporations the capital market instruments of which are admitted to trading on the exchange and on the resolution regarding dividend distribution. Dividend to be paid to bonds bearing the same conditions is distributed to all of existing bonds as of the date of distribution, regardless of the issuance and maturity dates thereof.
5. Convertible Bonds (“CB”) and Exchangeable Bonds (“EB”)
CB refers to bonds that grant the right to acquire the issuer’s shares, while EB refers to bonds that grant the right to acquire shares of another company.
CB is defined in the Communiqué as “debt security which grants the right to convert into issuer’s shares either through capital increase of the issuer or by procurement of issuer shares within the principles set down in the prospectus or issue document.” CB owners can convert the bond into shares based on the principal amount and the interest amount to be paid on the conversion date as specified in the prospectus. Interest accrued until the day of conversion is paid to CB owners in cash. CB owners may also choose to receive the principal amount and interest instead of exercising the right to convert the bond into shares. The advantage for the issuer making a long-term investment through CB is that they are not required to make payments against equity until the investment yields results.
EB is defined in the Communiqué as “debt security which grants the right to exchange with the shares of other corporations whose shares are traded on the exchange.” EB owners also have the option to convert their bonds into shares or, instead, receive the principal and accrued interest. Unlike CB, EB holders can only exchange their bonds for shares that are traded on exchange.
CONCLUSION
Bond issuance, whether through public offering or without public offering, both domestically and internationally, allows corporations to meet their medium and long-term financing needs. Managing the issuance process meticulously and in compliance with the relevant legal regulations and the rules set by the Board is crucial for the successful execution of this process. The options provided by bonds regarding maturity, interest, buy back, convertibility, and other features contribute to increasing the demand for bonds in the capital markets. Companies seeking financing to achieve their medium and long-term goals may consider bond issuance as a strategic financial instrument.
