How to issue bonds?

[philly123]

I searched through the internet to find out anything about issuing bonds by a Ltd company but there was no useful, practical information at all. I'm hoping that I will find some good advice on this forum.

How can a private company limited by shares issue bonds? Can it be done basing only on a written contract between the company and the creditor?

What regulations apply to issuing bonds? Is it just the section of Companies Act on debentures?

Does it have to be done through the bank/investment firm?

Many thanks for any hints on this topic.

 

[Mancepo]

The issuing of bonds is an issue not talked of for private limited companies as it is not a common source of finance.

For a PLC, it is common because these debentures are tradeable, and have a value, especially when they are Convertible loan stock (ie becoming share capital at a predetermined time)

The only two general rules pertaining to issuing debentures are

1. does the memorandum and articles allow these as instruments, or do you need to change them to have them allowed?

2. who are you seeking to take up the issue of debentures (ie even a private limited company if seeking outsiders to subscribe, must produce a prospectus). However if I offered to invest 20k, and you offered me debentures and I was happy with it, then there is no need to issue me witha prospectus, as I am already known to you.

I accept the above is a bit simplistic, but its basically correct.

However, here is the point.........

Debentures usually carry a coupon value (interest %), that is generally payable every 6 months, so if I injected my mythical 20k to your company, I would be seek a rate better than I could get with say Santander.... So for ease of maths, you issue me with 5% debenture stock. ie I get 5% of 20k over the life of the debenture, generally 500 pounds every six months, but for how long a determinate amount of time??????

You could make it a 10 yr debenture, so for next ten years I get £1000 each year, and at year ten I get my 20k back, however, what if interest rates rises, and Santander offers 6%. I'd be stuck with your stock, and as a private company, couldn't offload it, so basicaly am I willing to gamble that your rate is higher than Santander for next 10 yrs. Nope, as duncan Bannatyne would say "I'm Out"

Assuming I am still in and if it were a two year debenture which I have seen on many occasions, why would I invest the money for little above Santanders return, and then after two years, be repaid and told to go away. I'd love to see you get an overdraft at 5%. So if you offered me 10%, I might do it, but you'd get an overdraft cheaper, however as the banks wont lend, you'd be stuck with me.

Complicated? Yes and no.. complication is only caused by greed. For me I'd not want to lend you cheap money and then be repaid. Either my debenture is convertible at some point to share capital, so I'd have a stake in your company, or else I'd ask for preference shares. However for you, debentures are cheaper as they get tax relief unlike paying 5% or 10% dividend on shares.

Again with debentures, I'm more protected in case you go into liquidation than a preference share holder.

Bottom line:::::

1. Check your Memo & Articles
2. Review your forecasts to see if Shares or Debentures are your best course
3. Negotiate with potential investor as to the return they will get & their protection.

 

[philly123]

Thank you for so much help, Mancepo.

Can this debenture exist only as a piece of paper? Is there any way of storing it electronically?

Another question is tax associated with issuing bonds. Will the bonds of my company treated as qualified bonds, so that there is no capital gains tax on them? I've read that this exemption does not apply to zero-coupon bonds.

However, what if the company issued bonds at a discount with a low coupon, say 2%? Then, for an individual investor there would be only 20% or 40% tax payable on interest and no tax on the capital gain?

 

[philly123]

By the way, which section of the Companies Act 2006 regulates record-keeping in an electronic form?
I know there has to be a register of debentures as part of the statutory books, but what if the debenture document gets lost? Can a copy held by the creditor serve as evidence of the existence of debenture? Is it possible to retrieve information on company's debenture from Companies House?

 

[teddys]

Sections 738 et seq of CA 2006 deal with debentures and bonds and s1168 of the ACt deals with communications in electronic form. Further, these regulations (http://www.legislation.gov.uk/uksi/2008/3006/pdfs/uksi_20083006_en.pdf ) deal with company records in either electronic or paper form.

Issue of bonds by a private company is subject to similar rules as are applicable to shares in that you can't go public with the bonds issue unless all the procedures ( right from issue documents etc) are followed. So, if it is a private affair then all elements of a valid contract (offer, acceptance etc) will need to be satisfied.

The tax rules are complicated, but broadly for the investor there should be an income tax charge if a discounted bond (s427 ITTOI 2005) and for the company the bond-holder is loan creditor s.519 (2) CTA 2009.

 

[philly123]

OMG, why is this so complicated and illogical?
Difference between the bond issue price and redemption price is capital gain, so why does income tax apply to it?
On what grounds are corporate bonds exempt from capital gains tax, as many sources claim?

 

[simondclinch]

The principal amount of any loan is issued and then repaid the other way, so there is no tax payable on the principal at either end of the term. In the UK, tax is payable on the interest (i.e. coupon income) but it is deferred until the year the bond matures. The logic is that the chargor has had to invest the princip so that he is not realising any profit on the deal until maturity unless the deal is so long term that eventually interest payments have accrued to more than the principal. But more to the point, the chargor runs the risk of default on the principal (if the chargee goes bust) and might have to hedge that with a credit default swap.