Matczuk Wieczorek and Partners is pleased to announce that the Ministry of Finance in cooperation with the Government Legislation Centre intends to introduce new law on bonds into the Polish legal system,. After consideration of the draft law by the Council of Ministers and the public consultations as well, preliminary content of the provision has been agreed to. New law on bonds will replace the existing rules of the present act of June 29th 1995 (Journal of Laws of 2001, no. 120, pos. 1300, as amended).
MWW as legal advisor to a significant number of bond issuers and the administrator of liens and mortgages would like to draw your attention to the most important changes resulting from the planned regulation.
What is the reason of a completely new regulation in this regard?
According to the assumptions of the project, the new law aims to liberalize the rules and support market development of long-term non-treasury debt securities. In addition, it promises to increase the confidence and safety of the market, by improving the readability of this legal act and outcome appearing on its ground interpretative doubts.
In the opinion of the legislators, long-term non-treasury debt securities market is one of the less developed segments of the Polish capital market. Unsatisfactory level of growth is characterized by the whole domestic commercial bond market, with particular emphasis on bonds issued by non-financial companies. The expected long-term goal of legislative intervention in adopted project is support of this market. The intention of the legislators is to achieve a situation where the issue of corporate bonds starts to play the role of an additional, complementary in relation to bank loans sources of capital obtain.
New solutions that are in the project include:
1) Introducing an institution of bondholders’ assembly and determine its rules of operation (Articles 46-73 of the project),
An institution of bondholders assembly deserves special attention. Its establishment depends on the will of the issuer, but in the draft law provides for the right of bondholders to demand the convening thereof, if they represent at least one tenth of the total nominal value of the bonds. Assembly will be valid if it is represented at least half of the adjusted total nominal value of the bonds. Depending on the bondholders assembly’s provisions substance, it will be necessary to obtain different majorities at the meeting (¾ votes - qualified change in the terms of issue, unanimity - reducing the nominal value of bonds, the absolute majority of the votes - other provisions).
Introduction of the bondholders assembly institution is intended to exclude the possibility of applying conversion agreements, which are currently used to amend bond issue conditions.
2) Increasing the number of entities capable to issue bonds to legal persons established outside the territory of the Republic of Poland and special purpose companies created exclusively to carry out bond issue (Article 2 of the project),
3) Creation of new types of bonds (Art. 22-23 of the project),
- perpetual bonds
Another issue of note is the introduction of perpetual bonds to the Polish legal system. They have no maturity date, and its resulting benefit is payable only on the rental receivables in the form of interest for an indefinite period. This type of bonds is now widely used in developed financial markets. From the perspective of issuers the possibility of obtaining long-term capital is particularly attractive, while investors’ benefit is rental pension in the form of investment with high interest payments.
During the government's legislative process, it was decided that the structure of these bonds does not have to cause to perpetual burden on the issuer. Bond contract shall terminate in case of the occurrence, which are foreseen in the project assumptions. This will take place in a situation of declaring bankruptcy, liquidation of the issuer or issuer’s delay in the bondholders entitled benefits. In terms of the issue is scheduled other eventualities resulting in maturity of perpetual bonds. There will also be the possibility of introducing a redemption option, which could be executed not earlier than after five years from the date of issue.
- subordinated bonds
Another new type of bonds introduced by the new law are the subordinated bonds, which so far were only used as an instrument for increasing the bank’s ancillary funds. Subordinated bonds are characterized by the ability to satisfy bondholders solely prior to persons entitled from equity instruments. Their construction, which is devoid of any other collaterals, is a measure of the risk of the issuer. Due to the little likelihood of repaying creditors in case of bankruptcy, the market value of subordinated bonds is strongly, but directionally sensitive to any changes in the operational risk related to the business of the issuer.
Receivables due to such bonds shall be subordinate to the other claims against the issuer. Bondholders receivables will be repaid after other creditors, such as lenders.
4) Specification of the terms of the issue (Article 6 of the project),
Moreover, in the current law there is no definition of the terms of the issue. The new law will indirectly change it. The project introduces the following necessary ingredients of the terms of the issue:
- type of bonds,
- the issuer’s name,
- the address of its website,
- indication of the issuer's decision concerning the issue,
- nominal value and the maximum number of bonds proposed to be acquired,
- description of the benefits arising from the bonds,
- information about the established or planned receivables collaterals,
- place and date of the preparation of the terms of the issue and
- signatures of the persons authorized to enter into commitments on behalf of the issuer.
5) Granting the bondholders' assembly a competence to change the terms of the issue after the completion of the issue process in the way of the resolution upon the issuer’s consent (Article 7 of the Project)
Ministry of Finance, which is the body responsible for drafting a new law on bonds, in a new document dated on 11 July 2014, points out that the ability to change the terms of the issue by a resolution of the bondholders meeting should be treated in the first place as a tool for restructuring, used in crisis scenarios, i.e. not only for the benefit of the issuer, but also for the bondholders.
The project includes restrictive requirements for adopting resolutions in the case of bonds admitted to trading on a regulated market or introduced to the alternative trading system. The unanimity requirement for adopting bondholders resolutions shall not be to the minority bondholders detriment - beyond the situation in which the bonds are offered in private issues.
As noted by Filip Suchta, the legal adviser and partner in Law Firm “Matczuk Wieczorek and Partners”, co-head of the Capital Market Practice: “Besides the public offers of bonds purchase, in the role of sole bondholder usually appears a professional investor. In these circumstances, the risk of opposition in adopting resolutions by minority groups of bondholders is considerably reduced. Nevertheless, it cannot be ruled out that in the private issue the bonds will be acquired by more investors. At that time, resolutions of bondholders assembly concerning changes in the terms of the issue, in accordance with art. 65 par. 1 of the draft law, shall be adopted by a ¾ majority of votes, which represent at least half of the adjusted total nominal value of the bonds.”
For whom else is the new Act on Bonds?
As the lawyer Filip Suchta points out: “From the explanatory of the draft law arise the care of its designers to create more opportunities for capital raising through the issuance of bonds for non-financial companies. Non-financial corporations are units whose main activity is the production of goods or the provision of non-financial services. These include in particular state-owned enterprises, companies, cooperatives, branches of foreign companies, natural persons conducting business activity employing more than 9 persons, producer groups, private universities, private health care, research and development units and agencies (except for the state agency) ".
The new law increases certainty and safety of obtaining alternative sources of financing. Extension of the personal scope of the act, by granting the issue ability to foreign entities and special purpose companies, allow issue subordinated and perpetual bonds and implement to the Polish legal system an institution of assembly as a representation of all bondholders of particular series towards issuer, will increase the amount of issuance and the development of this market. It should be mention, that capital rising through the issuance of bonds already gives the issuer much more freedom to develop contractual relationship than the most commonly currently used bank loans.
On 4 August 2014 project of the new law on bonds was delivered to the Council of Ministers and waits for consideration.