In a recently approved corporate admission document on the Prospects MTF, a “Change of Control” clause was included as part of the offering; a first in the local corporate bond market. This is commensurate with a push for features included in corporate admission documents and prospectuses alike to be more in line with bond offerings in the international markets. These features are designed to give more comfort to potential investors and to mitigate some of the risks associated with bond investing.
The change of control clause is, at its core, a put option given to bondholders whereby in the event that certain “Change of Control Events” occur, bondholders have the right to oblige the company to immediately re-pay the bondholders their nominal amount invested; and typically be compensated for doing so by being rewarded a premium (“Change of Control premium”).
The change of control clause is designed to protect investors from the bond issuing company being taken over by a another person or entity during the life-time of the bond, thus changing the overall risk profile that the original bond investors signed up for. Drawing on an example from the local corporate bond market, the acquisition of 6PM plc by IDOX plc marked a change in ownership of the company. In the event that a change of control clause had been inserted into the offering prospectus of the 6PM plc bonds, then the acquiring company would have been obliged to make an offer to all bondholders to re-purchase the existing bonds, an option which some bondholders might have availed from.
Change of Control Events are not standard and can be customised accordingly. Typically change of control events would include either a change of ultimate beneficial ownership via takeover, recapitalisation or a similar transaction; or via the sale of “all or substantially all” of the properties or assets of a company. Unfortunately, unlike the change in ultimate beneficial ownership, the latter condition leaves the door open somewhat to interpretation, and therefore could be challenged legally.
A practice often seen on the international bond markets, is prior to a change of control event being actioned, the bond issuing company would seek consent from bondholders for the action to take place. This is typically the case when major assets are set to be sold by the bond issuing company.
In my opinion the change of control clause is especially important for bond issues which are unsecured and/or are issued by companies which have a lot of their asset base tied up in intellectual property. This clause offers more protection to bondholders. Additionally, the clause can be seen as a take-over defence mechanism, whereby an acquiring company would be obliged to acquire the debt of the company in addition to the cost of purchasing a controlling share of the equity.
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