Corporate (ECM+DCM)

Exercise 5

Bond Issuance
(Answer & Tips)

Key Point Checklist

Question 1: Documentation Requirements
□ Listed all core transaction documents:

  • Subscription Agreement

  • Trust Deed

  • Agency Agreement

  • Global Certificate

□ Included all legal opinions
□ Mentioned comfort letter package
□ Listed all HKEX forms and announcements
□ Explained purpose of each document
□ Demonstrated understanding of each party's role in documentation

Question 2: Transaction Parties
□ Covered all key parties:

  • Issuer's counsel role and responsibilities

  • Underwriters' counsel functions

  • Trustee duties

  • Paying agent responsibilities

  • Listing agent role

  • Auditors' involvement

  • Rating agencies (if applicable)
    □ Explained how parties interact
    □ Understood each party's primary obligations

Question 3: Due Diligence Process
□ Covered key components:

  • Company searches

  • DDQ scope

  • Management interviews

  • Document review
    □ Mentioned professional investor focus
    □ Explained verification process
    □ Discussed insider information checks

Question 4: Offering Circular Content
□ Referenced Chapter 37 requirements
□ Covered all key sections:

  • Business description

  • Financial information

  • Risk factors

  • Use of proceeds
    □ Understood professional investor focus
    □ Mentioned disclosure standards
    □ Explained financial statement requirements

Model Answer

Question 1
Core Transaction Documents (almost always governed by Hong Kong law):

1. Subscription Agreement

  • Primary contract between issuer and underwriters

  • Sets out bond pricing, allocation, and settlement mechanics

  • Contains representations, warranties, and indemnities

  • Specifies conditions precedent to closing

  • Details selling restrictions and distribution terms

2. Trust Deed

  • Constitutes the bonds and their terms and conditions

  • Appoints trustee and defines their powers and duties

  • Contains covenants protecting bondholders

  • Specifies events of default and enforcement procedures

  • Details bondholder meeting procedures and voting rights

3. Agency Agreement

  • Appoints and governs roles of various agents

  • Details procedures for payments of interest and principal

  • Sets out transfer and registration procedures

  • Specifies fee arrangements and agent responsibilities

  • Contains indemnification provisions for agents

4. Global Certificate

  • Physical certificate representing entire bond issuance

  • Held by common depositary for clearing systems

  • Contains summary of key bond terms

  • Enables electronic trading through clearing systems

5. Legal Opinions:

• Issuer's Counsel Opinion

  • Confirms issuer's legal capacity to issue bonds

  • Verifies validity and enforceability of documents

  • Addresses regulatory compliance

  • Confirms necessary approvals obtained

• Underwriters' Counsel Opinion

  • Independent verification of legal matters

  • Addresses selling restriction compliance

  • Confirms disclosure adequacy

  • Provides transaction validity comfort

6. Corporate Authorizations:

• Board Resolutions

  • Approve bond issuance and documentation

  • Delegate signing authority

  • Confirm commercial terms

  • Authorize use of company seal (if required)

• Shareholders' Resolutions (if needed)

  • Required for significant transactions

  • May be needed under constitutional documents

  • Approves specific terms or thresholds

7. Comfort Package:

• Auditor's Comfort Letter and Arrangement Letter

  • Confirms accuracy of financial information

  • Provides negative assurance on financial changes

  • Addresses specific financial metrics

  • Usually dated pricing date

  • Includes circle-up (the auditor compares financial data in the prospectus with accounting records or financial statements or proves the arithmetical accuracy of such data)

• Bring-down Comfort Letter

  • Updates comfort to closing date

  • Confirms no material changes

  • Includes circle-up (the auditor compares financial data in the prospectus with accounting records or financial statements or proves the arithmetical accuracy of such data) - usually the same as the one before

  • Final confirmation before settlement

8. Listing Documents:

• Offering Circular

  • Primary disclosure document

  • Contains all material information about issuer

  • Details bond terms and conditions

  • Includes risk factors and financial information

•Formal Notice (See example here)

•Completion Announcement (See example here)

•HKEX Forms

  • Form M103: Initial listing application

  • Form FFD002M: Formal application at closing

  • Form FFD004M: Issuer's compliance declaration

  • Form FF004: Directors'/officers' personal information

9. Other Essential Documents:

• KYC Documentation

  • Required for regulatory compliance

  • Verifies identity of transaction parties

  • Anti-money laundering checks

• Due Diligence Materials

  • Responses to due diligence questionnaires (usually conducted three times - once during the project, another before pricing and the last before closing, the pricing and closing one is to confirm the first comprehensive one remains true, so its usually much shorter)

  • Supporting documentation

  • Meeting records and verification materials

Question 2
Issuer's Counsel serves as the primary legal advisor, responsible for document preparation, legal due diligence, and regulatory compliance. They coordinate with HKEX and draft the offering circular.

Underwriters' Counsel conducts independent due diligence and reviews all documentation to protect the underwriters' interests. They ensure compliance with securities laws and provide legal opinions.

The Trustee acts as the bondholders' representative throughout the bond's lifecycle, managing default scenarios and bondholder meetings. They hold security (if applicable) and enforce bondholder rights.

The Paying Agent manages the operational aspects, including interest payments, principal repayment, and maintaining payment records.

Additional parties include:
• Listing Agent for HKEX listing procedures
• Auditors providing comfort letters and arrangement letter
• Rating Agencies assessing credit quality
• Bond Registrar maintaining ownership records
• Process Agent for legal service

Question 3
Due diligence is less extensive than IPO due diligence because bonds target professional investors who require less regulatory protection. There are usually three due diligence - first during project (the most extensive one), then one at pricing and another at closing to bring down the first due diligence. Due diligence can take form on paper (through email) or over the phone, it depends on which method the issuer prefers. The process includes:

Legal Review:
• Company and litigation searches
• Regulatory compliance verification
• Material contracts examination
• Corporate authorization review

Due Diligence Questionnaire covers:
• Business operations and material changes
• Financial condition
• Insider information
• Regulatory compliance
• Material litigation

Question 4
Business Description section should comprehensively cover the company's business model, revenue streams, market position, and growth strategy. Example of an offering circular can be found here.

Financial Information must include:
• Three years of audited financials
• Recent interim results
• Capital structure analysis
• Working capital adequacy

Risk Factors need to address:
• Market risks including interest rates and economic conditions
• Operating risks including project execution and regulatory compliance
• Financial risks including refinancing and covenant compliance

Use of Proceeds section should detail the intended application of funds and implementation timeline.

The offering circular must comply with HKEX Chapter 37 requirements while being clear and concise for professional investors to evaluate the investment opportunity.

Common Mistakes

Misconceptions:
A very common mistake is treating the due diligence process like an IPO, which is unnecessarily extensive for professional bond offerings. Issuers may not like that they are being “questioned” after being on the market for so long. If you are the underwriters’ counsel, please consult your senior for precedent and delete unnecessary questions to avoid issues.

Another common mistake is to not tailor the DDQ to that specific issuer - junior lawyers are often asked to conduct news search, litigation search etc. to check if anything would need to be added into the DDQ. Pay close attention to these as they can cause big consequence.

Documentation Oversights:
Inexperienced trainees often overlook crucial agreements like the Agency Agreement or misunderstand the purpose of comfort letters. Some fail to grasp the interaction between various transaction documents and their respective roles in the overall structure.

Check with your seniors re purpose of each of the document (or alternatively, come to our case study class! We can explain each of them to you thoroughly if your senior is busy…)

Process Management Issues:
Poor understanding of the distinction between signing and closing requirements can cause delays (and often, frowned upon regarding your professional ability). Junior lawyers sometimes struggle with coordinating multiple parties and managing the flow of conditions precedent.

Effective Transaction Management:
Bond issuance tends to have a much shorter timeline, some even shorten to 48 hours. Establish clear communication channels with all parties early in the process, including your seniors.

Documentation Best Practices:
While using precedents is helpful, understand why specific provisions are included rather than copying blindly. Maintain organized documentation and create clear responsibility matrices. Keep detailed notes of key commercial and legal decisions for future reference.

Market Awareness:
Stay current with HKEX requirements and market practices. Understanding recent comparable transactions helps provide practical advice to clients. Regular monitoring of regulatory changes ensures compliance and helps anticipate potential issues.

Client Relations:
Clear communication with issuers is crucial. Explain technical requirements in practical terms and flag key decisions early. Regular progress updates help manage expectations and maintain client confidence.

Career Development:
Build knowledge through careful observation of senior lawyers' approaches. Develop good organizational habits early, including transaction bible (extremely important!) maintenance. Understanding commercial drivers behind legal requirements helps provide better advice.

Professional Tips