Analysis

Amended Law on Bonds

Legal alert (10/2015)

As of 1 July 2015, major amendments will be introduced to the regulations applicable to bonds.

As of 1 July 2015, major amendments will be introduced to the regulations applicable to bonds. Introduction of the general meeting of bondholders, subordinated and perpetual bonds in addition to extending the list of entities which may issue bonds, are among the provisions set forth in the Law on Bonds of 15 January 2015 (Journal of Laws of 2015, item 238), which will supersede the law of 29 June 1995 (consolidated text of 12 March 2014; Journal of Laws of 2014, item 730, as amended).

The new law is aimed at supporting development of the long-term, non-treasury debt security market. According to the legislator, the bond regulations currently in force are among the major barriers to the said development, mainly due to numerous doubts that have arisen as to their interpretation and, consequently, uncertainty as to whether specific solutions are used correctly, along with a failure to address new issues in the segment of debt securities. Therefore, the new law has been amended in particular with a view to:

  • enabling introduction of effective changes in the obligation-based relationship resulting from bonds;
  • extending the scope of instruments available to the issuer (through introduction of subordinated and perpetual bonds) and
  • resolving the doubts arising from the regulations in force.
Terms of issue

Although the expression “terms of issue” is frequently used in the law that is currently in force, it is not defined therein. Neither does the said law set forth any provisions that would define its scope or facilitate its understanding. The new law defines the terms of issue, including their scope, obligatory elements and modification, in detail. The terms of issue should specify the performances relating to bonds, their fulfilment as well as the related rights and obligations of both the issuer and the bondholders. The terms of issue may be modified both through identical agreements made by the issuer with each bondholder and through a resolution adopted by the general meeting of bondholders. The general meeting of bondholders is a new institution. A decision on its establishment will be taken by the issuer in the terms of issue, which will also set out the terms of its convening and organizing as well as the resolution adoption procedure. It should be emphasized that in such cases as specified in the law, the issuer may unilaterally modify the terms of issue due to their “technical” nature, e.g. affecting the rights and obligations of the bondholders. The aforesaid unilateral change will be possible, in particular, in the event of designation of the entity acting as the lien or mortgage administrator and, for bonds in book-entry form, with respect to identification of the entity authorized to keep the records or deposit of securities, where the said entities are parties to an agreement on bond registration made with the issuer.

New bond types

The list of instruments available to the issuer has been extended to include two new types of bonds, namely perpetual and subordinated ones.

Perpetual bonds have no maturity date and the issuer is obliged to pay interest to the bondholders. Such bonds are not redeemable. The issuer does not take on the obligation to redeem perpetual bonds at any time but instead to pay fixed income to the bondholders for an indefinite period of time. Perpetual bonds may be perceived as an interesting financial instrument both by issuers and investors. The former may obtain long-term, stable funding. The latter may see it as an “investment” offering high interest payments.

On the other hand, what is characteristic of subordinated bonds is subordination of the resulting claims. In the event of the issuer’s bankruptcy or liquidation, any claims arising from such bonds are satisfied after all other claims against the issuer have been paid. The construction of subordinated bonds precludes the possibility of providing any collateral. As the probability of claims satisfaction in the event of the issuer’s bankruptcy is limited, the market value of subordinated bonds is highly (and one-directionally) sensitive to any changes in the issuer’s operational risk.

Revenue bonds

Revenue bonds have been available under the law that is currently in force. However, they do not attract as much interest as they could considering their obvious advantages – a guarantee of the issuer’s solvency and the possibility of off-balance sheet funding (the issuer’s obligations to the eligible bondholders under revenue bonds are not taken into account for purposes of setting debt limits of local government entities). So far, only a few such issues have been arranged. However, this financial instrument demonstrates a considerable growth potential, which may also be unlocked by the new Law on Bonds, which has been designed to eliminate numerous doubts as to the interpretation of provisions applicable to revenue bond issues. Revenue bonds guarantee higher seniority of claims, as a result of which bondholders’ claims are satisfied prior to those filed by the remaining creditors of the issuer – effective from 1 July – using the total or part of revenue or the total or part of the assets of undertakings that have been financed, in whole or in part, using the proceeds of the issue or, in whole or in part, using revenue generated on other undertakings. Furthermore, the new law introduces a standard basis for classification of revenue bonds into (i) revenue bonds with limited liability of the issuer and (ii) revenue bonds with unlimited liability of the issuer. What is important, the said law extends the list of entities which may issue revenue bonds. In line with the regulations currently in force, revenue bonds could not be issued by entities engaging in any business other than satisfaction of the needs of local communities or fulfilment of public utility tasks. Effective from 1 July 2015, the aforesaid activities will have to be the “core” as opposed to the “sole” business of the issuer.

Longer list of issuers

The new law directly confers the right to issue bonds on foreign entities, i.e. legal persons that engage in business activity and are registered outside the territory of Poland as well as special purposes vehicles, i.e. legal persons established solely for purposes of issuing bonds. This eliminates doubts concerning classification of SPV’s activity as business activity and, most importantly, its being considered organized and continuous, as these are characteristics of business activity in accordance with the Act on Freedom of Economic Activity of 2 July 2004 (Journal of Laws of 2013, item 672, as amended).

The Law on Bonds dated 15 January 2015 will enter into force as of 1 July.

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