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12 May 2009
Convertible Bond Cash-Box Structures
Incorporation of a Subsidiary
Issue of Cash-Box Shares and Bonds
Payment of Cash to UK PLC
Uses of Cash-Box Structures
Advantages of Using Jersey Companies
In the current recession and turmoil in the financial markets the demand from investors for equities and the price of equities have fallen, along with the availability of debt financing. At the same time, companies in the United Kingdom are facing needs to recapitalize their balance sheets and raise money from their assets. For those that do have funds available, there are also attractive assets available to buy at good prices. Convertible and exchangeable bonds offer a way of meeting these various requirements.
Structuring a convertible or exchangeable bond issue using a Jersey cash-box structure can make it easier to implement the bond issue and may also offer other benefits.
After a quiet period, UK companies are revisiting the convertible bond sector either as a means of raising capital without being penalized by having to attract investors with high coupons or as a way of monetizing holdings of existing shares or securities through the equity capital markets. From the investor side, some leading fund managers believe that depressed equity prices will turn convertible and exchangeable bonds into an important and attractive asset class that is particularly suited to current conditions.
Where a cash-box structure is used for the bond issue, it can offer the benefit that the bonds or the securities into which they are exchangeable are issued for a non-cash consideration, allowing for some flexibility in relation to the application of pre-emption provisions under the UK Companies Act. In addition, where relevant, the bond issue may be structured so as to give the parent company the benefit of merger relief provisions under the UK Companies Act, relieving it from the requirement to account for share premium on the issue of its shares and enabling it to create a distributable reserve.
This update describes how cash-box structures work in relation to convertible and exchangeable bond issues, and explains why Jersey companies are particularly well suited to these cash-box structures.
Two principal types of cash-box structure are used in connection with the issue of convertible or exchangeable bonds. The first is the parent issuer structure, under which the bonds are issued by the UK company in consideration of the transfer to it of shares issued by the Jersey cash-box company. The second is the cash-box issuer structure, under which the Jersey cash-box company issues the bonds which are guaranteed by the UK parent company. The bonds are convertible into preference shares in the Jersey cash-box company, which are then exchanged for the securities that the UK company wishes to issue or transfer.
The appropriate structure for any particular issue will be determined by a number of different factors, including:
If the UK parent company wishes to have the benefit of the provisions allowing for merger relief, so as to be able to create distributable reserves when the bonds are converted, the cash-box issuer structure is likely to be the more suitable form because the shares of the UK parent company are issued in return for the transfer of shares in the Jersey cash-box company rather than directly upon conversion of the bonds.
In relation to pre-emption rights, the restrictions applicable in relation to the issue by the UK parent company of shares for cash apply to the issue of convertible bonds for cash in the same way as they do to the issue of shares for cash. Where flexibility is required in relation to pre-emption rights, either type of cash-box structure can help: the flexibility in relation to pre-emption rights which is afforded when equity securities are issued for a non-cash consideration is also available when convertible bonds are issued for a non-cash consideration, as is the case under both the parent issuer structure and the cash-box issuer structure.
In respect of either type of structure, a UK listed company (UK PLC) that wishes to use a cash-box structure to issue a convertible or exchangeable bond needs first to incorporate a subsidiary to act as the cash box . The cash box is usually incorporated in Jersey, but in order to avoid the need for Her Majesty's Treasury's consent under the UK Income and Corporation Taxes Act, it must be managed and controlled in the United Kingdom for the purposes of UK tax.
If the UK PLC is to be the issuer of the bonds, the cash box can be a private company because its shares will be held by only the UK PLC and the managers for the issue. If the bonds are to be issued by the cash box, it must be a public company and it will need regulatory approval in Jersey to issue the bonds and to circulate the offer for the bonds. The UK PLC may also need regulatory consent in Jersey for raising money in Jersey.
In a parent issuer structure, the key steps are as follows:
In a cash-box issuer structure, the key steps are as follows:
The treatment of the cash raised by the issue of the bonds depends on the type of structure used.
In a parent issuer structure, the cash box becomes a wholly owned subsidiary of the UK PLC when the managers transfer the cash-box shares that they hold to the UK PLC and the bonds are issued. From that time, the cash box has no obligations of its own to meet in relation to the bonds and accordingly, although there may be circumstances in which it is appropriate for the funds to be lent by the cash box to the UK PLC, it is usual for them to be paid to the UK PLC by way of redemption of the preference shares or in a winding-up of the cash box.
In a cash-box issuer structure, until conversion or exchange of the bonds, the cash box has continuing liabilities in respect of the bonds. Initially, therefore, the proceeds of the bond issue need to be invested by the cash box so as to produce sufficient income for it to be able to meet its obligations under the bonds. This is commonly done by way of a loan of the net proceeds of the bond issue to the UK PLC on terms that enable the cash box to meet its bond obligations. Upon conversion of the bonds into preference shares of the cash box and their exchange for the securities issued or, as the case may be, owned by the UK PLC, the cash box has no continuing obligations in respect of the converted bonds it issued and is a wholly owned subsidiary of the UK PLC. The net proceeds of the issue of the bonds that have been converted can then be paid to the UK PLC by redemption of the preference shares issued in respect of the converted bonds, offsetting the amount payable in respect of the redemption against the UK PLC's obligations in respect of the loan from the cash box or, if all the outstanding bonds have been converted or exchanged, in a winding-up of the cash box.
Convertible and exchangeable bond structures offer benefits to issuers and investors. For issuers, the benefits include the following:
For investors, the benefits include:
Jersey companies are suited for use in cash-box structures for a number of corporate and tax reasons:
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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