At the time of writing, the COVID-19 pandemic has resulted in the death of more than 370,000 people in the world. The rapid spread of the novel Coronavirus has disrupted global economic activity and triggered volatility in the international and local capital markets. The uncertainty occasioned by the pandemic has also adversely impacted investor appetite for securities, including debt products.
Notwithstanding the effects of the pandemic, there remains some investor appetite for debt products issued by reputable or relatively healthy issuers with favourable ratings. Recently, two notable Nigerian companies successfully accessed the bond market through debut bond offerings. Dangote Cement Plc’s debut N100 billion series 1 bond offering was 1.5 times oversubscribed. Similarly, Axxela Limited, one of sub-Saharan Africa’s fastest-growing gas and power firms, through a special purpose vehicle issued its N10 billion series 1 bonds which recorded a 15% oversubscription.
Preparing for the Market
Market conditions are constantly changing as the pandemic situation evolves. As governments implement policies to re-open certain sectors of the economy based on public health guidelines, the capital markets may recover and see an improvement in investors’ appetite for debt products, especially debt products issued by small or mid-sized companies. Improved market conditions may open issuance windows for certain categories of issuers and these entities must be prepared to take advantage of the windows of stability.
A key step towards preparing for the market is the establishment and registration of shelf programmes by prospective issuers. Issuers with expired debt programmes should also consider renewing expired programmes with the Securities and Exchange Commission to prepare for favourable issuance windows.
Virtual Due-Diligence Preparedness
The lockdowns and movement restrictions necessitated by the pandemic have forced companies to implement work from home policies or operate skeletal office services. Issuers must ensure that all documents required for due diligence are accessible through virtual platforms such as data rooms, to ensure a seamless due diligence process for their advisers. The issuer’s team must assess all possible logistical issues related to the conduct of due diligence and address these issues before due diligence. A coordinated due diligence exercise between the issuer and its advisers should also focus on identifying the impacts of the pandemic on the issuer’s business and ratings, to ensure that investors are made aware of the business and financial condition of the issuer.
COVID Disclosure Obligations
One of the hallmarks of the capital market is transparency to investors. Given the current uncertainty in the capital markets, investors will require clarity and access to information on the impacts of the pandemic on the issuer’s business to enable them to make informed investment decisions. Issuers may be required to disclose the impact/potential impacts of the pandemic on their ability to fulfil their payment obligations. However, given the constantly changing nature of the pandemic situation, issuers may elect to provide limited disclosure on the potential impacts of the pandemic on their businesses, subject to applicable laws. This disclosure will be typically provided in the marketing documents for the debt offering.
Roadshows and Investor Engagement
As business meetings have transitioned to virtual meeting software and applications, issuers and issuing houses must adapt to the new reality and ensure seamless roadshows and investor meetings through electronic platforms. However, issuers and advisers must ensure that all possible security challenges associated with virtual meetings are addressed to ensure that confidentiality of information related to the offering is maintained at all times.
COVID Contractual Considerations
Issuers and solicitors appointed to advise on debt capital market transactions must pay careful attention to the contractual issues which may arise due to the pandemic. Financial covenants, negative pledges and restrictions on the ability of the issuer to incur additional indebtedness or create security must take into consideration a worst-case COVID scenario to ensure that there is a possible window for the issuer to raise further financing in the event that the pandemic takes a deeper toll on the business of the issuer.
In drafting force majeure, material adverse change and termination clauses, issuers and solicitors must also ensure that the triggers and thresholds are reflective of current times. Traditional representations and warranties typically given by issuers must be re-assessed to ensure that issuers do not make misleading representations or warranties.
Possible disruptions to payment timelines must be considered and the transaction documents may contain clauses extending timelines and deadlines for funding coupon or principal payment accounts, to ensure that an event of default is not triggered due to a technical payment disruption event occasioned by the pandemic.
Debt Restructuring and Liability Management
The nature of the liability management exercise to be adopted by an issuer will largely depend on the specific financial condition of the Issuer and relevant securities laws. For instance, as a liability management tool, an issuer may consider the redemption of already issued debt securities and issuance of replacement securities under new terms reflective of current market conditions. Issuers may also consider the amendment of existing documentation to extend maturity or funding dates and coupon payment timelines to reflect their current cashflow situation. Liability management exercises will require careful structuring, investor engagement and approvals from regulators and trustees. To ensure a seamless process, the issuer must ensure that a clear engagement plan is developed to ensure that all relevant consents and approvals are obtained.