Shearman & Sterling and SIFMA Announce Model Voluntary Investment Grade Bond Repayment Provision | Shearman & Sterling LLP


Shearman & Sterling is pleased to announce the publication of the optional redemption model provision of SIFMA Investment Grade Bonds. After convening a task force of investment banks operating in the US and global capital markets to agree on general principles and proposed wording, we developed a model provision that promotes consistency and clarity while removing ambiguity. found in historical provisions. This standard arrangement offers issuers, investment banks, investors and other market participants certainty and specificity in the calculation of the redemption price of bonds. The new language is expected to be introduced across the industry from Q4 2021 through 2022.

Links to the sample disposition forms and an overview providing more details on the disposition are included below.

Background

The provisions for the optional redemption of investment grade bonds and the calculation of the overall redemption price may vary depending on the issuer and the methodology used by the investment bank assisting in this calculation. This variation in language and calculation results in a lack of standardization in the way of calculating the repurchase price. As a result, market players have expressed a desire for standardized language in the voluntary repayment provisions for quality bonds.

In many summary calculations, a US Treasury benchmark is selected by the issuer with the assistance of an investment bank. In others, a constant US Treasury deadline, as published by the Board of Governors of the Federal Reserve System (a “constant treasury deadline”), is used. In either case, a “redemption” spread that was established at the time the issue’s initial price was fixed is added to the yield of the selected Treasury security or the constant maturity of the Treasury, and the resulting yield is used to discount the sum of the present values ​​of the applicable remaining scheduled payments of principal and interest up to the repayment date. The yield on the benchmark US Treasury or constant-maturity Treasury security is most often referred to as the “Treasury rate.”

In the existing optional redemption arrangements, there are variations in the method of selecting the US Treasury security or constant maturity of the Treasury and the corresponding yield. Many current arrangements use a “comparable cash issue” selected by an independent investment bank in accordance with “standard financial practices for pricing new issues” of corporate debt to determine the Treasury rate. Ambiguity as to which cash is “comparable” and what is “usual” can lead different investment banks to select different benchmark treasuries and yields.

In order to promote consistency and clarity for the benefit of both issuers of corporate debt and holders of this debt, the SIFMA working group focused on the definition of the Treasury rate and examined, among other things, the source and the optimal method of selecting and calculating the Treasury rate, including the role of the independent investment bank. The SIFMA working group also considered additional modifications to the existing provisions.

The resulting standard arrangement offers issuers, investment banks, investors and other market participants certainty and specificity in the calculation of the redemption price of the bonds to be redeemed.

Summary of the model provision

Below is a summary of the main aspects of the model provision:

  • The general principles of the overall calculation are unchanged. Principal and interest payments are discounted on the redemption date using a Treasury rate determined at the time of redemption plus the offset that was determined at the issue price.
  • The calculation of the Treasury rate and the redemption price is carried out by the issuer. It is no longer necessary for an independent investment bank to select a US Treasury security or perform the aggregate calculation.
  • The primary method of calculating the Treasury rate will be done using the most recent statistical publication released by the Federal Reserve System Board of Governors referred to as “Selected Interest Rates (Daily) – H. 15 “or any successor designation or publication (” H.15 “) at 4:15 p.m. New York time on the third business day preceding the redemption date and choosing the constant maturity of the Treasury or the constant maturities of the relevant Treasury .
  • The applicable calculations use the period from the redemption date to the maturity date (or, if the Notes have an “call-to-par” date, the call-to-par date), this period being called the “duration. of remaining life ”.
  • In the majority of redemptions, two returns are used: a return corresponding to the constant maturity of the Treasury on H. 15 immediately shorter than the Remaining Term, and a return corresponding to the constant maturity of the Treasury on H. 15 immediately longer than the Remaining Life.
  • The two returns are interpolated to the maturity date, or the nominal call date, as the case may be, on a straight-line basis using the actual number of days. To calculate the actual number of days, the constant Cash expiration applicable on H.15 is deemed to have an expiration date equal to the number of months or years concerned, as the case may be, from this constant Cash expiration from of the repayment date. Except for maturities of less than one year, this means that a constant Cash Maturity will be deemed to have a maturity date with a month and day identical to the redemption date, and the applicable year corresponding to the constant maturity. of Selected Treasury.
    • For example, if the repayment date is November 15, 2021 and the au pair call date is April 15, 2027 and the period between the repayment date and the au pair call date is 5 years and 5 month, the issuer will select the yield corresponding to the constant 5-year Treasury maturity and the yield corresponding to the constant 7-year Treasury maturity on H. 15 (there is no constant 6-year Treasury maturity ). The returns will be interpolated on a linear basis using the actual number of days. For this interpolation calculation, the constant 5-year Treasury maturity will be deemed to have a maturity of November 15, 2026 and the constant 7-year Treasury maturity will be deemed to have an expiration date of November 15, 2028.
  • In more limited circumstances, only one cash and one yield will be used. This occurs when (i) the remaining life corresponds exactly to a constant Treasury maturity (for example, if the period from the redemption date to the call date at par is exactly 5 years, the yield of the constant 5-year Treasury maturity on H. 15 will be the Cash Rate) or (ii) if there is no constant Treasury maturity on H. 15 immediately shorter or immediately longer than the Remaining Life, as applicable (for example, if the period from the repayment date to the due date, or nominal call date, as the case may be, is less than one month or greater than 30 years) .
  • If H.15 or any successor designation or publication is no longer published, the model provision provides a safeguard that calculates the Treasury rate using the yield on the US Treasury security maturing on the maturity date or with a deadline closest to it. , or the date of the au pair call, as the case may be.
  • Subjective determinations such as “comparable cash flow” or what conforms to “standard financial practices for pricing new issues” have been eliminated.
  • The redemption notice must be mailed or delivered electronically at least 10 days but not more than 60 days before the redemption date. Although this period is shorter than the historic 30-day notice period, 10 days has become customary in current debt issues and should provide investors with sufficient advance notice of the repayment.
  • After all calculations are complete, the Treasury rate is rounded to three decimal places.

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