One of the basic tasks to perform before investing in any asset is understanding the contractual terms of the asset transfer. Be it land, gold, stocks or bonds. In the case of bonds, similar to equity stocks, bond issuers submit a bond prospectus to regulatory authorities stating the terms of the agreement. When the bonds are offered to the public, the bond issuers submit the offering documents comprising the latest financial statements, the memorandum or prospectus with the regulatory authorities that can be accessed by the general public.
Investors can find two types of bond prospectus, which are typically issued in two stages: preliminary prospectus and final prospectus. The preliminary prospectus, which is also called a draft or red herring, does not contain pricing details or the size of the bonus offers. Once the road show is over and a final price is set, a final prospectus is published with all the details. Since some of the terms in the draft prospectus are printed in red, it is called a false prospectus. The draft prospectus can go through multiple iterations based on market demands before a final price is set.
Generally, the bonds offered under the REGS or 144A rule contain the following information: details of the issuers and guarantors, terms of the bonds, risk factors, use of proceeds, pro forma capitalization structure, corporate structure, description of the existing debt, description of the notes or bonds offered, details of the bond’s subscribers, organizers and trustees. It also provides legal information such as the law governing the contract, validity of the securities, enforceability of civil liabilities and general information on bond prices, compensation. The latest financial statements are also attached with the prospectus, also with details of the industry dynamics and an overview of the credit and business profile of the issuers.
The main advantage of becoming familiar with the terms of the bonds is that it keeps investors informed of all parties related to the bonds. The corporate structure established in the prospectus will provide a clear view of the related parties and help investors to clearly understand the extent of the liability (such as collateral, collateral) of each of these parties. At times when the market reacts to negative news about any issuer, a knowledgeable bond investor can assess the impact of the news on each of these parties. You have the opportunity to act on the information available instead of false alarms about the sender. For example, consider a coal mining company that has issued asset-backed bonds held in North America and certain assets held in China. Unless investors know which assets in China are insured, they will react to any negative news about the Chinese coal mining sector. Similarly, bond investors should also be aware of the rights and protections available to them under the agreement. In the event of default, bankruptcy or other credit events, the investor who knows the legal implications of the enforceability of his rights and protection gains a competitive advantage over other investors.
Although it sounds cliché, it is extremely important to read the bond offering documents before investing. And as a corollary, investors should get all offering documents vetted through their financial advisers and legal support to fully understand and appreciate the terms of these agreements.