Reasons for Conversion
Convertible bonds and other debt instruments provide joint stock companies with capital-raising options beyond ordinary shares and conventional bank lending. The framework for issuing debt instruments draws on the general Companies Law alongside specific securities regulation where the instruments are publicly offered or listed. For companies contemplating substantial capital programmes, the design of debt and convertible instruments is part of broader financing strategy.
Categories of Debt Instrument
Joint stock companies can issue various debt instruments:
- Ordinary corporate bonds providing fixed or floating-rate income to holders.
- Convertible bonds combining debt features with the right to convert into shares of the issuer.
- Exchangeable bonds convertible into shares of a company other than the issuer.
- Subordinated debt ranking below ordinary creditors in priority.
- Sukuk and other Shari’a-compliant instruments.
- Specific structured products combining features for particular commercial purposes.
Each category has its own legal and commercial characteristics.
Issuance Process
Issuance of debt instruments typically involves:
- Strategic decision by the board on issuance, including terms and amount.
- Where required by the Companies Law or the articles, general assembly approval.
- Preparation of the instrument terms and supporting documentation.
- Where applicable, engagement with the Iraq Securities Commission for public offerings and listing.
- Marketing to investors through processes appropriate to the instrument and target investor base.
- Subscription and closing with payment of subscription amounts.
- Registration of the instruments and ongoing administrative arrangements.
- Where applicable, listing on the Iraq Stock Exchange for instruments to be publicly traded.
The process is more substantial for public offerings than for private placements to defined institutional investors.
Convertible Bond Features
Convertible bonds add specific features to the basic bond framework:
- Conversion right allowing holders to exchange the bonds for shares at defined rates.
- Conversion period during which the right can be exercised.
- Conversion price determining how many shares the holder receives.
- Anti-dilution adjustments protecting holders against capital changes affecting conversion economics.
- Mandatory conversion provisions triggering conversion in defined circumstances.
- Coupon and redemption terms operating alongside the conversion features.
Convertible bond design balances debt and equity characteristics in ways that should reflect the issuer’s specific objectives.
Implications for Existing Shareholders
Convertible bonds have implications for existing shareholders. Conversion of the bonds dilutes existing holdings, with the extent of dilution depending on the conversion terms. Pre-emption rights may apply to convertible bond issuances in some circumstances, with their treatment depending on the Companies Law framework and the company’s articles. Voting rights generally do not attach to convertible bonds before conversion, but on conversion the resulting shares typically carry full voting rights. Existing shareholders should evaluate convertible issues with attention to both the immediate capital benefits and the potential dilution on conversion.
Holder Rights and Protections
Bond holders have specific rights and protections:
- Contractual rights to interest and principal under the bond terms.
- Rights of enforcement on default, including acceleration and security enforcement where applicable.
- Information rights supporting holders’ monitoring of the company.
- Voting rights on amendments to the bond terms in defined circumstances.
- Specific protections against actions that would prejudice holders disproportionately.
- Where applicable, trustee arrangements supporting collective action by holders.
Bond holders are creditors of the company, with rights protecting their position alongside the company’s other creditors.
Listed Debt Securities
Where debt instruments are listed on the Iraq Stock Exchange, the framework administered by the Iraq Securities Commission and the exchange engages alongside the general framework. Listing supports liquidity for holders and broader market access for issuers, but it engages additional disclosure and procedural requirements. Issuers contemplating listed debt should engage with the listing framework early in the issuance process.
Tax Considerations
Debt instruments engage specific tax considerations including the deductibility of interest payments to holders, withholding obligations on interest payments to specific holder categories, treatment of original issue discount or premium, capital gains treatment of holder dispositions, and where convertible, the tax treatment of conversion events. Cross-border issuances raise additional considerations affecting both the issuer and foreign holders.
How We Can Help
Etihad Law Firm advises joint stock companies on debt and convertible instrument matters in Iraq, instrument design, issuance procedures including engagement with the Iraq Securities Commission where applicable, documentation, listing arrangements where relevant, and ongoing administration during the instruments’ life. We work alongside financial advisors and accounting firms for issuances of substantial scale.