What is a bond? Guide to bond issuance in the UK
What is a bond?
Definition of a Bond: A bond is essentially an IOU — a promise by a borrower (known as the issuer) to repay money to an investor (known as the bondholder), usually with interest. Bonds are one of the most common ways for businesses, governments, and organisations to raise money.
When a company issues bonds, it borrows money by selling bonds to investors. The issuer receives the cash upfront, and the bondholder receives a legally binding promise that the debt will be repaid at a future date, typically with regular interest payments in the meantime.
Why do companies issue bonds?
Issuing bonds is a way of raising finance without giving away ownership, unlike shares. Bonds are a type of debt security that can be traded (bought and sold) in the capital markets.
However, bonds are not limited to large corporations. Private companies, clubs, and organisations can also issue bonds — for example, a sports club issuing bonds to its members or supporters to raise money for a new stadium or development project.
Many of the same principles, terms, and conditions that apply to bonds also apply to other types of debt instruments and securities.
Registered bonds in certificated form
One common type is the registered bond. When registered bonds are issued, a physical certificate is produced and given to the bondholder.
Important: This certificate is only evidence of title. The register of bondholders is the definitive proof of ownership. Simply handing over the certificate does not transfer ownership. Instead, title passes only when the new owner’s name is entered in the register.
In other words, registered bonds require an official amendment to the central register in order to transfer ownership.
Payments to bondholders
During the life of a bond, the issuer normally makes regular interest payments to bondholders. These payments are made against the surrender of interest coupons until the bond matures.
If a bond matures early — for example, due to an event of default or early redemption — then any coupons for future interest must also be surrendered. If they are not, the face value of each missing coupon will be deducted from the payment due.
Legal requirements for issuing bonds in the UK
Before launching a bond issue, an issuer must ensure there are no legal barriers. A UK company should check that:
- The issue is within the powers of the company as set out in its memorandum and articles of association.
- There are no borrowing restrictions in the articles of association or in agreements to which the company is already a party.
- The issuer can legally give a negative pledge (an undertaking not to create security over other indebtedness, or more specifically over other bond issues) in a legally acceptable form.
The issuer may also need to convene a board meeting to approve the bond issue (see Standard document, Board minutes: bond issue).
Key Takeaways
- A bond is a debt instrument, not an ownership stake.
- Bondholders are creditors, not shareholders.
- Registered bonds require the register of bondholders to be updated for ownership to transfer.
- Issuers must comply with UK company law and their governing documents before issuing bonds.
