The new Act on Bonds of 15 January 2015 did not introduce any revolutionary changes in relation to regulations applicable in the Act on Bonds of 1995. However, the legislator gave precision to some earlier regulations, which – as was stressed in the justification of the new act – strengthened the position of bondholders and therefore reduced the risk connected with revenue bonds.

The debt to be paid

Revenue bonds are one kind of debentures. By issuing bonds, the issuer contracts a debt towards the bondholder which it is obliged to repay in a time period specified in the bond issuance terms document. The bondholder is usually entitled – apart from demanding that the issuer pays the amount of the buy-back on the day of buy-back of the bonds – to receive periodic payments in the form of interest as remuneration for the capital lent to the issuer.

The rules of revenue bonds issuance do not differ fundamentally from those applicable for issuing classical bonds. However, revenue bonds differ from ordinary bonds in that bondholders are entitled to satisfaction as a matter of priority before the issuer’s other creditors, firstly either from all or part of the revenue or from all or part of the assets of undertakings financed entirely or partially from funds obtained from the issuance of bonds, or, secondly, from all or part of the revenue from other undertakings specified by the issuer.

Example

A town plans to build a recreational facility containing an arena and a complex of pitches and courts. Funds for that purpose can be gained both from credit and from issuing revenue bonds. In the case of financing by issuing revenue bonds, it might be stated in the issuance terms that bondholders would have priority of satisfaction from all or part of the revenue obtained from building such a facility (i.e. from funds obtained from organising sporting events or from making pitches and courts available to private persons).

What is essential in the context of the changes that came into effect on 1 July 2015 is that currently holders of revenue bonds can have priority of satisfaction from the revenue or assets of undertakings which were also financed only partially from funds obtained from the issuance of bonds. Until now, it had only been possible to decide on the priority of holders of revenue bonds if an undertaking had only been financed entirely from funds from issuing bonds and it had been excluded in a situation where an undertaking had been financed partially from funds from issuing bonds and partially with funds from credit or loans, for example.

Who can be an issuer

The circle of entities entitled to issue revenue bonds has been specified in Article 25 of the Act on Bonds and is narrower than the circle of entities having a general bond issuing capacity (Article 2 of the Act on Bonds). From the perspective of local government, particular attention would have to be drawn to the possibility of revenue bond issuance not only by territorial self-government units and their unions, but also by companies meeting the requirements specified in the Act on Bonds.

Issuing capacity with regard to revenue bonds is therefore also possessed by joint stock and limited liability companies in which a territorial self-government unit or a union of such units hold, individually or jointly with another territorial self-government unit or another union of such units, shares or ownership interests in a number guaranteeing them more than 50 per cent of the total number of votes at the general meeting or meeting of shareholders. A requirement here is that the main subject of activity of such a company is satisfying the needs of local communities or performing public utility tasks.

In this respect we must indicate an important change in relation to the previous legal state. Above all, the current regulations make it possible for companies established by several territorial self-government units or several unions of such units to issue revenue bonds. This means that, for example, several neighbouring local authorities can form a joint stock company in which they will hold over 50 per cent of the votes at the general meeting, and such a company will issue revenue bonds in order to finance an undertaking which is crucial for those few local authorities. Also, on the basis of currently applicable regulations, satisfying the needs of local communities or performing public utility tasks must be the main subject of activity of such a company and not the only subject, as was the case in the previous legal state. This change means that the company-issuer is no longer all that limited in its activity, which is also an advantage from the bondholders’ perspective.

Revenue bonds can also be issued by joint stock and limited liability companies whose main subject of activity is performing public utility tasks on the basis of an agreement concluded with, among others, a territorial self-government unit or a union of such units. What is essential is that such an agreement should be concluded for a period which is at least equal to the period of maturity of the revenue bonds issued.

Restriction of liability

One of the most important advantages of issuing revenue bonds is the possibility of restricting the liability of their issuer for the liabilities arising therefrom to the amount of revenue or the value of assets of an undertaking, to which the bondholders are entitled to priority of satisfaction before other creditors. This right of the issuer is a significant departure from the general rule that the issuer is liable for performances under the bonds with all of its assets.

A novelty in the Act on Bonds is the introduction of a clear regulation according to which the bondholder’s entitlement regarding priority of satisfaction does not influence the order of satisfying the dues of other creditors whose receivables were secured before the date of issuing bonds, for example by a mortgage, pledge, registered pledge or fiscal pledge, or making use of the statutory right of priority as well as rights encumbering a property before an entry was made in a land and mortgage register on initiating enforcement or before placing an application for such an entry to be made in the set of documents. However, the issuer is obliged to provide information about the existence of such security in the terms of issuance of revenue bonds.

Mechanisms protecting bondholders

Because, when issuing revenue bonds, the issuer can – in the terms of issuance – limit the scope of its liability for liabilities arising from revenue bonds issued, the legislator provided guarantees in the act which are intended to protect bondholders against any dishonest actions by the issuer. As a result, revenue bonds are becoming more attractive for bondholders, and consequently the issuer benefits too. Guarantees protecting bondholders are:

A separate bank account

The Act on Bonds states that if bondholders are given the right of priority in satisfying their claims from revenue from a particular undertaking, then all the revenue from that undertaking should be paid into a separate bank account. The issuer is restricted in managing the funds on that account. This is because the issuer cannot make withdrawals from it for purposes other than satisfying the claims of bondholders entitled under the revenue bonds. The sole exception here is the possibility of the issuer making a withdrawal from that account of VAT for transfer to the tax office.

Also, the issuer can, in the issue terms, specify that it will be entitled to make withdrawals of amounts from the account which exceed the amount needed to satisfy the bondholders’ claims within the period of the next 12 months. However, if such a proviso is not included in the issue terms, the issuer will not be able to have control of excess amounts even if they exist.

Setoffs prohibited

Another restriction is being prohibited from making setoffs using funds on the separate bank account, which applies to both statutory and contractual setoffs.

Exemption from enforcement

An additional guarantee for holders of revenue bonds is the rule stating that funds on a separate bank account are not subject to enforcement conducted from the account of the issuer of revenue bonds up to the amount of the issuer’s liability towards bondholders entitled under the revenue bonds. In the event of enforcement conducted from particular constituents of property of an undertaking, the amount necessary to satisfy claims of bondholders entitled under revenue bonds is not subject to seizure. This amount is transferred to the separate bank account and cannot be withdrawn for purposes other than satisfying the claims of those bondholders. The above restrictions obviously do not apply to enforcement initiated to satisfy claims under revenue bonds.

Selling and encumbering particular constituents of property of an undertaking prohibited

Holders of revenue bonds are also protected in such a way that the issuer of the revenue bonds cannot sell or encumber particular constituents of property of an undertaking. An exception to this is a situation where the issuer carries out a sale as part of correct economy without causing a significant reduction in the value of that undertaking in the process.

In addition, revenue-creating receivables to which bondholders are entitled to the right of priority of satisfaction must not be the subject of securing with a pledge, and also cannot be transferred to third parties.

The issuer’s obligations connected with issuance

It also does not seem likely that potential issuers might be discouraged from issuing revenue bonds by the obligations connected with issuing such bonds, as they are not much greater than those imposed on issuers of ordinary bonds.

The content of documents

First of all, the issuer’s obligations connected with issuing revenue bonds concern the specific content of the resolution on issuing revenue bonds and the content of the bond issue terms. Thus, in comparison with the requirements of the resolution on issuing ordinary bonds, the resolution on issuing revenue bonds should additionally specify the undertaking and the manner of calculating revenue from the undertaking, and it should also indicate up to what part of the revenue from the undertaking or the assets of the undertaking the bondholders are entitled to priority of satisfaction. What is essential is that the resolution on issuing revenue bonds can specify more than one undertaking. This considerably facilitates matters for issuers, and above all enables them to save funds intended for preparing the revenue bonds issue, because issuers can gain funds for several undertakings independent of each other under a single issuance.

The issuer of revenue bonds should also include the above information in the terms of issuance.

The issuer’s information obligations

In connection with the revenue bonds issue, the issuer also has to carry out specific information obligations. The issuer is obliged to make a report available to bondholders containing information about the total amount of revenue from an undertaking, which has been paid into the separate bank account, and about the amounts paid out to bondholders as well as to the issuer from that account in the period from the previous pay-out of performances, and which also discusses the structure of the revenue from the undertaking as well as the structure of costs incurred by the issuer in connection with the undertaking in that period. Such a report should be made available to bondholders at least 14 days before each deadline for paying out performances under the revenue bonds, but not less often than once a year.

Additionally, after issuing revenue bonds the issuer is obliged to announce the total amount of debt on account of those bonds and to state the undertaking. It must here be stressed that, in accordance with the currently applicable Act on Bonds, the announcement should be made via the issuer’s website, and not by placing an announcement in two daily newspapers, including at least one nationwide daily newspaper, as has been the case so far.

Individual debt indicator

A revenue bonds issue can also be attractive because, in accordance with Article 243a of the Act on Public Finances of 27 August 2009 (consolidated text Journal of Laws of 2013, item 885 as amended), in determining restrictions of the debt of territorial self-government units (as referred to in Article 243 of the Act on Public Finances) no account is taken of funds coming from an undertaking and being recorded on a separate bank account, or of the issuer’s performances due to bondholders entitled under revenue bonds.

We can mention here the ruling of the Province Administrative Court in Lublin of 23 July 2014, case file no. III SA/Lu 622/14, issued under the Act on Bonds of 1995 (a last-resort appeal was filed against the ruling). According to the Province Administrative Court, classifying bonds as revenue bonds – which conditions the use made of the possibility of not taking the aforementioned funds and performances into account when determining restrictions of the debt of territorial self-government units – does not depend on whether the issuer is liable towards the bondholders for its liabilities with all of its assets, or on whether its liability is restricted to the amount of the revenue or the value of the assets of the undertaking concerning which the bondholders are entitled to the right of priority of satisfaction. This therefore means that the above right specified in Article 243a of the Act on Public Finances can also be made use of by territorial self-government units issuing revenue bonds in whose terms of issuance no limitation of liability was provided for and where the general rule that the issuer is liable towards the bondholders with all its assets applies.

legal basis: Act on Bonds of 15 January 2015 (Journal of Laws of 2015, item 238)