On September 20 2019, CEE Legal Matters reported that BLS had advised Pannonia Bio Zrt. – a company operating a biorefinery in Tolna County, Hungary, that is the largest ethanol plant in Europe – and that CMS Hungary had advised OTP Bank Plc. on Pannonia Bio’s issuance of the first Hungarian forint bond in line with the Central Bank of Hungary’s Bond Funding for Growth Scheme.
Counsel for OTP Bank: Erika Papp, Managing Partner, CMS Budapest
Counsel for Pannonia Bio: Gabor Kovacs, Partner, BLS
CEELM: Erika, how did you and CMS become involved in this matter? Why and when (and by whom) were you initially selected as external counsel?
Erika: We were already working on this product when Pannonia Bio, with whom we have a very good and long-standing relationship, approached us. Since there is lack of experience with transactions of this type in the market, our preliminary work in respect to bond issuances proved essential and helped us secure this deal.
For instance, we represented both issuer and arrangers in several similar transactions prior to this deal such as OTP Bank’s EUR 500 million MREL bond issuance on the Luxembourg Stock Exchange, where we acted as Hungarian legal counsel to OTP Bank as issuer.
Our initial kick-off meeting about this bond issuance proved quite successful. We initially met Pannonia Bio in a local café to discuss bond issuances in general. Following the discussion, we were asked by Pannonia Bio as issuer and OTP Bank as lead arranger to represent OTP Bank in the Pannonia Bio issuance, which marked the first ever bond issuance within the framework of the Bond Funding for Growth Scheme.
CEELM: What about you, Gabor? How did you and BLS become involved in this matter?
Gabor: Our team has acted as the outsourced legal department of the issuer, Pannonia Bio, for more than half a decade. From the outset of this project, we worked closely with management to make sure that the issuance process aligned with their expectations and the way in which the company does business.
CEELM: What exactly was the initial mandate when you were retained for this project at the beginning?
Erika: OTP Bank gave us the mandate to act as counsel for this project. This effectively meant that our colleagues drafted and negotiated several documents (e.g. certain parts of the information memorandum, and other transaction documents) necessary for issuances of this kind, and participated in personal meetings with the main investor, the National Bank of Hungary.
Gabor: We were contracted to manage all legal functions of Pannonia Bio, a major regional producer of sustainable biofuel, animal feed, and other co-products. The mandate was to provide legal counsel in an efficient and transparent way, so that management could focus on business development. Unlike conventional law firms, we advise the company on any and all legal matters around the clock, and in this instance we advised them throughout the bond offering.
CEELM: Who were the members of your team, and what were their responsibilities?
Erika: Dr. Arpad Lantos, senior consultant, and Dr. Zsolt Beregi, junior associate, were responsible for the drafting, negotiation, and timely delivery of the transaction documents.
Arpad has many years of experience in debt capital markets both in regulatory advice and transactional assistance.
Zsolt has an LL.M. degree in International Banking and Finance Law at University Collage London (University of London) and he also has considerable domestic and international experience in debt capital markets transactions including bond issues and regulatory matters both in English law and Hungarian law.
At CMS, we always strive to do transaction management proactively, which we did in the present matter as well. This effectively involves the preparation of documentation, gathering comments from various stakeholders in the transaction, and driving the transaction forward so it can be completed on schedule to the satisfaction of all parties involved.
Gabor: The client’s BLS team consisted of the founding partners, me and Erzsebet Szalay, and associate attorney Mark Bene. I managed the key work streams to make sure that they met the agreed-upon deadlines, and facilitated the seamless flow of information between various parties including the Organizer Bank (OTP), the Issuer’s internal departments, and additional advisors. Erzsebet supervised the corporate aspects of the case and ensured the quality of documentation, while Mark did the heavy lifting throughout the documentation process and technical coordination between the parties.
CEELM: Describe the issuance in as much detail as possible, and your roles in making it happen.
Erika: Pannonia Bio issued the first Hungarian Forint Bond in line with the Bond Funding for Growth Scheme announced by the Central Bank of Hungary in July 2019. For funding the entire programme, an aggregate amount of HUF 300 billion was initially set aside by the National Bank of Hungary, which was increased later.
Within the programme, issuer companies raise capital through debt financing. By purchasing the bonds, investors become lenders to the issuers and directly finance the operation of such companies. As opposed to the issuance of share and raising capital through equity financing, the purchasers of the bonds do not acquire ownership or voting right in the general meeting of the issuer, and they are not entitled to dividends from the profits.
Generally, in individual issuances, the issuer repays the principal borrowed amount in one lump sum on the final maturity date whereas the interest is paid on a periodic basis. The tenor of the bonds may range from three to ten years from the date of issuance under the programme.
The bonds are issued first to a selected few institutional investors in an auction, and within 180 days of the auction the bonds will be traded in a newly-set up multilateral trading platform of the Budapest Stock Exchange, called the Xbond platform.
Pannonia Bio’s B+ credit rating and good standing helped to decrease the yield on the bonds in the auction procedure and also helped to make the bonds more attractive to investors.
Finally, investors purchased all issued bonds with the National Bank of Hungary purchasing the maximum 50% on first issuance and an additional 20% on the secondary market.
Gabor: The issuance was among the first of its kind under the National Bank of Hungary’s Growth Scheme. The issuance process is relatively standardised, with a few specific rules set by the NBH for this particular scheme. Our biggest added value was to clearly explain the specialties of each party, so that Pannonia could act in a way that ensured that their needs were understood and addressed – all within the tight turnaround time set by the company’s management.
CEELM: What’s is the current status of the issuance?
Gabor: The bonds will soon be listed on the xBond system operated by BET, the Budapest Stock Exchange.
CEELM: What was the most challenging or frustrating part of the process? And why?
Erika: The most challenging part was that this was the very first issue within the scheme and the parties had to be cautious how to price the bond given Pannonia Bio’s high credit rating. The National Bank had to consider future issuances especially in respect to the potential spread offered to investors of future issuances within the programme. The concern was that if the yield on Pannonia’s bond was priced too high, then companies that enter into the scheme at a later stage with lesser credit rating would have to offer a higher yield to investors. This would have led to certain companies being out priced from the future issuances.
Gabor: Being the first in anything is never easy, especially when it comes to implementing a new rulebook set by a financial regulator in a relatively mature and highly regulated environment like bond regulations. We had to cooperate closely with all of the parties involved, especially CMS, to find solutions that could serve as a model for future issuances. Understandably, we encountered a few bumps along the road, but the direct and professional service that we provided eventually paid off. For me, the most challenging task was to clearly reflect Pannonia’s specific considerations as a family-owned private company.
CEELM: Was there any part of the process that was unusually or unexpectedly smooth?
Erika: The whole transaction was completed in less than a month after receiving the mandate due to the professionalism of the teams with OTP Bank and Pannonia Bio. It was easy to get along with them, which helped the smooth completion of the deal.
Gabor: I highly appreciated the efficient and constructive cooperation of CMS throughout the process. Their solid understanding of securities law made things much easier, and they were always open to our business-related comments.
CEELM: Did the final result match your initial mandates, or did it change somehow from what was initially anticipated?
Erika: The mandate matched the final product.
Gabor: It absolutely did, in the sense that we accomplished yet another important project for Pannonia acting as their outsourced legal department.
CEELM: Erika, what specific individuals at OTP Bank directed you, and how did you interact with them?
Erika: The OTP Bank team consisted of Andras Kazar, Head of Capital Markets Advisory and Securities Services, and Gyorgy Szelényi, Senior Capital Markets Advisor. Most of the communications were done by email or phone. We had regular update calls with both the teams of OTP Bank and Pannonia Bio on the line where we discussed outstanding issues and how to proceed with the transaction.
CEELM: What about you, Gabor? What individuals at Pannonia Bio directed you?
Gabor: We worked with Lajos Dobai, the company’s CFO, who was internally responsible for the issuance at Pannonia. Our relationship with Lajos during the project is a great example of the way we look at the function of an external legal counsel: we worked with him on a daily basis, striving to put him in a position where he could concentrate on business decisions, while leaving the legal and technical matters to us with full confidence. This fits well into our working philosophy of working in tandem with business.
CEELM: How would you describe the working relationship with each other on the deal?
Erika: We have a good standing relationship with BLS. Most of the time the negotiations took place via phone and emails and there was a personal meeting in which the representatives of all parties and the National Bank also participated. The final negotiations were completed within hours. Fortunately, the whole process was smooth.
Gabor: As mentioned previously, the working relationship with CMS is excellent on every level. I appreciate their integrity and dedication to soliciting clear legal advice, as this makes our business legal consulting work much more straightforward. Deals like this involve a lot of iterations, calls, meetings and extensive e-mail correspondence between the working parties. I believe that the key to success is to select the right communication channel for the status of the transaction and the goals of each party. I think the entire project team nailed this, and CMS played a decisive role in making that happen.
CEELM: How would you describe the significance of the issuance to Hungary and CEE in general?
Erika: We advised the very first bond issue within the Bond Funding for Growth Scheme in Hungary. This means that the National Bank of Hungary purchased corporate bonds within the scheme for the very first time. Moreover, in CEE no other bond growth programme offers the possibility for any Central Bank to purchase 70% of issued bonds.
Gabor: Boosting the local bond market via the GS programme was a clear policy goal set forth by the National Bank of Hungary. Had financially stable private companies declined to participate in the programme, achieving that goal would have been challenging. As such, we felt that the entry of Pannonia Bio as a regionally significant player within the CEE region would be an important development for the local economy. As business lawyers that advise clients running operations within the CEE region, we welcome any initiatives that enhance access to funding and develop the region’s financial markets.