144A DEBENTURE PLACEMENT

Explanation

A 144A Debenture placement is actually an offering of securities that requires no formal SEC registration . This is because the offer is only made to financial institutions who are classified as Professional

Investors under the Securities and Exchange Act.

Most 144A offerings involve the placement of debt instruments which are for a period of 3-5 years, however there are some that start at 10 years and go on indefinitely. Due to the relatively short time period for these instruments there is usually too little time to create a secondary market to provide an exit route on the instruments therefore these are restricted to investors who have their own secondary market and who can trade among themselves.

This represents an ideal vehicle for those who are seeking large amounts of debt finance for the first time through a formal placement route of debenture bonds.

 Pre-Requisites

Firstly there should be enough tangible assets within the issuer company to adequately cover the proposed debt obligation. Assets can be in the form of freehold or leasehold property, liquid securities or certified cash-flows.

The issuer company must be correctly constituted and be authorised to issue instruments representing the proposed debt obligation and is usually stipulated in the memorandum and articles of association. If provision for this does not exist, it must be incorporated by way of a board resolution that must be registered with the Company Registration Authorities within the jurisdiction of the incorporation.

The project, the Company and its current directors and major shareholders will be subject to due diligence- there must be total transparency.

A full business and marketing plan showing total feasibility must be submitted including a viable exit strategy from the obligation must be shown.

Basic Procedure

1. Retention of Professional Advisors and the main advisor should be an Investment Banking Firm or a Securities Law firm. In the case of the first, the investment banker will usually retain the legal services required as part of the overall service. In the case of a Law Firm, they will be acting for the issuer not its banker and can be relied upon to give independent advice. Specialist law firms also provide direct access to appropriate underwriters and placement brokers and in many cases an intermediary company can also be retained to provide an affective interface between the issuer and the specialist advisors needed to complete the offering. Her at Mancala Group we provide this often essential interface function under a common retention contract with our preferred law firms, so there is no need to have a separate Agreement. As a condition of executing a retention agreement, the issuer will be asked to place a retainer of US$ 150,000 on deposit with the securities lawyer

2. The First step after the retention of advisors is the preparation of the core project and financing plan. This is undertaken by Mancala Group in consultation with the issuer.

3. Upon agreement of the financing plan, the project is passed to the appointed law firm for preparation of the legal and placement documents, normally known as the ‘Placement Memorandum’.

4. During the preparation of the legal documents, it will be established whether or not the placement requires the services of an underwriter. Where it is agreed that this is required an appropriate underwriter will be appointed by appointed the law firm. Underwriting costs will be applicable but they are always subject to negotiation and in many cases the underwriting fees can be paid from the proceeds of the placement.

5. Once all the documentation has been prepared and approved by the issuing company, placement will be undertaken through the appointed brokers. Their fees will be commission based and will be negotiable. In some cases, commission fees can be rolled into the offering price of the debentures.

6. Funds from the placement will be accumulated in a trustee client account and then transferred to the company upon completion of the placement. The Trustee can be one of the appointed directly by the issuer, or by the retained law firm.

The whole process can take between 8 to 12 weeks which is dependent readiness of the project and it principals.

Ongoing Obligation

The terms of the band indenture will stipulate the periodic payments due under the bond and the issuer must make these payments in order to avoid default. Although the exact terms will be subject to the agreement with the issuer, it must be remembered that all payments due must be made on time. Therefore, when agreeing terms, the issuer’s cash-flow statement must be amended to reflect the repayments in order to assess the impact on the bottom line cash flow statements.

Prepared by Mancala Group Marketing Division

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