Bond Purchase Agreement (BPA)
What Is a Bond Purchase Agreement (BPA)?
A bond purchase agreement (BPA) is a legally binding document between a bond issuer and a underwriter laying out the terms of a bond sale. The terms of a bond purchase agreement will incorporate sale conditions, in addition to other things, for example, sale price, bond interest rate, bond maturity, bond redemption provisions, sinking fund provisions, and conditions under which the agreement might be canceled.
Understanding a Bond Purchase Agreement (BPA)
A bond purchase agreement is a contract that gives certain provisions that are executed on the date the new bond issue is priced. The terms and conditions of a BPA include:
- Terms of the bonds.
- Conditions that must be met before the purchase of the bonds by the underwriter.
- Execution and delivery date and place of the bonds.
- Conditions under which the underwriter might pull out from the contract without penalty.
- Purchase price and interest rate of the bonds.
- Expenses to be paid by different gatherings.
- Certain SEC requirements to be trailed by all gatherings.
A bond purchase agreement has many conditions. For instance, it could expect that the issuer assumes no other debt secured by the equivalent assets that will secure the bonds the underwriter is selling, and it could specify that the issuer tell the underwriter of any adverse change in the issuer's financial position. The bond purchase agreement likewise guarantees that the issuer is who it says it is, that it is authorized to issue bonds, that it isn't the subject of a claim, and that its financial statements are accurate.
The bonds — once paid for by the underwriter — will be properly executed, authorized, issued, and delivered by the issuer to the underwriter. After the issuer conveys the bonds to the underwriter, the underwriter will put the bonds on the market at the price and yield laid out in the bond purchase agreement and investors will purchase the bonds from the underwriter. The underwriter gathers the proceeds from this sale and procures a profit in light of the difference between the price at which it purchased the bonds from the issuer and the price at which it offers the bonds to fixed-income investors.
A bond purchase agreement is a document that specifies the conditions of a sale between the bond issuer and the underwriter of the bonds.
Bond Purchase Agreement versus Bond Indenture
A BPA is like a bond indenture (or trust indenture) in that they are the two contracts laid out between an issuer and an entity based on the conditions of a bond. While a BPA is an agreement between the issuer and the underwriter of the new issue, the indenture is a contract between the issuer and the trustee who addresses the interests of bond investors.
The terms of the bond featured in the bond indenture incorporate the bond's maturity date, face value, interest payment schedule, and purpose of the bond issue. For instance, a trust indenture might demonstrate whether an issue is callable. In the event that the issuer would be able "call" the bond, the indenture will incorporate call protection for the bondholder, which is the period of time during which the issuer can't repurchase the bonds from the market. The Securities and Exchange Commission (SEC) expects that all bond issues, aside from municipal issues, have bond indentures.
Bond purchase agreements typically address privately placed securities or investment vehicles issued by more modest companies. These securities are not available to be purchased to the overall population, but rather all things considered, are sold straightforwardly to underwriters. Moreover, bond agreements might be eligible for exemption from SEC registration requirements.
Features
- Bond purchase agreements (BPAs) incorporate conditions that must be met before an underwriter purchases the bonds, and conditions in which the underwriter might pull out.
- Typically, the issuer must advise the underwriter of any changes in its financial condition, and the agreements will limit the assets that are being utilized as collateral.
- BPAs are typically private placement securities or investment vehicles issued by more modest companies.
- The terms spread out in a bond purchase agreement might incorporate price, interest rate, maturity date, any redemption provisions, and some other cancellable provisions.
