Bond Purchase Agreements (BPAs) develop rules of engagement for the sale of bonds between an issuer and an underwriter. These contracts spell out the sale conditions, including the bond's price, interest rate, maturity date, and redemption processes. Also determined in this agreement are situations under which the contract might be nullified.
The functions of a BPA come into play when a new bond issue is being priced. A BPA is crucial as it protects the interests of not just the issuer and the underwriter, but also the investor. For example, the agreement may prohibit the issuer from taking on additional debt that could negatively impact the assets securing the bonds being sold by the underwriter. It also ensures that the issuer is genuine, legally allowed to issue bonds, not embroiled in legal troubles and that its financial statements are accurate.
Once the underwriter has paid for the bonds, the bond issuer is bound by the BPA to execute, authenticate, issue, and transfer the bonds to the underwriter. The underwriter, in turn, sells these bonds to fixed-income investors in the broader market based on the price and yield laid down in the BPA. The underwriter's profit stems from the difference between the buying and selling prices of the bonds.
BPAs align closely with bond indentures, which are contracts drawn up between a bond issuer and a trustee representing investors' interests. While the BPA is concerned with the new issue transaction between the issuer and the underwriter, the indenture focuses on the bond's features-maturity date, face value, interest payment timeline, and use of the bond revenue.
Particularly, if a bond is callable (allowing the issuer to buy back bonds before maturity), the indenture contains provisions to protect bondholders during the period when the issuer cannot repurchase the bonds. The SEC mandates bond indentures for all bond offerings, except municipal issues.
BPAs usually come into play with securities privately placed or those issued by smaller enterprises. These documents ensure that direct sales to underwriters, rather than the public, adhere to set conditions. Even securities exempted from SEC registration requirements might be bound by terms of a bond purchase agreement.