recent developments in debt capital markets › v3 › assets › blt3de4d... · 3 february 2017:...

Recent Developments in Debt Capital Markets

Marieke Driessen Peter Voorhees

Financial Markets Legal Update 18 May 2017

© Simmons & Simmons LLP 2016. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

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Introduction

Macroeconomic and political environment: Quantitative easing, Brexit, US deregulation, Capital Markets Union

Legal developments: PD3/Disclosure standards, Comfort standards, Market abuse, PRIIPS

Regulatory capital developments: CRD IV/Basel III

Further market developments: Private placements (USPP, EUPP, Schuldschein), Green bonds, Direct lending, Unitranche



Quantitative easing

Quantitative easing by the ECB: asset purchase programme (APP)

Value of €60-80 billion per month on average

At least until end of 2017 or inflation aim of 2% achieved

Purchase of private sector and public sector securities: EUR 1,834.4 billion – third covered bond purchase programme (CBPP3): EUR 216.4 billion – asset-backed securities purchase programme (ABSPP): EUR 23.8 billion – public sector purchase programme (PSPP): EUR 1,511.9 billion – corporate sector purchase programme (CSPP): EUR 82.3 billion

All APP instruments can be used for collateral lending by ECB/national banks



Brexit

UK gave notice of its intention to withdraw from the EU

If no agreement on UK’s withdrawal is reached, Brexit will occur on 29 March 2019. Default position: leave on World Trade Organisation terms.

UK Government: Great Repeal Bill and simultaneously convert all EU law into domestic legislation, so no legal vacuum

Issues for DCM: – Different prospectus and listing requirements in the UK from those in the EU – No longer equivalence / passporting available – Costly for issuers to make public offers both in the UK and Europe – Risk factors? – Choice of law: move to Dutch law? – Choice of forum: recognition of judgments? Netherlands Commercial Court?



US deregulation

Trump administration:

3 February 2017: “Executive order on Core Principles for Regulating the US Financial System”: America first in international financial regulatory negotiations and meetings, making regulation efficient, effective and appropriately tailored

Specific areas of focus: softening of Dodd-Frank, including on Volcker Rule, softening of regulatory capital rules for systemically important financial institutions (SIFIs) trading with each other, Net Stable Funding Ratio not necessary

Regulatory delays at SEC



Capital Markets Union (“CMU”)

What is Capital Markets Union?

Ambitious plan to create a single market for capital across Europe

Wide and varied aims include: – Greater retail investment in capital markets products – Easier and cheaper for SMEs to access capital markets

CMU Action Plan published in September 2015

Prospectus Directive review is part of EU Commission’s CMU initiative



CMU: Review of Prospectus Directive regime

February 2015: Commission published Prospectus Review Consultation Paper. Scope of Review was extremely wide.

Commission prioritised the modernisation of the Prospectus Directive as part of CMU initiative.

November 2015: Commission published Legislative Proposal to modernise the Prospectus Directive.

December 2016: Council published “compromise text” reflecting agreed position between the Council and the Parliament.

Compromise text in the form of a draft Regulation – final form expected to be published in H1 2017.



Key Proposals

Abolition of EUR 100,000

Exemption

Changes to

Prospectus Summaries

New regime for

Risk Factors



PD3 Exemptions

Offer to Qualified Investors

only

Offer can be made without the prior publication of an approved prospectus

*Individual Member States have a discretion to set this threshold at between EUR 1,000,000 and EUR 8,000,000, so ultimately this exemption may not be harmonised across Member States.

Offer to less than 150

persons per Member

State (other than

Qualified Investors)

Minimum consideration

of EUR 100,000 per investor per

offer

Total consideration less than EUR [1-8],000,000

calculated over 12 month period*

Minimum EUR

100,000 denoms



Changes to Prospectus Summaries

Summary regime overhauled as part of PD2 amendments

PD2 Summaries with “elements” generally considered to be: – Overly rigid – Difficult to read – Of limited assistance to retail investors

PD2 Summaries to be replaced with a new Q&A Summary, limited to seven sides of A4 (plus an extra side if there is a guarantee)

Risk Factors in Summary limited to 15 key risks regarding issuer and securities

Base Prospectus “pro forma” placeholder Summary to be abolished

No Summary required for “wholesale” prospectuses (i.e. those (a) with min. EUR 100k denomination or (b) traded on a QI-only market or market segment)

Interplay with PRIIPs


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Prospectus Summaries – Retail and Wholesale Concerns

Products which fall within Prospectus regime and PRIIPs regime will require a Summary and a KID in order to market the securities

Parts of KID may be replicated in Summary

Scope of Summary is wider than KID – what role will the Summary play in making an investment decision?

Difficulties in summarising complex structures in 7 sides of A4


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Changes to Risk Factors

Commission took the view that risk factors in Prospectuses are used primarily as a liability management tool and are of limited assistance to investors

New regime will limit Risk Factors to those which are: – Specific to the issuer – Specific to the securities – Material for taking an informed investment decision

RFs must be presented in a limited number of categories depending on their nature, and must be in order of materiality

Materiality must be based on probability of occurrence and expected magnitude of negative impact

Optional categorisation in terms of “High Risk”, “Medium Risk” or “Low Risk”

ESMA guidelines on risk factors to follow


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Other Changes

Universal Registration Document

Reduced competent authority review of issuer disclosure for certain

frequent issuers

“Straddling” Public Offers Offer periods can straddle two base prospectuses, so long as there is no

gap between base prospectuses (walk away rights would apply)

Secondary Issuances Simpler regime for tap issues listed

on a regulated market for > 18 months and issuers with equity listed

on a regulated market for > 18 months who then issue debt

Representative for non-EEA Issuers

To ensure issuer compliance with regime (unclear why this is

considered necessary)

Greater Powers for ESMA Expanded investigatory and

enforcement powers

ESMA Prospectus Database

Free searchable database of approved prospectuses


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What is not changing?

Key point is that EUR 100,000 denomination public offer exemption is kept

In addition, separate disclosure regime for wholesale securities kept (where wholesale means min. EUR 100,000 denoms or “non-equity securities traded on a regulated market, or a specific segment thereof, to which only QIs can have access for the purposes of trading in such securities”)

No expansion of the Prospectus regime to MTFs (such as GEM and EuroMTF)

No limit to length of Prospectus

Term of validity of Base Prospectus kept at 12 months

Triggers for publication of a Supplement (although it is envisaged that ESMA will develop further Regulatory Technical Standards on this topic)


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A few other key issues, and timing

New 20% threshold for convertibles, with carve-out for conversion of AT1 securities (but not Tier 2 CoCos)

24 month implementation period, though with some exceptions (e.g. 20% threshold for convertibles, which will apply on entry into force of PD3)

If published in the Official Journal in H1 2017, implementation for most sections will be in H1 2019; therefore updates this year and 2018 should be unaffected, but issuers may look to do an interim update just ahead of the 2019 effective date

Brexit! The Regulation will be in force by the time the UK leaves the EU, so it will continue to have statutory effect unless or until amended or disapplied


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Timing of Implementation Regulation to be published in Official Journal, expected H1 2017

20 days later will be implemented

Most provisions will come into effect 24 months later

N.B. Regulation – so direct effect Commission to provide further

information ESMA to provide

further information

Content of prospectuses and final terms Omission of information in prospectuses Procedures for scrutiny and approval of

prospectuses Prospectus advertisements

Format of financial information SME Prospectuses Risk Factors Documents incorporated by reference Publication of prospectuses Supplements Standard forms for competent

authorities


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Disclosure standards

Risk factors

MD&A

Due diligence

Disclosure liability

Opinion coverage

Auditor comfort


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Comfort standards

US 10b-5 disclosure letters

Purpose of 10b-5

Negative assurance

Carve outs

US legal opinions

No registration

Investment Company Act


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Comfort letters

Forms of Comfort Letters Key Considerations

US: SAS 72 Timing

US: SAS 76 Arrangement Letters/Rep Letters

US: SAS 100 Auditor participation in diligence


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Market abuse

Market abuse regulation 596/2014 and Directive 2014/57/EU on criminal sanctions

In effect since 3 July 2016. Levels 2 and 3 to follow

Scope of MAR and impact on debt capital markets issuers

Unlawful disclosure of inside information

Insider dealing: PDMR reporting and restrictions

Market manipulation: market sounding


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Scope of MAR and impact on DCM issuers

Wider scope than Market Abuse Directive

MAD only covered financial instruments admitted to trading on EU-regulated markets

MAR also covers financial instruments admitted to trading on Multilateral Trading Facilities (e.g. the Irish Stock Exchange’s Global Exchange Market and the Luxembourg Stock Exchange’s Euro MTF Market), Organised Trading Facilities (OTFs) and emission allowances

Impact on investment grade and high-yield issuers

Impact on DCM documentation


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Inside Information

What constitutes insider information in relation to debt securities?

Information of a precise nature, which has not been made public, relating directly or indirectly to an issuer or a financial instrument and which, if it were made public, would be likely to have a significant effect on the price of the financial instrument or related derivatives

To be determined on case-by-case basis

Information to consider (will not necessarily be the same as for equity securities) includes events or circumstances that have an impact on: - an issuer’s ability to pay interest or principal - an issuer’s credit rating or credit worthiness


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Disclosure of Inside Information

Method of disclosure

As soon as possible (but see next slide on ability to delay disclosure)

Disseminated to as wide a public as possible on a non-discriminatory basis, free of charge and simultaneously throughout the EU

Communicated electronically to the media which are reasonably relied on by the public for dissemination - through an officially appointed mechanism (e.g. RNS)

Communicated in a manner that clearly identifies it as inside information

Maintained on an issuer’s website for at least five years


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Disclosure of Inside Information

Delay of disclosure

Issuers may only delay disclosure if: - the issuer has legitimate interests that immediate disclosure would prejudice - the delay will not mislead the public - the issuer can ensure the confidentiality of the information

An example of legitimate interests for delaying disclosure is where an issuer is conducting negotiations where the outcome of those negotiations is likely to be jeopardised by immediate public disclosure

Reasons for any delay must be properly documented


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Inside Information

Insider lists

An issuer must draw up a list of all persons who have access to inside information that work for the issuer or otherwise perform task through which they have access to insider information, such as advisers, accountants or rating agencies

Preparation of insider lists - information to be included - specific template

Insider lists must be updated (e.g. to add new person)

Insider lists must be kept for at least 5 years


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PDMR Reporting and Restrictions

Persons discharging managerial responsibility

Issuers must ensure that transactions by PDMRs and persons closely associated with them are disclosed promptly and no later than 3 business days after the transaction

Relevant transactions - transactions relating to the issuer’s listed debts securities or other linked financial instruments

Form of PDMR notification

Closed periods


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Market sounding

“Market sounding”: communication of information, prior to announcement of transaction, gauge interest of investors in transactions/conditions (such as size or pricing), one or more potential investors (Article 11 MAR)

RTS and ITS published on 17 June 2016 on arrangements, systems, procedures, record keeping, notification

ESMA Guidelines on market soundings on 13 July 2016/10 November 2016


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PRIIPs and EMTN Programmes

Why an issue?

ICMA working group

Selling Restrictions – Option 1: no sale to retail at all, no flexibility – Option 2: default setting is no sale to retail at all, but this can be switched off

in the Final Terms (e.g. if the issuer takes the view that the product is definitely not “packaged” – e.g. plain vanilla fixed rate note with no puts or calls, and in period up to 31 December 2017)

Option 2 becoming “market”, but some reservations among banks


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Regulatory capital

Quick recap: – CRD IV – BRRD – Basel III

Basel IV / CRD V


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Basel III: minimum capital ratio: 10.5% by 2019 CRD IV = CRD + CRR BRRD Basel III for G-Sib

MREL = TLAC = CET1 CET1 CET1 AT1

+ AT1?

+ AT1

T2

+ T2?

+ T2

[informal T3]

+ [informal T3]

8% + [ ]% 6-16% 16-18[20]% - Leverage Ratio (>3% CET1; G-Sibs) From 1.1.2015; amends from 1.1.2018 - Liquidity Cover Ratio (LCR) (liquidity in stressed conditions; 30 days) - Net Stable Funding Ratio (NSFR) (liquidity in normalised conditions; 1 year) From 1.1.2018


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CRD IV

CET1 > 4.5% of RWA

T1 > 6% of RWA

T1+T2 >8% of RWA

Capital conservation buffer 2.5%

Systemically important buffer 1-2.5%

Countercyclical buffer [0-2.5%]

Additional buffer supervisor [3]%

Total >18.5%


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TLAC > 16% RWA From 1.1.2019

> 18% RWA From 1.1.2022

PLUS: G-Sib specific [1-3.5%]

TLAC-leverage > 6% by 1.1.2019; > 6.75% from 1.1.2022

TLAC: – CET1 counts (but max 66% of TLAC) – AT1 and T2 count if TLAC-criteria met

From 2022: must be issued by resolution entity

MREL = TLAC?


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Basel IV

In effect from?

Leverage ratio: from 1.1.2018 > 3% (or more if G-Sib)

Fundamental review of trading book: from 1.1.2019: must be in banking book: unlisted equity, securitisation warehousing, r.e. holdings, retail and SME credit. Mandatory use of standardised approach

Counterparty risk, interest rate risk, credit risk, operational risk: more standardised risk weighting


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Further market developments

Green bonds

Direct lending

Unitranche

Private placements


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Further market developments: private placements


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Questions?

Marieke Driessen Partner, Financial Markets

Simmons & Simmons Amsterdam

T +31 20 722 2308

E [email protected]

Peter Voorhees Partner, Financial Markets

Simmons & Simmons Amsterdam

T +31 20 722 2330

E [email protected]


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Recent Developments in Debt Capital Markets