Debt capital markets in Hong Kong: regulatory overview
A Q&A guide to debt capital markets law in Hong Kong.
The Q&A gives an overview of main debt markets/exchanges, regulators and legislation, listing requirements, offering structures, advisers, prospectus/offer document, timetables, tax, clearing and settlement, continuing obligations and reform.
To compare answers across multiple jurisdictions visit the Debt capital markets country Q&A tool.
This Q&A is part of the global guide to debt capital markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/debtcapitalmarkets-guide.
Main debt capital markets/exchanges
Unless otherwise specified, the following applies to listing debt securities on the Main Board.
Main debt markets/exchanges
The main debt securities market/exchange is the Stock Exchange of Hong Kong Limited (SEHK) (see Equity Capital Markets in Hong Kong, Question 1 ( www.practicallaw.com/2-505-0423) ). There are currently no debt securities listed on the Growth Enterprise Market (GEM).
Approximate total issuance on each market
There is no answer content for this Question, as it is a new addition to the template that did not exist at the time of writing.
The main regulators are the Securities and Futures Commission (SFC) and the SEHK.
The main legislation/regulations are the Securities and Futures Ordinance (SFO), the Companies Ordinance (CO) and the Listing Rules (see Equity Capital Markets in Hong Kong, Question 2 ( www.practicallaw.com/2-505-0423) ).
Market activity and deals
Market activity and deals
2011 saw a rise in the number of listed debt securities (HKEx):
At year end 2010, there were 169 listed debt securities. At year end 2011, there were 192 listed debt securities. A total of 50 debt securities were newly listed during the year compared to 38 the year before.
At year end 2010, about HK$140.3 billion was raised by newly issued debt securities. At year end 2011, about HK$152.5 billion of debt securities was raised.
The Main Board attracts a diverse range of issuers, including banks, corporate, states and supranationals.
The most significant and high profile transaction in 2011 was the Hong Kong Government's HK$10 billion inflation-protected retail bond issuance launched in July 2011. The bonds were a new type of debt security and recorded a total turnover of HK$840.33 million, constituting 99.7% of the total turnover of debt securities in the year.
The market also saw the world's first RMB-denominated Islamic bonds in October 2011, which were issued by Khazanah Nasional Bhd, the state investment company of Malaysia.
Listing debt securities
Debt securities listed on SEHK can be categorised as follows:
Corporate bonds. Corporate bonds are debt securities issued by private and public corporations, such as listed companies or their subsidiaries.
Convertible bonds. Convertible bonds have investment characteristics of both debt and equity securities. A convertible bond gives its holder the right to convert the bond into shares of the issuing corporation according to predetermined terms during a conversion period or at conversion dates.
Exchange fund notes (EFNs). EFNs are Hong Kong dollar fixed income bonds issued by the Hong Kong Monetary Authority (HKMA) on behalf of the Hong Kong Special Administrative Region Government for the account of Hong Kong's Exchange Fund under the Exchange Fund Ordinance. Whenever the HKMA arranges the listing of an EFN on the SEHK, investors may participate in the tendering for the new issue.
Government/supranational bonds (GSBs). GSBs are debt securities issued by a government or supranational organisation such as the PRC or China Development Bank.
Below are the requirements for issuers other than states, supranationals, state corporations, banks and debt issues to professional investors, which are subject to different requirements.
Minimum size requirements
If the shares of the issuer or (if applicable) the guarantor are not listed, the issuer must have total shareholders' funds of at least HK$100 million.
If the shares of the issuer or (if applicable) the guarantor are not listed, the nominal amount of each class of debt securities must be at least HK$50 million, or such other amount as the SEHK may from time to time prescribe.
The same limits apply to the underlying debt securities to be subscribed or purchased.
Trading record and accounts
A new applicant or (if applicable) the guarantor, must have produced audited accounts in accordance with its national law covering the three financial years preceding the application for listing. In very exceptional cases the SEHK may accept a shorter period of two years. In the case of a new applicant, the latest financial period reported on by the reporting accountants must not have ended more than nine months before the date of the listing document.
There are no minimum denomination requirements.
SEHK can impose additional conditions in a particular case and SEHK retains an absolute discretion to accept or reject applications for listing (such as compliance with the relevant conditions may not of itself ensure an applicant's suitability for listing).
Structuring a debt securities issue
Generally (subject to exceptions), issues of debt securities can be structured in one of the following major ways:
Offer for subscription. An offer to the public by or on behalf of an issuer of its own debt securities for subscription.
Offer for sale. An offer to the public by or on behalf of the holders of debt securities already in issue or agreed to be subscribed.
Placing. The obtaining of subscriptions for debt securities by an issuer or intermediary from persons selected or approved by the issuer or intermediary.
Exchange. An exchange or a substitution of debt securities for or a conversion of debt securities into other classes of securities.
In addition, debt securities can also be issued through the exercise of options, warrants or similar rights to subscribe or purchase debt securities.
A retail issue of debt securities is commonly offered to the public while a wholesale issue is typically subscribed through private placement or offers to professional investors only.
Both trust structures and fiscal agency structures are used for issues of debt securities in Hong Kong.
In a trust structure with a trust deed, the issuer covenants to the trustee to pay the principal and interest on (and otherwise comply with the terms of) the debt securities. The trustee then holds the benefit of the covenant on trust for the holders of debt securities. The principal advantage of opting for a trustee for the issuer is that only the trustee can accelerate the debt securities on the occurrence of an event of default (although the bondholders can, by extraordinary resolution, direct the trustee to accelerate the debt securities). This constraint protects the issuer from the possibility of a single "rogue" bondholder accelerating the debt securities it holds.
In a fiscal agency structure, the fiscal agent has no legal relationship with the holders of the debt securities and owes no duties to them. It is the agent of the issuer and its administrative functions are performed on behalf of the issuer. The main advantages of a fiscal agency structure are cost savings.
Advisers and documents: debt securities issue
The main advisers are:
Bookrunners and lead managers, responsible for the underwriting part of the offering, and who may also co-ordinate and manage the offer and sale of the debt securities.
Arrangers, responsible for arranging the establishment of medium term notes (MTN) programmes.
Dealers, responsible for the underwriting part of the drawdown under an MTN programme, and who may also co-ordinate and manage the offer and sale of the drawdown.
Legal advisers to the issuer, providing legal advice to the issuer and preparing or assisting in the preparation of documents, in accordance with the legal and regulatory requirements of the relevant jurisdictions.
Legal advisers to the bookrunners and lead managers or, as the case may be, the arrangers and dealers, providing legal advice and preparing or assisting in the preparation of documents, in accordance with the legal and regulatory requirements of the relevant jurisdictions.
Auditor and reporting accountants, preparing or assisting in the preparation of financial information, reports and (where applicable) the issue of comfort letters.
The prospectus under the CO (for an offering to investors including the retail public).
A listing document under the Listing Rules (for an offering to professional investors only, and it can be an offering circular or any equivalent document).
Debt prospectus/main offering document
An offer of debt securities of a company to the public by means of any document requires preparation and registration of a prospectus that complies with the provisions of the CO, unless an exemption from registration applies. Subject to exemption of certain persons and prospectuses from compliance with certain requirements, a prospectus issued by or on behalf of a company must either be in English and contain a Chinese translation or be in Chinese and contain an English translation.
In practice, most listed debt securities in Hong Kong are offered to professional investors only and, in this case, a prospectus under the CO is not required. Instead, a listing document (which can be a circular or any equivalent document) under the Listing Rules is required to support the listing application. Every listing document must be in English and be accompanied by a Chinese translation except that, in the case of a new applicant, the English language version of the listing document can be distributed separately from its Chinese translation (and vice-versa) provided that both are available at each place where the distribution of such documents takes place. Where the debt securities are issued to professional investors only, the listing documents can either be in English or Chinese. No listing document can be issued until SEHK has confirmed to the issuer that it has no further comments. It is common market practice for a preliminary listing document to be circulated to the relevant investors three to five business days before pricing and for the final listing document to be circulated as soon as practicable after pricing.
Generally, the following safe harbour offers can be made without triggering the prospectus regime:
Offers to professional investors only.
Offers to not more than 50 persons.
Small offers with total consideration not more than HK$5 million (or its equivalent in other currency).
Offers where the minimum principal amount to be subscribed or purchased is not less than HK$500,000 (or its equivalent in other currency).
Offers where the exchange of debt securities does not result in an increase in the aggregate outstanding principal amount.
Offers in connection with a collective investment scheme authorised under Section 104 of the SFO.
Offers in connection with which the issue of each advertisement, invitation or document has been authorised under Section 105 of the SFO.
The following methods of listing are required by the Listing Rules to be supported by a listing document:
Offers for subscription.
Offers for sale.
Exchanges or substitutions of securities.
The main content and disclosure requirements for a prospectus (or listing document) are set out in the CO and the Listing Rules.
Generally, a prospectus/listing document should contain sufficient information to enable a reasonable investor to form a valid and justifiable opinion and informed assessment of the debt securities and the financial condition and business of the issuer and (if applicable) the guarantor at the time of the issue of the prospectus/listing document.
A prospectus generally includes the following information:
General nature of the business of the company.
Authorised share capital and share details.
Sufficient information for formation of a valid and justifiable opinion.
Details of management and directors.
Details of the debt securities to be issued.
Commission and preliminary expenses.
A listing document generally includes the following information:
General information about the issuer, its advisers and the listing document.
Information about the debt securities for which listing is sought and the terms and conditions of their issue and distribution.
Information concerning the debt securities.
Additional information concerning options, warrants or similar rights.
Information about the issuer's capital.
General information about the group's activities.
Financial information about the group and prospects of the group.
Information about the issuer's management.
Additional information on mineral companies.
Information on property interests.
Contracts pertaining to the issue and documents for inspection.
However, the actual content/disclosure requirements vary according to the nature and circumstances of the issuer and the types of issuer, transaction/issuer structure or debt securities being listed (each as defined in the Listing Rules), including:
Convertible debt securities.
Asset backed securities.
Offers to professional investors only.
Debt securities listed on SEHK are commonly issued by offering to professional investors only. For such issues, as an overriding requirement, the Listing Rules state that a listing document must contain the information that the investors an issuer is offering the securities to would customarily expect it to contain and Appendix 1 of Part C of the Listing Rules need not be complied with.
Broadly, a prospectus/listing document is prepared by the issuer and its directors with the assistance of its advisers (including drafting).
The prospectus/listing document is the responsibility of the issuer. Generally, each of the directors of the issuer and any guarantor (if applicable) take responsibility for the information included in the prospectus/listing document. A statement to that effect must be incorporated into the listing document, except in the case of states and supranationals. A listing document must also contain on the front cover or inside front cover a prominent and legible disclaimer statement.
Directors, among others, may be subject to potential civil and/or criminal liability and/or disciplinary actions under the common law, the Listing Rules, the CO, the SFO and other relevant legislation, in relation to the issue of a prospectus/listing document, especially for:
Making untrue statements.
Giving false, misleading or deceptive information.
Making fraudulent, reckless or negligent misrepresentations.
Timetable: debt securities issue
The following is a general timetable for the issuing and listing of debt securities by a new applicant (the actual timetable may vary on a case-by-case basis):
Date of listing application hearing by the Listing Committee (LHD) minus 1 to 2 months. Preparation work, including conducting due diligence, drafting and negotiating transaction documents and drafting the listing document and listing application forms.
LHD minus 2 to 3 weeks (at least 14 clear days before the date on which the listing document is to be bulk printed (BPD)). Submission of the listing application form (Form A1 of Appendix 5 of the Listing Rules) accompanied by:
specified documents (such as the listing document and draft timetable agreed in advance with SEHK);
a non-refundable deposit of the initial listing fee payable.
LHD minus less than 1 week. Closing and funding.
LHD minus at least 3 clear business days before BPD (in the case of a new applicant) or at least 2 clear business days (in the case of a listed issuer). Specified documents are submitted the to the SEHK including (but not limited to):
the signed listing application form;
the final proof of the listing document;
final proof of formal notices;
a certified copy of corporate approvals;
certain transaction documents;
listing undertaking; and (in the case of a new applicant):written submission to the Exchange in support of the application for listing, a certified copy of the certificate of incorporation or equivalent document of the issuer and (if applicable) the guarantor, and a certified copy of the certificate(s) (if any) entitling the issuer and (if applicable) the guarantor to commence business.
LHD. Hearing of the listing application by the Listing Committee.
LHD plus around 1 week. Issue of listing document, lodging of specified documents and listing of the debt securities.
For issues to professional investors only, the timetable is more flexible and the time period can be shortened considerably as SEHK can issue a listing eligibility letter within five business days of submission of the listing application with the requisite documents and listing fees.
Tax: debt securities issue
Several tax issues can arise relating to the issuing and listing of debt securities and professional tax advice is always recommended. The major Hong Kong tax issues include:
Whether any withholding tax is payable in respect of payments of principal or interest on debt securities, or any tax on capital gains arising from the resale of debt securities.
Whether debt securities are subject to stamp duty, either on issue or on any subsequent transfer.
Interest on debt securities and profits arising from the sale, disposal or redemption of debt securities may be subject to profits tax (if certain criteria apply).
Whether there is any tax exemption or incentive to investors on interest income of the debt securities.
Clearing and settlement of debt securities
Debt securities in Hong Kong are commonly cleared through:
Euroclear Bank S.A./N.V. in Europe.
Clearstream Banking société anonyme in Europe.
Depository Trust Company in the US.
Central Moneymarkets Unit Service (CMU Service) operated by the Hong Kong Monetary Authority in Hong Kong (HKMA).
Debt securities in Hong Kong are not limited to a specific currency but it is usual practice to issue in renminbi, Hong Kong dollars or US dollars.
Continuing obligations: debt securities
For issues of debt securities other than issues to professional investors only, the continuing obligations under the Listing Rules are designed to ensure that issuers keep the holders of their debt securities (and the public) fully informed of all factors which might affect their interests and treat the holders of their debt securities in a proper manner. A number of continuing obligations are set out in a listing agreement entered into between an issuer and SEHK and the Listing Rules. The SEHK retains the right to impose additional requirements from time to time.
The general continuing obligations under the Listing Rules are:
Compliance with the Listing Rules.
The issuer must keep SEHK and holders of debt securities informed as soon as reasonably practicable of material information relating to the group which is:
necessary to enable them and the public to appraise the position of the group;
necessary to avoid the establishment of a false market in its listed debt securities; and
might be reasonably expected to significantly affect its ability to meet its commitments.
If the issuer is listed on other stock exchanges, information released to any of such other exchanges is released to the market in Hong Kong at the same time as it is released to the other markets.
The publication of a change in either:
the rights attaching to any class of listed debt securities; or
the rights attaching to any shares into which any listed debt securities are convertible or exchangeable.
The publication of a decision to pass any interest payment of listed debt securities, as soon as reasonably practicable after the decision has been made.
The publication of any purchase, redemption or cancellation by the issuer, or any member of the group, of its listed debt securities, as soon as possible after the purchase, redemption or cancellation.
Annual reports or summary financial reports (as applicable) must be delivered to the trustee or fiscal agent (as applicable) and every holder of its listed debt securities (not being bearer debt securities) within no less than 21 days before the issuer's annual general meeting. An offshore issuer must deliver its annual report within no less than 21 days before the date of the issuer's annual general meeting and no more than six months after the end of the financial year to which they relate. Additionally, the issuer must make up its annual accounts to a date falling no more than six months before the date of its annual general meeting. The Listing Rules set out additional information required to be delivered or included in the annual report and accounts.
The Listing Rules also specify certain notifications to be given to the SEHK, including new issuances of debt and any decisions to change the general character or nature of business of the issuer or group.
Information such as notices, advertisements or announcements relating to the debt securities or to a new issue of debt securities must be submitted to the SEHK for review. The SEHK must confirm that they have no comments on them before they can be issued or implemented.
The issuer must inform the SEHK if any part of the listed debt securities of the issuer or any of its subsidiaries is listed or dealt in on any other stock exchange.
Furthermore, the issuer may be required to appoint and maintain a paying agent and/or (where appropriate) a registrar in Hong Kong as long as the debt securities are outstanding unless the issuer itself performs the functions of such paying agent and/or registrar.
However, the actual details of continuing obligations vary according to the type of issuer.
For issues of debt securities to professional investors only, an issuer's continuing obligations include the following:
Compliance with the Listing Rules.
Announcement of any information which is necessary for investors to appraise its position or avoid a false market in its securities or that may have a material effect on its ability to meet the obligations under its debt securities.
Announce if aggregate redemptions or cancellations exceed 10% and every subsequent 5% interval of an issue or any public disclosure made on another stock exchange about its debt securities.
Prior notification of any proposal to replace a trustee, amend the trust deed or amend the terms of convertible debt securities, unless the amendment occurs automatically in accordance with the terms of the debt securities.
Notification of listing of debt securities on another stock exchange.
Provision of a copy of any circular sent to bondholders or any trustee; and (if the issuer is a body corporate) provision of annual report and interim report.
Generally, the continuing obligations apply to overseas issuers. However, the SEHK may accept a listing agreement which incorporates equivalent continuing obligations to those imposed by the stock exchange where the overseas issuer has its primary listing. The SEHK retains a right to impose additional requirements if it is not satisfied with the requirements of the stock exchange where the overseas issuer has its primary listing.
In addition to its powers to suspend or cancel a listing, if the Listing Committee finds there has been a breach of the Listing Rules it may:
Issue a private reprimand.
Issue a public statement which involves criticism.
Issue a public censure.
Report the offender's conduct to the Securities and Futures Commission established under section 3 of the SFO, another regulatory authority or an overseas regulatory authority.
Ban a professional adviser or a named individual employed by a professional adviser from representing a specified party in relation to a stipulated matter or matters coming before the Listing Division or the Listing Committee for a stated period.
Require a breach to be rectified or other remedial action to be taken within a stipulated period.
In the case of wilful or persistent failure by a director of a listed issuer to discharge his responsibilities under the Listing Rules, state publicly that in SEHK's opinion the retention of office by the director is prejudicial to the interests of investors.
In the event a director remains in office following a public statement as above, suspend or cancel the listing of the issuer's securities or any class of its securities.
In the case of wilful or persistent failure by a listed issuer to discharge its responsibilities under the Listing Rules, order that the facilities of the market be denied for a specified period to that issuer and prohibit dealers and financial advisers from acting or continuing to act for that issuer.
Take, or refrain from taking, other action as it thinks fit.
The major consultation papers published recently include the following areas:
Proposals to amend the property valuation requirements, to remove unnecessary burdens on listing applicants and listed issuers. The SEHK and the SFC adopted the proposals and they were implemented through amendments to the Listing Rules that took effect on 1 January 2012.
To seek market views on whether shares of an issuer should be traded ex-entitlement only after the entitlement has been approved by shareholders. The SEHK has now decided to prevent trading ex-entitlement before shareholder approval. In addition, it will require the record date to be set at least three business days after the date of shareholder approval and there be a minimum of one last cum-trading day after the general meeting. The relevant Listing Rules amendments took effect on 20 June 2011.
Proposals to change the Code on Corporate Governance Practices and Listing Rules, to promote a higher level of corporate governance among issuers. The SEHK has adopted the proposals and made amendments to the Code on Corporate Governance Practices (renamed the Corporate Governance Code) and Listing Rules, which have been approved by the SFC. Most of the Listing Rules amendments took effect on 1 January 2012 while the remaining will be effective on 1 April 2012.
Proposals to amend the Listing Rules for listing debt securities for professional investors only, to bring the SEHK more in line with the requirements of other stock exchanges, and allow the SEHK to offer processing times that are comparable to those exchanges. The SEHK adopted the proposals with modifications to the definition of "professional investors" and the documentary requirements for listing application. The Listing Rules were amended accordingly and became effective on 11 November 2011.
Proposed introduction of after-hours futures trading (AHFT) and the relevant operational arrangements. The SEHK has concluded that AHFT will tentatively take place in the second half of 2012, subject to the approval of the necessary rule amendments by the SFC and market readiness.
In addition, the SEHK conducted the following consultations, the outcomes of which remain to be seen. It is anticipated that different interested parties/sectors may express different views on the proposals. The regulators have not given any timetables as to when these consultation reports will be published, nor when the proposals will come into force:
Proposals to bring the risk management requirements of the three clearing houses of the SEHK, namely Hong Kong Securities Clearing Company Limited (HKSCC), HKFE Clearing Corporation Limited (HKCC) and The SEHK Options Clearing House Limited (SEOCH), in line with or to exceed the standards set by the Committee on Payment and Settlement Systems and the Technical Committee of the International Organisation of Securities Commissions.
Proposed introduction of a general disclosure regime and recommended best practices in respect of listed issuers' workplace quality, environmental production, operating practices and community involvement.