Debt capital markets in UK (England and Wales): regulatory overview
A Q&A guide to debt capital markets law in the United Kingdom (England and Wales).
The Q&A gives an overview of legislative restrictions on selling debt securities, market activity and deals, structuring a debt securities issue, main debt capital markets/exchanges, listing debt securities, continuing obligations, advisers and documents, debt prospectus/main offering document, timetables, tax, clearing and settlement, 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.
Legislative restrictions on selling debt securities
Main restrictions on offering and selling debt securities
There are restrictions on offering and selling debt securities under UK and EU law. The main domestic statute that offers of debt securities must comply with is the Financial Services and Markets Act 2000 (FSMA).
EU law. Securities offerings in the European Economic Area (EEA) are regulated by Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading, as amended (Prospectus Directive). Unless an exemption applies, the Prospectus Directive requires an approved prospectus to be made available to the public in the EEA before:
Securities are offered to the public.
Securities are admitted to trading on a regulated market.
The International Capital Market Association (ICMA) has published standard form selling restrictions for offers of securities in the EEA, aimed at ensuring that offers of securities in EEA member states are only made pursuant to an available exemption or otherwise in compliance with the Prospectus Directive.
UK law. In accordance with the UK implementation of the Prospectus Directive under Part 6 of FSMA, Commission Regulation (EC) No 809/2004 as amended (PD Regulation) and the Prospectus Rules issued by the Financial Conduct Authority (FCA) in its capacity as the relevant competent authority (known in this capacity as the UK Listing Authority (UKLA)), there are detailed disclosure rules that any prospectus must satisfy for it to obtain UKLA approval (where such approval is required) (see Question 6).
ICMA has published standard form UK selling restrictions for debt securities. Other than a requirement to comply generally with all applicable provisions of the FSMA, the ICMA standard selling restrictions focus on:
The ICMA standard selling restrictions recommend that on an issuance of debt securities, managers represent and agree that there will be no breach of the requirements of section 21 of the FSMA. The restriction states that a manager must not communicate, or cause to be communicated, an invitation or inducement to engage in investment activity in any circumstances other than where section 21 of the FSMA does not apply to the issuer (or would not, if it was not an authorised person, apply to the issuer).
Accepting deposits is a regulated activity (section 19, FSMA) and any person accepting deposits in the UK must be authorised to do so or be exempt. The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (RAO), provides a wide exclusion from the restrictions for the proceeds from issues of debt securities. However, securities with a maturity of less than one year are treated as "commercial paper" under the RAO. The exclusion only applies to commercial paper if it:
Is issued to persons:
whose ordinary activities involves them acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses;
who it is reasonable to expect will acquire, hold, manage or dispose of investments (as principal or agent) for the purposes of their businesses.
Has a redemption value of not less than GB£100,000 (or equivalent in another currency).
Where commercial paper is issued by issuers who are not authorised, and non-exempt issuers, the standard ICMA selling restrictions recommend that the managers represent and agree that the commercial paper is only offered to investors whose ordinary activities involve them acquiring, holding, managing or disposing of investments. To fall within this exemption, it is also customary for commercial paper to have a minimum denomination of at least GB£100,000 (or equivalent in another currency).
Restrictions for offers to the public or professional investors
The main restrictions on offers to the public or professional investors are listed above.
Market activity and deals
According to data released by the London Stock Exchange (LSE):
972 Eurobonds were listed on the Main Market in 2015 by UK issuers, representing a total of GB£153 billion of raised debt.
979 Eurobonds were listed on the Main Market in 2015 by non-UK companies, representing a total of GB£137.4 billion of raised debt.
The LSE's Main Market is the UK's principal regulated market (as that term is used for the purposes of the Prospectus Directive).
Structuring a debt securities issue
Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading, as amended (Prospectus Directive) does not distinguish between public and professional investors for the purposes of prospectus disclosure requirements. Instead, for disclosure purposes it distinguishes between securities with a minimum denomination of:
Less than EUR100,000 (or equivalent), widely known as retail issues.
EUR100,000 (or equivalent) or more, which are widely known as wholesale issues.
The disclosure requirements for the related prospectus differ depending on whether the retail or wholesale regime applies. There are slightly more limited disclosure requirements applying to issuers that are small or medium sized enterprises (SMEs) or companies with reduced market capitalisation.
There are certain additional disclosure requirements for retail securities under the Prospectus Directive. These include a requirement to include a summary of the offering in the prospectus that (concisely, in non-technical language and in an appropriate structure) conveys the key information relevant to the securities that are the subject of the prospectus in order to aid investors when considering whether to invest (when read with the rest of the prospectus).
The process for offering securities to retail investors can involve an offer period during which the managers procure orders for the securities from investors. In such circumstances the prospectus must be published before the beginning of the offer period. The issuer must update the disclosure through the publication of a supplement if a significant new factor, material mistake or inaccuracy arises or is noted during the offer period.
One of the prevailing methods of distributing securities to the retail market is in the form of a "retail cascade". This involves the issuer selling the securities to investment banks underwriting the issue who, in turn, sell them to retail distributors (before or after the issue date of the securities), which creates a distribution chain. The retail distributors, in turn, can on-sell the securities to their own clients at prices that may vary from sale to sale, reflecting market conditions at the time of sale. Each stage of the retail cascade can potentially involve different terms of sale. In the past, there was a concern that each separate on-sale of securities would require a separate prospectus. However, following the amendments to the Prospectus Directive made by Directive 2010/73/EU, it is now clear that financial intermediaries reselling securities to investors can rely on an issuer's prospectus provided that the issuer has consented to its use for this purpose.
The wholesale regime under the Prospectus Directive has slightly lighter disclosure requirements. Under the Prospectus Directive, a summary is not required for a wholesale issue. However, if a summary is included in the prospectus for a wholesale issue, the same disclosure requirements as for a retail issuance will also apply here. There are also certain exemptions from the financial promotion legislation that allow managers to approach professional or institutional investors and take orders before the final prospectus is approved.
Debt securities are commonly issued under either a trust structure or a fiscal agency structure. Certain types of issue require a trustee, but in most cases the issuer can elect whether it appoints a trustee to represent the interests of the bondholders or instead issues under a fiscal agency structure. The structure adopted depends on several factors, including cost.
Under a trust structure, the trustee is appointed under a trust deed to act as an intermediary between the bondholders and the issuer. The trustee represents the bondholders' interests throughout the life of the bonds.
Common features of a trust structure include the following:
The bondholders are restricted from bringing proceedings against the issuer (unless the trustee, having been instructed, then fails to bring proceedings in a reasonable timeframe).
The trustee is given discretion in the exercise of its powers under the trust deed. Circumstances where the trustee is sometimes given discretion include, in relation to the following provisions:
events of default;
a substitution of the issuer;
making certain determinations as to materiality;
the absence of material prejudice to the interests of the bondholders.
The trustee can also be given discretion to agree with the issuer limited changes to the terms and conditions of the securities without consent from the bondholders at a bondholders' meeting.
The trustee is not a paying agent. Separate paying agents are appointed under a paying agency agreement that sets out the mechanics for payments of interest and principal to be made on the bonds.
The trustee acts for the bondholders, so it cannot be removed by the issuer without their consent.
Recent experience has indicated that trustees can be reluctant to exercise some of the discretions described above without prior bondholder authorisation and indemnification. Therefore, while issuers can sometimes benefit from trustees being willing to exercise discretions (without the requirement to approach bondholders), the flexibility, in practice, can be limited.
If the bonds are secured (that is, if security is taken in respect of the bonds), a trustee will usually hold the benefit of the security on trust for the holders because it is impractical for security to be given to each bondholder separately. Generally, the more complex the issuance, the more likely an issuer is to appoint a trustee. Also, if bonds have a long maturity, where there is potential for the terms of the bonds to change before the maturity date, having a trustee can also be favourable. Finally, some (but not all) bondholders may prefer a professional entity to be appointed to represent their interests as against the issuer.
Fiscal agency structure
A fiscal agent acts as an agent of the issuer and carries out functions for the issuer. It does not act on behalf of the bondholders. The fiscal agent's functions are primarily administrative, as set out in a fiscal agency agreement, and include:
Making payments of principal and interest to the bondholders.
Keeping records of payments.
Other administrative functions in relation to the issue of the bonds.
Unlike a trust structure, under a fiscal agency structure:
Each security constitutes a separate contract between the issuer and the relevant bondholder.
The fiscal agent cannot exercise the same discretions regarding changes to the terms and conditions, waivers and other modifications.
If the bondholders wish to take action against the issuer, they cannot do so through the fiscal agent.
The fiscal agent is usually the principal paying agent.
The fiscal agent does not have a monitoring role on behalf of bondholders.
The fiscal agent does not take enforcement action against the issuer.
The fiscal agent can be removed solely by the issuer.
As a result, each bondholder must monitor for itself whether, for example:
An event of default has occurred.
The issuer has complied with its covenants.
The issuer has made the necessary interest payments.
Where the issuer breaches its obligations, the bondholder is responsible for accelerating and enforcing the securities held by it.
Circumstances that encourage the appointment of a fiscal agent include:
"Vanilla" stand-alone bond issues and medium-term note programmes that do not have any complicated provisions or structures.
Issues where bonds are to be placed with one or a small group of sophisticated investors.
Under either a trust structure or a fiscal agency structure, issuers have the choice of either issuing bonds under a stand-alone transaction or under a programme. The key advantage of a programme is that it allows multiple issuances throughout a 12-month period (or longer for unlisted notes) without the requirement for a new prospectus for each issue (although supplements may be required), and with reduced requirements for other documentation for each issue. For infrequent issuers, there are fewer advantages in establishing a programme.
Main debt capital markets/exchanges
Main debt markets/exchanges
There are two principal markets for listing debt securities:
The Main Market.
The Professional Securities Market (PSM).
Both are operated by the London Stock Exchange (LSE).
Main Market. The Main Market is a regulated market for the purposes of the Markets in Financial Instruments Directive (Directive 2004/39/EC), as amended (MiFiD). Therefore, securities listed on the Main Market are subject to a number of other EU Directives, including:
The Market Abuse Directive (Directive 2003/6/EC, as amended). This deals with insider dealing and market manipulation.
The Transparency Directive (Directive 2001/34/EC, as amended). This deals with continuing disclosure requirements for securities admitted to trading on a regulated market.
The Main Market is a globally recognised listing venue for domestic and foreign issuers, including a number of sovereigns. It is also the listing venue of choice for all government issues (www.londonstockexchange.com/companies-and-advisors/main-market/main-market/home.htm).
The LSE also operates the Order Book for Retail Bonds (ORB), an electronic trading platform for gilts and corporate bonds that are listed on the Main Market and issued in retail-size trading denominations (less than GB£100,000) (www.londonstockexchange.com/traders-and-brokers/security-types/retail-bonds/retail-bonds.htm).
The ORB was launched in 2010 in response to demand from retail investors for access to an on-screen secondary market in fixed income securities. It enables securities trades to be executed on its books electronically and processed directly to the CREST electronic settlement system. Market makers (that is, LSE member firms that must buy and sell securities in which they are registered throughout the mandatory quote period), continually price securities traded on the ORB.
Currently, only sterling-denominated securities are admitted to trading on this platform.
Professional Securities Market (PSM). The PSM is a market for listing specialist debt securities or depositary receipts issued to professional investors (www.londonstockexchange.com/companies-and-advisors/psm/home/psm.htm). The PSM is a multilateral trading facility (MTF), but not a regulated market for the purposes of MiFiD, allowing issuers a more flexible and pragmatic approach to regulatory requirements.
Debt securities, regardless of the denomination, can be admitted to the PSM under a regime equivalent to the Prospectus Directive wholesale regime.
Approximate total issuance on each market
Main Market. According to the LSE, the value of debt securities admitted to the Main Market exceeds GB£1.65 trillion, accounting for almost a quarter of the GB£6 trillion of securities that are listed on the Main Market. There are more than 14,500 debt securities from around the world listed on the Main Market.
ORB. As of 15 April 2016, there were 177 retail bonds admitted to trading on the ORB platform, consisting of:
106 corporate bonds.
Two supranational bonds.
PSM. There are currently more than 550 debt securities admitted to the PSM.
The regulator is the Financial Conduct Authority (FCA), which operates as the UK Listing Authority (UKLA) in relation to the regulation of the issuance of both equity and debt securities.
In the UK, offers and listings of debt securities must comply with the Financial Services and Markets Act 2000 (FSMA) and the PD Regulation (see Question 1).
Under the FSMA, the UKLA has developed three sets of rules that are published as part of the FCA Handbook:
The Listing Rules set out minimum requirements for the:
admission of securities to listing;
content and publication of listing particulars;
continuing obligations for issuers after admission.
The Prospectus Rules implement the Prospectus Directive regime in the UK and apply where a prospectus is required (see Questions 13 and 14). Under the Prospectus Rules a prospectus must be issued, unless an exemption applies, if there is:
an offer of transferable securities to the public;
a request for the admission to trading of transferable securities on a regulated market (that is, for the securities to be admitted to trading on the LSE's Main Market).
The Prospectus Rules set out the form, content and approval requirements for prospectuses and are contained in the Prospectus Rules sourcebook (although to a large extent they copy out provisions of the PD Regulation which is directly applicable law in each member state).
The Disclosure and Transparency Rules (DTRs) implement the Transparency Directive. The DTRs consist of two distinct sets of rules:
the "Disclosure Rules" that set out the rules for issuers on the disclosure and control of inside information and transactions by persons discharging managerial responsibilities and their connected persons;
the "Transparency Rules" that relate to major shareholdings and the notification and dissemination of financial and other information by issuers.
The International Capital Market Association (ICMA) issues market-standard recommendations and guidance that are contained in the ICMA Primary Market Handbook, for example, the standard ICMA selling restrictions (see Question 1). These are not legally binding, but are generally followed by market participants.
Listing debt securities
All debt securities must comply with the following eligibility requirements set out in Listing Rule 2 in order to be listed:
Incorporation. The issuer must be duly incorporated or otherwise validly established according to the relevant laws of its place of incorporation or establishment and operating in conformity with its constitution.
Validity. In order to be listed, the securities must:
conform with the law of the issuer's place of incorporation;
be duly authorised according to the requirements of the issuer's constitution;
have any necessary statutory or other consents.
Transferability. The securities must be freely transferable and free from all liens and from any restriction on the right of transfer.
Market capitalisation. The expected aggregate market value of the securities to be listed must be at GB£200,000 (or equivalent). This does not apply to tap issues where the amount of the securities is not fixed (securities of lower value may be admitted in certain limited circumstances).
Whole class to be listed. An application for listing of securities of any class must:
relate to all securities of that class, issued or proposed to be issued, if no securities of that class are already listed;
relate to all further securities of that class, issued or proposed to be issued, if securities of that class are already listed.
There is no minimum denomination required for listing. However, the maximum denomination for securities admitted to the Order Book for Retail Bonds (ORB) is GB£10,000 (only sterling denominated securities are currently permitted on ORB).
Before securities can be offered to the public or admitted to trading on the Main Market, a prospectus must be:
Approved by the UK Listing Authority (UKLA) in accordance with the Prospectus Rules.
Made available to the public.
In order for securities to be listed on the Professional Securities Market (PSM), listing particulars must be:
Approved by the UKLA in accordance with Rule 4 of the Listing Rules.
Published in accordance with Rule 4 of the Listing Rules.
Under Listing Rule 2, convertible securities and miscellaneous securities that give the holder the right to buy or subscribe for other securities can be admitted to listing, but only if the securities into which they are convertible (or over which they give a right to buy or subscribe) are already, or will become at the same time as listing, listed either on:
A London Stock Exchange (LSE) market.
Another regulated, regularly operating and recognised open market.
The listing of depositary receipts (certificates representing shares) is governed by Listing Rule 18. They require equity levels of disclosure from the issuer. The issuer must provide information about itself and the underlying shares.
For disclosure requirements for equity securities, see Equity capital markets in the UK (England and Wales): regulatory overview.
Warrants linked to shares in the issuer (or a member of its group) are treated as equity securities for disclosure purposes. Warrants linked to shares of an unrelated company are likely to be securitised derivatives under the Listing Rules.
The listing of securitised derivatives is governed by Listing Rule 19. The issuer of a securitised derivative must:
Be a bank or a securities and futures firm.
Be an authorised issuer of securitised derivatives under the Financial Services and Markets Act 2000 (FSMA).
Arrange for its obligations in relation to the securitised derivatives to be unconditionally and irrevocably guaranteed by an entity that is a bank or a securities and futures firm and is authorised under FSMA to carry on its activities relating to securitised derivatives.
If the issuer is located outside of the UK, it must be similarly regulated overseas (or, for each trade, be guaranteed by an entity that is similarly regulated overseas).
The underlying instrument must be traded on a regulated, regularly operating and recognised open market (unless it is a currency, index, interest rate, a basket or a combination of any of these).
A retail securitised derivative must, under its terms, require the issuer to pay the holder a cash amount or deliver the underlying instrument to it.
Continuing obligations: debt securities
Generally, an issuer with debt securities listed on a market in the UK must comply with the continuing obligations in the Disclosure Rules and Transparency Rules (DTRs).
Periodic financial reporting
Under DTR 4, an issuer must publish audited annual accounts (meeting the requirements of the DTRs) within four months of its year end and interim accounts (that do not need to be audited but must meet the requirements of the DTRs) within three months of the end of the interim period. Issuers of wholesale debt and issuers on the Professional Securities Market must prepare annual reports but are exempted from the requirement to prepare half-yearly reports.
Disclosure of inside information
Under DTR 2, an issuer must notify a regulatory information service, for example, the London Stock Exchange's Regulatory News Service, as soon as possible of inside information directly concerning the issuer, unless legitimate interests permit otherwise.
Inside information is information of a precise nature that:
Is not generally available.
Relates directly or indirectly to the issuer or securities.
Would, if generally available, be likely to have a significant effect on the price of the securities.
Listing Rule 17.3 also sets out continuing obligations for issuers of debt securities. These include:
Requirements regarding the preparation and filing of an issuer's annual report and accounts. These apply to issuers of wholesale securities that are not required to comply with the periodic financial reporting requirements of the DTRs.
Rules for the circulation of information regarding proposed amendments to trust deeds (including terms and conditions).
Rules for the circulation of information in connection with early redemption of securities.
Requirements for the presentation and content of documents of title relating to securities.
There are exemptions from certain of these continuing obligations for issuers whose only securities admitted to trading have a denomination of at least EUR100,000 (or equivalent).
The continuing obligations apply to any issuer whose home member state for the purposes of the DTRs is the UK and similar requirements will apply to any other issuer. However, if the issuer is incorporated in a non-EEA state whose relevant laws are considered by the FCA to be equivalent to the relevant UK requirements, the issuer is subject to less onerous obligations in relation to certain information requirements and financial reporting obligations.
Advisers and documents: debt securities issue
The roles of advisers (and other parties to an issuance of debt securities) are as follows:
Arranger or lead manager (investment bank). These are appointed by the issuer to arrange the issue of debt securities and manage the issue process, including the structure, timing and pricing of the issue. Depending on the terms of its appointment, the lead manager generally takes the risk that if the issue is not fully subscribed by investors, it will purchase the unsubscribed securities. Therefore, the lead manager can spread the risk by recruiting co-managers who agree to subscribe for the securities and sell them to investors.
Trustee. A trustee is appointed by the issuer (often on advice from the lead manager or the issuer's lawyers). The trustee acts on behalf of the bondholders, so owes them a duty of care under common law trust principles (see Question 4).
Fiscal agent. A fiscal agent is primarily responsible for the payments to bondholders in a fiscal agency structure. If a trustee is appointed, the principal paying agent is appointed to perform this function. The fiscal agent's other administrative functions include the publication of notices to bondholders (see Question 4).
Auditors. The issuer's auditors will generally be required to take part in the preparation of the prospectus (or other disclosure document) and to issue a comfort letter to the lead managers on the issuer's accounts. The comfort letter typically confirms that all financial information in the prospectus is correct and that there has been no material adverse change in the issuer's financial condition since its last accounts were published.
Lawyers. The issuer, the lead manager and (if applicable) the trustee usually each appoint legal advisers. If a fiscal agency structure is used, the agent does not usually appoint separate legal counsel. The lawyers usually take responsibility between them for preparing the offering documentation and transaction documents.
The main documents produced when issuing and listing debt securities are:
Prospectus or listing particulars. A prospectus is required for regulated markets such as the Main Market. For the Professional Securities Market (PSM), listing particulars are used, although the disclosure requirements are very similar. These provide detailed information about the securities and the issuer for potential investors. Prospectuses must comply with the Listing Rules, the Prospectus Rules and the PD Regulation, whereas listing particulars only have to comply with the Listing Rules.
Subscription or underwriting agreement. This is entered into by the issuer, the lead manager and any co-managers. The agreement deals with the issuance of the bonds and how the managers will subscribe for the bonds. Where the bond is not underwritten but an agent is appointed to market or place the bonds with investors, a placement agency agreement can be used instead.
Trust deed (in a trust structure). This is a contract between the issuer and the trustee that covers, among other things:
the constitution of the bonds;
the requirement of the issuer to pay;
the trustee's powers and duties;
the appointment and removal of the trustee;
the process for conducting bondholders' meetings.
Paying agency agreement (in a trust structure). This is a contract between the issuer and the various paying agents, which sets out, amongst other things, the mechanism by which the issuer pays the principal and interest, typically through the clearing systems (such as Euroclear and Clearstream).
Fiscal agency agreement (in a fiscal agency structure). This is a contract between the issuer and the fiscal agent (and any other paying agents). It sets out, amongst other things, the forms of the bonds, the mechanism by which the issuer pays the principal and interest and the process for conducting bondholders' meetings.
Deed of covenant (in a fiscal agency structure). This gives bondholders direct rights of enforcement against the issuer if an event of default occurs.
Supporting documentation. In addition to the transaction documentation, the lead manager's lawyers must prepare supporting documentation to be submitted to the UK Listing Authority (UKLA) for approval with any prospectus. These include:
checklists to illustrate to the UKLA that all the requirements of the prospectus directive have been complied with;
a contact details form for the issuer;
a "Form A" confirming that the UK is the issuer's home member state, all necessary information has been included in the prospectus and all necessary documents and information have been provided;
a publication form setting out how the prospectus will be made available to the public (see Question 13); and
a sanctions compliance letter (for emerging markets issuers) confirming that the issuer has complied with the international sanctions in place against applicable entities.
Debt prospectus/main offering document
Unless there is an applicable exemption (see Question 14), a prospectus is required for the issue of debt securities in the UK where:
There is an offer of securities to the public.
There is an application for admission to trading on a regulated market (that is, the Main Market).
The UK Listing Authority (UKLA), as the competent authority, can approve the prospectus of any UK company, or the prospectus of any company that wishes to list its securities on the Main Market or offer them to the UK public, provided the securities have a minimum denomination of at least EUR1,000.
The issuer must file the approved prospectus with the UKLA, through the National Storage Mechanism portal, via the Morningstar website (www.morningstar.co.uk/uk/NSM) and make it available to the public by:
Publication in a newspaper.
Making it available in printed form at the offices of the issuer and any financial intermediaries (such as the paying agents or the fiscal agent).
Publication on the issuer's website.
Publication on the London Stock Exchange's (LSE) website, through the publication of an announcement on the LSE's Regulatory News Service.
If the issuer publishes the prospectus in a newspaper or makes it available at its offices, it must also publish the prospectus on its website. If one of the electronic publication methods is chosen, the issuer must also make hard copies available on request, without charge.
Offer to the public
An offer to the public is exempt from the requirement for the approval and publication of a prospectus if:
It is made to qualified investors only.
It is made to fewer than 150 persons (other than qualified investors) per European Economic Area (EEA) state.
The minimum consideration paid by any person is at least EUR100,000.
The securities are denominated in amounts of at least EUR100,000.
The total consideration is not more than EUR100,000.
Admission to trading
Listing of securities that are already admitted to trading on another regulated market in the EEA is exempt from the requirement for approval and publication of a prospectus, subject to certain conditions set out in the Prospectus Directive.
Where an offer is both an offer to the public and an application for admission to trading on a regulated market, it is necessary to qualify for an exemption for each limb.
A prospectus must contain the information necessary to enable investors to make an informed assessment of the (section 87A, Financial Services and Markets Act 2000):
Assets and liabilities.
Profits and losses.
Prospects of the issuer (and of any guarantor).
The rights attaching to the securities.
This information must be:
Presented in a form that is comprehensible and easy to analyse.
Prepared having regard to the particular nature of the securities and the issuer.
If the prospectus states that the guarantor is a European Economic Area (EEA) member state, the prospectus does not have to include other information about the guarantor.
The prospectus should, in summary, include:
Two years of audited annual financial statements in respect of the issuer and any guarantor (or such shorter period as the issuer/guarantor has been in operation).
Details of any significant change in the issuer's (or guarantor's) financial or trading position or material adverse change in the issuer’s (or guarantor's) prospects since its most recent audited financial statements.
Risk factors covering the issuer's (or guarantor's) ability to fulfil its obligations under the securities and factors material to the securities to make an assessment of the market risk associated with them.
Details regarding the terms of the securities.
Information regarding the directors, including any conflicts of interest.
The principal activities and principal markets of the issuer (and any guarantor).
Details of any material contracts, to the extent they can be publicly disclosed.
Details of any significant legal or arbitration proceedings (including any that are pending or threatened over the preceding 12 months).
Any other information as is required under the applicable section of Appendix 3 to the Prospectus Rules (the exact list of information requirements depends on the nature of the securities in question).
The disclosure regime for retail securities under the Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading (Prospectus Directive) has a requirement to include a summary of the offering in the prospectus that (concisely, in non-technical language and in an appropriate structure) conveys the key information relevant to the securities that are the subject of the prospectus to aid investors when considering whether to invest (when read with the rest of the prospectus). The order and format of the prospectus must comply with the relevant Prospectus Rules and the PD Regulation.
People with statutory liability for a prospectus relating to debt securities are (Prospectus Rule 5.5.4):
Each person that accepts, and is stated in the prospectus as accepting, responsibility for the prospectus.
The offeror (if the offeror is not the issuer) in relation to offers.
The person requesting admission (if this is not the issuer) in relation to a request for admission to trading.
The guarantor (in relation to information in the prospectus that relates to it or to the guarantee) for a guaranteed issue.
Any other person that has authorised the contents of the prospectus.
There is no requirement for an issuer's directors to take responsibility for a prospectus relating to debt securities.
Timetable: debt securities issue
The timetable for issuing and listing debt securities can vary. If the securities are being issued under a pre-existing programme, or to institutional investors, then the timetable is shorter than if the issuer is either:
Issuing securities for the first time.
Offering them to the public in circumstances where a prospectus is required.
This is because the prospectus must be drafted and approved before investors can be approached and there will be a longer period for marketing and for publicising the issue.
The familiarity of the issuer and its advisers with the disclosure process and also the complexity of the relevant terms and conditions can also affect the length of the transaction.
The London Stock Exchange (LSE) has an indicative timetable on its website (www.londonstockexchange.com/specialist-issuers/debts-bonds/types-of-debts-bonds/a-practical-guide-to-listing-debt-in-london.pdf).
Tax: debt securities issue
Withholding tax (WHT)
According to UK tax law, UK income tax generally must be withheld at the basic rate (currently 20%) from payments of interest that have a "UK source". Generally this covers payments by UK incorporated issuers or UK branches of non-UK incorporated issuers.
Issuers should ensure that debt securities are "gross-paying" as this is what the market and investors expect. Issuers paying "UK source" interest usually try to ensure that the issued securities fall within one of the UK withholding tax exemptions. Broadly, the main exemptions are for securities that satisfy one of the following tests:
The securities are issued by a company, carry a right to interest and are, and continue to be, listed on a recognised stock exchange (for example the Main Market or the Professional Securities Market).
The securities qualify as an Additional Tier 1 instrument or Tier 2 instrument for the purposes of Commission Regulation (EU) No 575/2013.
The redemption date of the securities is 364 days or less from the date of issue.
Where the issuer has permission under Part 4 of the Financial Services and Markets Act 2000 (FSMA) to accept deposits and the interest is paid in the ordinary course of its business, there is a WHT exemption. Guidance on this exemption can be found in HMRC’s Corporate Finance Manual at 75100. (www.hmrc.gov.uk/manuals/cfmmanual/CFM75100.htm)
Where the issuer is a person authorised for the purposes of FSMA, there should be no WHT on the interest provided that:
the issuer's business consists wholly or mainly of dealing in financial instruments as principal;
the payment of interest is made by that person in the ordinary course of business (section 885, Income Tax Act 2007).
The securities are issued by a company to another company resident in the UK or non-UK resident company acting through a permanent establishment within the charge to UK corporation tax in respect of that income.
The securities are privately placed, have a term not exceeding 50 years, and aggregate minimum value of GB£10 million and are not listed on a recognised stock exchange.
The presence of a particular type of tax avoidance purpose can remove the applicability of some of those exemptions.
The same WHT rules and exemptions apply to premiums and can, in certain circumstances (particularly if there is no other interest payable), also apply to discounts.
Stamp duty and stamp duty reserve tax (SDRT)
Most vanilla fixed and floating rate debt securities satisfy the "exempt loan capital" exemption (section 78, Finance Act 1986) and are, therefore, exempt from stamp duty and SDRT.
The most commonly seen examples not covered by that exemption are convertible securities and profit-participating securities (such as, subordinated notes on a securitisation). In both these cases, there are certain other potential exemptions, particularly where there is no register of the securities in the UK, but the terms of the relevant exemptions are more complex. The position is further complicated by the fact that the UK has retained, but does not enforce, certain charges on issuing securities that are not "exempt loan capital" even though that charge has been held to be in breach of certain EU treaty freedoms. Nevertheless, even for those securities outside the safe harbour of the "exempt loan capital" exemption, in practice, there is generally no need to pay stamp duty or SDRT on the issuance or transfer of these securities.
Clearing and settlement of debt securities
Debt securities can be issued in:
Traditional "definitive" form, that is as paper certificates.
In "global" form.
With both definitive and global form, debt securities can be issued in:
Bearer form, where title is determined by possession of a certificate of title and is transferred by delivery of that certificate.
Registered form, where title is determined by the name entered on the register and is transferred by appropriate entries in the register of title.
Generally, modern debt security issuances occur in global form, to enhance the convenience with which securities can be held and transferred. A global note is a single document representing the whole issue that is deposited with a depositary for safekeeping on behalf of the "clearing systems". In Europe, Euroclear and Clearstream are the largest and most frequently used clearing systems for bond issues. Bondholders typically hold their interests in bonds through custodians or brokers that are account participants at these clearing systems.
Clearing and settlement are two separate processes, but are often referred to as one.
Establishes the obligations of the buyer and the seller.
Ensures that a buyer and a seller have agreed on an identical transaction.
Determines what each party expects to receive.
This process is normally provided by one of the clearing systems.
"Settlement" is the final stage. It discharges the obligations of the buyer and seller:
Securities are transferred from the seller to the buyer.
Funds are transferred from the buyer to the seller.
This process also happens through the clearing systems. Sellers and buyers each have two accounts with a clearing system, one for cash and the other for securities. These accounts are debited or credited depending on whether securities are being bought or sold.
An issuer can choose to issue debt securities in any currency to:
Access sources of financing that otherwise may not be available if the securities were denominated in the domestic currency of the issuer.
Address a specific funding need.
However, consideration must be given to the timing of settlement when settling debt securities in foreign currencies and between parties in varying time zones.
Proposed financial transactions tax
The European Commission has published a proposal for a Directive for a common financial transaction tax (FTT) which currently only ten member states have agreed in principle to introduce: in Belgium, Germany, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia (the participating member states). It is currently a proposal and has not been implemented, although in December 2015 the participating member states reached agreement on the main features of the FTT regarding shares and derivatives, and agreed to conduct further analysis of open issues with a view to a decision being taken on these open issues before the end of June 2016.
The initial form of the proposed FTT was very broad in scope. While the issuance and subscription of securities should be exempt, it would subject certain secondary market transactions to this transaction tax. Therefore, it would apply in particular to sales and purchases of securities issued by an entity that was established in a participating member state. No matter where the issuer was incorporated, the FTT charge also applies where either the:
Seller or buyer was a financial institution.
Seller or buyer was established in a participating member state.
The perceived extra-territorial nature of that second limb of charge is controversial and the UK government reiterated in December 2015 that the UK would not participate in the FTT and would oppose an FTT with extra-territorial effects that were detrimental to the interests of non-participating member states, including through a renewed legal challenge if necessary. It is now being determined whether it is more sensible to start taxation with only shares issued in the participating member states.
Certain limited exceptions will apply to agents and clearing members (acting as facilitators) and for market making. Nonetheless, this proposal would have very serious impacts on a number of areas, particularly the repo markets if introduced in its current form.
Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act (FATCA) is the name given to the provisions of sections 1471 - 1474 of the United States Internal Revenue Code which were introduced to combat tax evasion by US tax residents using foreign accounts. It requires US banks and certain other persons making payment of US source income and certain foreign financial institutions (FFIs) to report information about financial accounts held by:
Certain foreign entities in which US taxpayers hold a substantial ownership interest.
Failure to meet these new reporting obligations could, in certain cases, result in a 30% withholding tax on some payments to the FFIs.
The UK and the US signed an intergovernmental agreement (IGA) in September 2012 (based on a model IGA developed between the US government and several EEA states). The IGA reduces some of the administrative burden of complying with FATCA, and provides a mechanism for UK financial institutions to comply with their obligations without breaching data protection laws. Under this mechanism, financial institutions pass information to HM Revenue & Customs (HMRC) who then automatically exchange this information with the Internal Revenue Service (IRS).
Under the current implementing legislation of IGA, UK issuers do not face any obligations to withhold. This may change for payments made on or after 1 January 2019. However, it is expected that a grandfathering rule will provide that securities issued on or before the date that is six months after the date that the final US Treasury regulations addressing "foreign passthru payments" are published and that are not modified and treated as reissued (for US federal income tax purposes) will not be subject to withholding.
Key Information Document for packaged investment products
In April 2014, the European Parliament and the Council of the EU reached an agreement on a Regulation (Regulation 1286/2014) for a new Key Information Document (KID) to be produced by investment product manufacturers and provided to retail customers when they are considering buying packaged investment products. The Regulation entered into force on 29 December 2014 and it will take effect from 31 December 2016.
A KID is a new, short, pre-contractual disclosure document that is to be provided to retail investors to help them understand, compare and use information that is made available to them when they are considering buying a wide range of investment products that are referred to as packaged retail and insurance-based investment products. The Regulation will require the provision of basic information about:
The risk and return that can be expected.
The overall aggregate cost that will arise in making the investment.
The product manufacturer is responsible for preparing the KID and publishing it on its website.
On 7 April 2016, the Joint Committee of the European Supervisory Authorities (the ESAs) published draft regulatory technical standards (RTS) setting out the mandatory features of KIDs produced in accordance with the Regulation. The RTS will now be reviewed by the Commission, the Council and the European Parliament with the expectation that the RTS will enter into force in time for the application of the Regulation from 31 December 2016. Ahead of the application date, the ESAs expect to publish FAQs or "How-To" guides giving detailed guidance on methods for the calculation of the summary risk indicator for a product, performance scenarios and the cost information to be included in a KID.
In a debt capital markets context, it is important to note that the Regulation only applies to "packaged" investment products: that is, debt securities where the amount repayable to the holder is subject to fluctuations because of exposure to reference values or to the performance of one or more assets which are not directly purchased by the holder. Therefore the vast majority of "vanilla" debt capital markets securities will be outside the scope of the Regulation, although things like convertible or exchangeable bonds will potentially be in scope.
Capital Markets Union
The Capital Markets Union (CMU) is a flagship initiative of the 2014-19 European Commission that is intended to strengthen EU capital markets.
The Commission launched the CMU initiative because of concerns that, compared to other jurisdictions, capital market-based financing in the EU is relatively underdeveloped and businesses in the EU remain heavily reliant on banks as a source of funding.
The three main objectives of the CMU are to:
Broaden the sources of financing in Europe towards non-bank financing by giving a stronger role to capital markets. Borrowers and investors should be offered a broader set of financial instruments to meet their respective needs.
Deepen the single market for financial services. Capital markets should benefit from the size effects of the single market and become deeper, more liquid and more competitive, for the benefit of both borrowers and investors.
Promote growth and financial stability. The CMU should support growth and the creation of jobs by improving companies' access to finance, in particular small and medium-sized enterprises (SMEs). The CMU should also address possible risks stemming from the over-reliance on bank lending and intermediation in the financial system by promoting more diversified funding channels to the economy.
The Commission intends to deliver the CMU by a range of initiatives, rather than attempting to establish it through a single measure. These measures are a mixture of reforms targeted at specific sectors and more general reforms of the EU supervisory structure. The purpose of each of these measures is to remove barriers between investors' money and investment opportunities and to overcome the obstacles that prevent businesses from reaching investors. The Commission's September 2015 action plan on building the CMU (COM (2015) 468 final) sets out the full range of initiatives that the Commission is currently contemplating and its anticipated timings for delivering them.
The Commission's aim is to put in place the building blocks for a fully functioning CMU by 2019.
New Prospectus Regulation
One of the key elements of CMU is a Commission proposal (published in November 2015) to repeal and replace the Prospectus Directive with a new Prospectus Regulation to update its provisions relating to the scope of the requirement to prepare a prospectus, the contents of a prospectus and the approval process for prospectuses. The aim is to make it easier for companies to draw up a prospectus and access capital markets.
In its current form the proposed new Prospectus Regulation would trigger the following key changes to the Prospectus Directive regime.
Wholesale versus retail. The abolition of the slightly lighter touch "wholesale" disclosure regime that currently applies to securities having a denomination of at least EUR100,000 such that the additional "retail" regime requirements will apply regardless of the denomination.
Minimum disclosure regime. A "minimum disclosure" regime which will benefit issuers whose equity securities have been admitted to trading on a regulated market for at least 18 months and who issue non-equity securities, certain issuers of further fungible securities, offerers of securities already admitted to trading and certain small or medium-sized enterprises (SMEs) making public offers.
Summaries. A summary will no longer be required for a base prospectus, though the final terms for each individual issue under the base prospectus must have a summary of the issue annexed to it. The requirements for a summary remain highly formulaic, requiring them to follow a mandatory format congested with prescribed health warnings, and where a KID is required under the PRIIPs KID Regulation, the KID may be used in substitution for certain prescribed information in the summary.
Incorporation by reference. The range of information which can be incorporated by reference in a prospectus has been expanded to include all regulated information and also historic annual and interim financial information and audit reports, wherever published and for whatever reason.
Universal registration document. A "universal registration document" is a registration document drawn up by an EEA issuer (it is not available to non-EEA issuers) which already has securities admitted to trading on a regulated market or a multilateral trading facility in a member state. Such an issuer will, in certain circumstances, be able to utilise a fast track procedure for approval of its prospectuses, and also use its universal registration document to satisfy its Transparency Directive obligations to file and publish annual and half-yearly reports.
Risk factors. In order to curb the tendency of "overloading" the prospectus with generic risk factors which obscure the more specific risk factors that investors should be aware of, risk factors must be divided into two or three categories based on materiality and ESMA will develop guidelines concerning risk factors' specificity and materiality.
Expiry of base prospectus during offer period. Where an offer is made under a base prospectus whose validity expires during the offer period, the offer may continue after the expiry of the base prospectus provided that:
A new base prospectus is approved no later than the last day of validity of the previous base prospectus.
The final terms of the offer contain a prominent warning indicating the last day of validity of the previous base prospectus and where the new base prospectus will be published.
The new base prospectus includes (or incorporates by reference) the form of the final terms from the previous base prospectus and refers to the final terms which are relevant for the continuing offer.
Any investor who has agreed to buy the securities during the validity period of the previous base prospectus will acquire a withdrawal right, unless the securities have already been delivered.
The proposed new Prospectus Regulation is now being considered by the European Parliament and the Council for adoption. As an EU regulation, it will be legally binding in all EU member states without transposition into national law. The current proposal is that it will apply from the date which is 12 months after the date on which it enters into force. Consequently it will not be until sometime late in 2017 at the earliest that it will take effect.
Market Abuse Regulation
The EU market abuse framework, which includes requirements for member states' legislation to provide for disclosure of inside information, currently derives from the Market Abuse Directive 2003/6/EC (MAD). With effect from 3 July 2016 the Market Abuse Regulation (2014/596/EU) (MAR) will update this framework in a number of ways. However, in the context of the UK's requirements for disclosure of inside information relating to debt capital markets instruments, the principal change will simply be that much of the applicable legislation will cease to be found in the FSMA and the FCA's Disclosure Rules and instead will be found in MAR, which as an EU Regulation will have direct effect in the UK. Due to the direct applicability of MAR, the UK proposes to repeal the FCA's powers to make the Disclosure Rules and the FCA proposes to remove the rules and replace them with signposts to the relevant MAR provision. The "Disclosure Rules" will be renamed as "Disclosure Guidance".
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Anna Delgado, Partner
Professional qualifications. England and Wales, Solicitor, 1996
Tim Morris, Expertise Consultant
Professional qualifications. England and Wales, Solicitor, 1982