ACCESSING THE INTERNATIONAL DEBT CAPITAL MARKETS

Transcription

1 ACCESSING THE INTERNATIONAL DEBT CAPITAL MARKETS

2 ACCESSING THE INTERNATIONAL DEBT CAPITAL MARKETS A Summary of Considerations for Issuers Context This paper is a summary of the key commercial, legal and structural issues for consideration by issuers in the Asia Pacific region considering raising funds in the international debt capital markets. The following topics will be covered: Alternative bond markets Relevance of U.S. securities laws for debt offerings Clearing system mechanics Trustee or fiscal agency structure? Listing and listing venues Different currency markets Ratings Standalone vs MTN programme structure Liability for content of prospectus/offering circular Covenant package Typical timetable for debt issues This paper is not intended to be, and should not be, relied on as definitive advice in relation to any matter. Alternative markets There are primarily four key markets which issuers in the Asia Pacific region tap for their capital raising requirements as follows: 1 Eurobond market (or Regulation S market) a. Bonds sold internationally but outside of the United States (the "U.S.") under Regulation S of the U.S. Securities Act of 1933 (the "Securities Act") to avoid registration with the Securities and Exchange Commission (the "SEC") in the U.S (see section below on U.S. law). These bonds are often issued in a currency which is not the currency of the jurisdiction of the issuer (hence the term "euro" bond). b. Usually suitable for issue sizes of up to US$500m to US$750m. For anything more than these amounts, issuers will need to tap the deeper global bond market referred to below. c. Securities are often listed on a stock exchange to increase liquidity and allow access to a greater pool of investors. d. Bonds issued by investment grade issuers (i.e. issuers with a long term rating of at least BBB- by S&P or Fitch and Baa3 by Moody's), may often be issued without any security or any business or financial covenants except for a bond-style pari passu and negative pledge covenant (See "Covenants", below). 2 The global bond market - a. Bonds sold globally including into the U.S., often under Rule 144A of the Securities Act to avoid registration with the SEC in the U.S. (see "U.S. Securities Law", below). b. As with the eurobond market, investment grade issuers are usually able to issue bonds in this market without any security or any business or financial covenants except a bond style negative pledge. Page 1

3 c. Securities are often listed on a stock exchange to increase liquidity by allowing access to a greater pool of investors. Certain institutional investors are precluded from investing in unlisted securities. See "Is listing necessary?" below. d. For issues in excess of US$750m, issuers often tap the global bond market for better pricing and terms. 3 U.S. private placement- a. Bonds sold by way of private placement into the United States pursuant to Section 4(a)(2) of the Securities Act. b. Well-trodden path for many corporates in certain jurisdictions including Australia. c. Usually entail significantly more elaborate and onerous covenants than the eurobond or global bond market, even for a highly rated issuer. 4 Eurobond private placement. Private placement of bonds internationally but outside the United States - a. Usually appropriate for smaller issues. b. Is the default market for issuers that are not able to tap the Eurobond or global bond market. c. Investment grade issuers are usually able to issue bonds into this market without any security or any business or financial covenants except a bond-style negative pledge. U.S. Securities Law The Securities Act provides that no securities may be offered or sold unless the securities are registered with the SEC or an exemption from registration is available. Given that registration with the SEC is an expensive and time-consuming process (as it will involve the preparation of an offering circular or prospectus that complies with the substantial disclosure requirements of the SEC, obliges the issuer to comply with ongoing US disclosure obligations and potentially exposes the issuer to liability in the US), many international securities issues will be structured to qualify for one of the exemptions from SEC registration. In this respect, the two most commonly used exemptions are Regulation S and Rule 144A. Regulation S The Regulation S exemption is available for securities offered and sold outside the U.S. Two general conditions apply: any offer/sale must have occurred in an "offshore transaction", i.e. the buyer is "outside the U.S." or the purchase takes place through a "designated offshore securities market"; and there must have been no market conditioning activities, known as "directed selling efforts" in the U.S. by the issuer, any distributor or any of their affiliates. Regulations S distinguishes between three categories of transactions based on the type of securities being offered and sold, whether the issuer is a US/non-US issuer, and whether there is substantial U.S. market interest ("SUSMI") in their securities. The two most commonly seen categories are Category 1 and Category 2. Category 1 is generally available for offerings of securities of foreign issuers which are not U.S. Securities Exchange Act of 1934 reporters and do not have SUSMI in their securities. Under this category, securities may be offered to U.S. persons outside of the U.S. provided that no directed selling efforts have been conducted in the U.S. Category 2 is available for offerings of securities of issuers which do have SUSMI. In this case, there are more restrictions, including that any offer or sale prior to the end of a 40 day distribution compliance period may not be made to or for the account or benefit of a U.S. person. As securities are not being offered and sold into the U.S., the disclosure requirements as well as the due diligence procedures conducted for a Regulation S only deal are often less extensive than for a Rule 144A deal described below. Page 2

4 Rule 144A Rule 144A exempts offers/re-sales of securities to Qualified Institutional Buyers (or QIBs, as defined in Rule 144A) in the U.S. Often a Rule 144A offering into the U.S. will be coupled with a Regulation S offering outside of the U.S. in order to maximise investor access. Given that the U.S. is potentially a more litigious market, the level of disclosure as well as due diligence needed for a Rule 144A deal is often much more extensive than a Regulation S deal only. Accordingly, from a cost perspective, a Rule 144A deal will be much more expensive to execute (usually at least twice the cost of a Regulation S deal). Among other things, lawyers on both sides of the transaction will often be expected to deliver to the arranger banks a 10b-5 disclosure letter which states that nothing has come to counsel's attention suggesting that the offering document contains any material misstatements or omissions. The 10b-5 disclosure letters are required by the arranger banks for the purposes of establishing their due diligence defence against liabilities under the anti-fraud provisions of Rule 10b-5 under the U.S. Securities Exchange Act of 1934 which in general terms makes it unlawful in a securities transaction to make any "untrue statement of a material fact" or to "omit to state a material fact" necessary to make other statements "not misleading" in light of the circumstances under which they were made. The consequences for violation of U.S. securities law include criminal and civil liability. Although issuers with no connection with the United States may feel indifferent to these laws, the arranger or manager on the deal will often be an international investment bank which will need to ensure that all securities that it arranges or manages are in compliance with relevant U.S. securities law requirements. In addition, from an investor perception perspective, issuers will want to project an image of compliance in order to attract the widest range of investors. Clearing systems Bonds sold in the international markets are often cleared through a clearing system. Bonds are usually cleared through Euroclear Bank S.A./N.V. and Clearstream Banking, Société Anonyme (for investors outside the U.S.), and the Depositary Trust Company (or DTC) (for investors in the U.S.). Bonds that are issued and denominated in Singapore dollars are usually cleared through the Central Depository (Pte) Limited. Bonds that are cleared through a clearing system are issued in global form, meaning that only one note certificate is issued which represents all of the bonds globally. Such certificate would be issued in the name of a nominee or common depositary for the clearing systems. On the confidence that the note certificate is being held for or on its behalf, the relevant clearing system would then allocate principal amounts of the bonds to investors through accounts held with it. The diagram below shows a typical bond holding structure cleared through a clearing system. HOLDERS/ INVESTOR Secondary sale 4 ARRANGER/ MANAGER (underwriter) Accounts Account 3 CLEARING SYSTEM (Euroclear/Clearstream and/or DTC) Agency/trust $ Subscription price 1 2 COMMON DEPOSITARY 2 Global note $ Subscription price ISSUER Page 3

5 From the diagram: 1 The arranger/manager underwrites the issue and pays the subscription price to the common depositary after pricing and a few days prior to closing. 2 On closing, the issuer issues the global note to the common depositary in return for payment of the subscription price. 3 On the confidence that the global note is being held for it, the clearing system will then allocate principal amounts of the bonds to the arranger/manager. 4 The arranger/manager will then sell the bonds through the clearing system in the secondary market to investors. Only privately placed bonds are sometimes issued in definitive form held outside a clearing system. There are advantages in holding securities through a clearing system including: access to a wider class of investors. Some investors can only hold bonds cleared through a clearing system; ease of transfer of bonds between holders through the clearing system. No definitive certificate needs to be exchanged; usually not necessary to hold a bondholders meeting to decide amendments/waivers under the bonds as voting can be obtained electronically through the clearing system; and provision of notices to and from noteholders can be effected electronically through the clearing system without the need for publication of notices through newspapers which can be expensive. In order to allow bonds to be cleared through a clearing system it is necessary to appoint agents to act as intermediaries between the issuer and the clearing system to help the issuer pay principal and interest under the bonds, handle registration and transfer, etc. Trustee/Fiscal Agency structure On every bond issue, the question is often asked as to whether the issuer should adopt a fiscal agency structure or a trustee structure. Key features of a trustee structure include the following: The Trustee is not an agent of the issuer. The Trustee is a trustee (as opposed to a pure agent) of the bondholders and has (in theory) discretion to decide matters on behalf of bondholders without having to consult with, or obtain the consent of, the bondholders. In practice, however, given the potential for liability, trustees will rarely exercise such discretion without recourse to the bondholders. In a trustee structure, all interaction between the issuer and the bondholders (including enforcement action) must go through the trustee thereby providing the issuer with one point of contact to deal with all of the bondholders. On an event of default, holders cannot enforce directly against the issuer and must always enforce through the trustee. This helps the issuer avoid the mad bondholder problem (i.e. holders that enforce even on a mere technical default). Having a trustee adds a layer of costs to the bond offering transaction as a whole (trustees will charge additional fees, and a trust deed will need to be prepared and executed as a condition precedent to the closing of a bond issue). Key features of a fiscal agency structure are as follows: There is no agent or trustee acting for the bondholders and so each bondholder must monitor compliance with the bond documents and take enforcement action against the issuer directly on the occurrence of an event of default. Unlike a trustee, the agents including the fiscal agent are agents of the issuer and not the bondholders and so have much more limited discretion and must seek instructions on every issue. Page 4

6 The diagram below shows the typical trustee and fiscal agency structures. The fiscal agency structure is the same with a trustee structure but with the Trustee removed and the principal paying agent named as the fiscal agent": Trustee Structure Fiscal Agency Structure HOLDERS Trustee and agent of Bondholder Accounts Agency COMMON DEPOSITORY Global Note CLEARING SYSTEM $ Principal and Interest Notices AGENTS (Fiscal/Principal paying, registrar, ect.) $ Principal and Interest ISSUER Notices TRUSTEE Bonds covenants/ security Is listing necessary? Bonds sold in the international markets are traded over the counter and through a clearing system rather than on a stock exchange and so technically listing on a stock exchange is not necessary. Whilst bonds do not trade on market in the same way that equity securities do, listing is frequently a prerequisite for some investors (such as private banks, funds, insurance companies and other entities that are prohibited by law or investment mandates from investing in unlisted securities) to be able to invest. Listing also gives investors greater confidence in the offering (that, among other things, the content of the offering circular or prospectus has been prepared to a standard prescribed by the relevant requirements of the securities exchange) and has obvious marketing advantages. For programmes, it also makes the offering process for future tranches much simpler as the base offering circular or prospectus is published on the exchange. Subsequent offerings just need a short supplement to the offering circular or prospectus to the extent there have been material developments since the date of the original offering circular or prospectus or the date of the last update. Most euro bond and global bond issues are listed in order to access the widest range of investors. Private placements are usually not listed. Listing venue Unlike equity securities, the venue for listing bonds is largely driven by the ease of listing and compliance with listing criteria, and to a lesser extent, the issuer s location and the profile of the targeted investor base. Ease and cost of listing Generally, the U.S. and the European Union (the "EU") are highly regulated jurisdictions and have very prescriptive disclosure requirements for debt securities to be listed on exchanges in those jurisdictions. They also have fairly onerous continuing disclosure requirements. Page 5

7 In Singapore and Hong Kong, on the other hand (for debt securities that are offered only to institutional and sophisticated investors (i.e. wholesale as opposed to retail investors)), the disclosure requirements are much less onerous. Most issuers in the Asia Pacific region and South Asia (i.e. the Indian subcontinent and Sri Lanka) choose the Singapore Exchange Securities Trading Limited (the SGX ) or the Hong Kong Stock Exchange (the HKSE ) to list their debt securities even where the offering includes offerings to investors in the EU and the U.S. Location of the issuer: For issuers in South Asia, South East Asia and Australia, the SGX is used more often than other exchanges because it is one of the internationally recognised stock exchanges in those regions. For North Asian issuers, the HKSE is used more often than other exchanges for the same reason. Location of investors Issuers generally seek to list their securities on an exchange and in a jurisdiction that is geographically closer, and thus more familiar, to them and the targeted investor base. As mentioned above, for Asian issuers we often see either the SGX or the HKSE being used for debt securities. The target investor base would be mostly in the Asia Pacific region, but with some investors in Europe and the U.S. participating. If the primary investor base is in Europe then it makes more sense to have the securities listed on the London, Luxembourg or Irish stock exchange as those are the more recognised stock exchanges for debt securities in Europe. SGX For wholesale debt issues (offers to sophisticated or institutional investors) the key requirements of the SGX are as follows: the issuer undertakes that the offering circular contains all information that such wholesale investors would customarily expect to see in such document. The SGX relies on self-compliance and does not carry out a detailed review of the offering circular; bonds traded on the SGX are traded in board lot sizes of at least S$200,000; listing fees are typically S$25,000 (comprising a S$10,000 processing fee and a S$15,000 listing fee) plus GST (if applicable); and for the life of the securities, the issuer will be required to disclose to the SGX its annual report, semi-annual and quarterly financials (if prepared by the issuer) and any information which may have a material effect on the price or value of its debt securities or an investor s decision whether to trade in such debt securities. In this respect, if the issuer is listed on another exchange and has similar continuing disclosure obligations the issuer can use the same publication on such other exchange to disclose on the SGX. The issuer will also be required to announce on the SGX, redemptions and cancellations of the bonds, amendments to the trust deed and any replacements of the bond trustee. Target investors In order to avoid having to comply with local securities laws which may require registration of the securities and the preparation of a detailed prospectus that complies with local laws, most international bond issues are only offered or sold to the class of investors that are exempt from such laws (usually, sophisticated or institutional investors, i.e. the wholesale market). Currency 1 Bonds may be issued in virtually any currency. The choice of currency denomination is typically a function of: the currency that an issuer wishes to raise; Page 6

8 pricing in recent years it has become common for issuers to tap alternative currencies for better pricing. In this respect we have seen Australian issuers issue debt in Swiss Francs, Singapore dollars, Chinese RMB and Canadian dollars. The attractiveness of these currencies fluctuates depending on whether the "all-in pricing" for the issuer of the currency together with the cost of swapping them back into the currency desired by the issuer is less than the cost of borrowing in such desired currency. A currency that investors seek to gain exposure to. Most investors in the Asia Pacific region seek to invest in the G3 currencies being the U.S. dollar, euro and Japanese yen. 2 Generally, in order to ensure reasonable pricing of securities, issuers should seek currencies which are stable, readily available and are not subject to overly restrictive capital or exchange controls. Rating Most jurisdictions in the Asia Pacific region do not require bonds sold to wholesale investors, or their issuers, to be rated. However, a rating may help with marketing of the bonds and hence with their pricing. It provides investors with an independent assessment of the credit risk attaching to an issuer or a particular bond issue. Ratings also increase the universe of potential investors as some investors are prevented by law, their own industry or internal guidelines from investing in securities that are not rated (or rated at a certain level). Bond ratings are assigned by independent ratings agencies (of whom the main officially recognised agencies are Standard & Poor s Ratings Services, Moody s Investor Services and Fitch Ratings). The ratings classifications used by agencies are set out in Schedule 1 (Ratings Classifications), and range from investment grade (reflecting a high quality of credit and low possibility of default) to speculative grade or junk (reflecting lower credit quality and a corresponding probability of default). Rating agencies often provide a quote to rate both the company and any of its debt securities. There will usually be an initial fee and a nominal on-going maintenance of rating fee. For any particular issue, the rating agencies may charge a fee based on the size of the issue. The rating process usually takes several weeks (and sometimes months) and, in respect of a particular bond issue, will involve a review of the underlying bond documents and various meetings with management to allow the relevant agency to gain an appreciation of, among other things, the company, its management, the industry in which it operates, its corporate strategy, competitive landscape, debt structure and financial position. Standalone vs MTN Programme Structure A medium term note (or MTN ) programme is a framework of agreements designed to facilitate the quick, cheap and frequent issue of a wide range of debt securities by issuers in the international debt capital markets. In fact a typical MTN programme can cater for the issue of notes with all of the alternative characteristics set out in this paper (i.e. alternative currencies, distributions (U.S. or non-u.s.), public offerings/private placements, rated/unrated notes, listed/unlisted notes, secured/unsecured or guaranteed/unguaranteed notes). The main purpose of an MTN programme is to standardise the terms on which an issuer issues debt securities and consequently to minimise the documentation for issues of notes, and to restrict the cost, time and administration involved in separately documenting each issue. The market can then respond quickly to the borrowing requirements of the issuer. The establishment of a programme for multiple future issues of bonds (as opposed to a single, stand-alone bond issue) is more suitable to an issuer who is likely to access international debt capital markets on an opportunistic or frequent basis, as the cost of setting up and maintaining a programme will be justified by economies of scale in minimising costs and documentation for future issues. In more recent times, we have seen programmes being established not for the purpose of making frequent issues, but in the climate of volatility, for purposes of having documentation in place and ready to allow the issuer to tap the market relatively quickly when an issue window opens. Page 7

9 Liability (for content of the offering circular) Responsibility for the accuracy of disclosure in an offering circular and legal liability for material omissions and/or misstatements in an offering circular are largely driven by the market on which the securities are listed as well as where the securities are sold. As a general matter, responsibility/liability rests with: the issuer of the securities. In the absence of fraud, this usually means the issuer and not its directors; each person, other than the issuer, who accepts, and is stated in the offering circular as accepting, responsibility; the person requesting admission to trading of the bonds (if not the issuer); if the bond is guaranteed, the guarantor, in relation to information about the guarantor contained in the offering circular; and each other persons who has authorised the contents of the offering circular. This is a wide category, and typically includes the accountants (who verify the financial information in the offering circular, and the investment banks who act as the managers of a bond issue, and who are named on the front cover of the offering circular). As noted above, unlike equity securities, directors and officers of the issuer do not have responsibility or bear liability for material omissions or misstatements (unless as a result of fraud). Additional liability will apply in the case of bonds sold into the U.S. See U.S. securities law, above. Covenant package For investment grade/senior issues, covenants are light, typically relating to providing accounts and information required by the stock exchange (dependent on place of listing). Typically only include a pari passu clause (as standard) and negative pledge, which is limited to the creation of security in favour of other comparable bond issues. Elaborate financial covenants are only typically seen in high-yield bonds and cross-over credits and even then are more limited than comparable covenants in loan agreements. Timetable The timetable for executing a bond issue (or the establishment and first issue under an MTN programme) varies depending on a range of factors, such as the size and complexity of the issuer s business (e.g. how much time it will take to conduct due diligence and prepare an offering circular); whether sales will be made into the U.S. (i.e. in reliance on an appropriate exemption or pursuant to registration with the SEC); the structure and complexity of the securities being issued (e.g. how negotiated the documentation will be) and the degree of regulation of the country and industry in which the issuer operates (e.g. whether regulatory approvals are required, and how long it will take to procure). Typically, a bond offering takes approximately six to eight weeks to close, and is split into three distinct phases: (1) pre-launch; (2) launch to pricing; and (3) pricing to closing. Schedule 2 sets out an overview of these phases of a bond offering, for a typical Regulation S eurobond issue.. Governing law Euro bonds are generally governed by English law and global bonds are generally governed by New York law. Page 8

10 SCHEDULE 1 RATINGS CLASSIFICATIONS S&P MOODY S FITCH INVESTMENT GRADE AAA Aaa AAA AA Aa AA A A A BBB BBa BBB SPECULATIVE GRADE BB Ba BB B B: future default risk B CCC: high default risk CC C CI: no interest being paid Caa: may be in default or high risk of current default Ca: often in default CCC CC D: actual or expected default C: very poor prospects DDD. DD, D S&P may add a plus or minus to a rating, reflecting the outlook. Moody s may add 1, 2 or 3 to ratings from Aa to B. Page 9

11 SCHEDULE 2 PHASES & SUMMARY TIMETABLE FOR A BOND OFFERING PHASE TIME ESTIMATE ACTIONS PRE-LAUNCH Weeks 1 to 6 Appointment and mandate of managers; international and domestic counsel; trustee (if any) and agents; accountants Conduct of due diligence exercise (management/documentary/financial) Preparation and drafting of preliminary offering circular and roadshow and ancillary marketing materials Drafting and negotiation of transaction documentation (subscription agreement, trust deed (if trustee appointed), agency agreement, terms and conditions of notes and ancillary documentation; security and credit support documents (if any)) Drafting and negotiation of closing conditions precedent, including: auditors arrangement and comfort letters legal opinions lender consents Applying for and obtaining regulatory approvals Applying for approval for listing of bonds on stock exchange LAUNCH-PRICING Weeks 6 to 7 Pre-launch bring-down due diligence Announcement of transaction Meetings with investors (with finalised preliminary offering circular and roadshow and marketing materials) Pre-pricing Bring-down due diligence Pricing: Pricing terms agreed (size of offering; coupon; tenor) Final offering circular finalized (pricing information included) Subscription agreement signed PRICING - CLOSING Weeks 7 to 8 Settlement typically five business days after closing Transaction documents (trust deed, agency agreement and security documents (if any), signed Global certificate signed and delivered Bonds issued and net proceeds from issue paid to issuer. 1. Note that there is no difference between medium term notes and bonds ; these are essentially two different terms for securities with substantially the same commercial and legal features. Medium term notes is a term adopted by the market in order to reflect notes issued under a programme, but in effect, they are no different to bonds. Page 10

12 CONTACTS Philip Lee Partner International Capital Markets, Finance, Singapore T [email protected] Siddhartha Sivaramakrishnan Partner International Capital Markets, Corporate, Singapore T M [email protected] Page 11

13 GLOBAL OFFICE LOCATIONS Page 12

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