Capital Markets Union – Breakdown of EU Roadmap (Part 2)

12 Apr

Share Offerings Will be Made Easier by Reducing Prospectus Requirements

As it stands, the threshold for share offers which must issue a prospectus stands at €5million; though the European regulation leaves leeway for individual states to legislate a lower threshold. The EU proposal is for a higher and universal threshold. This, it is hoped, would reduce onerous requirements for companies to shell out for a professional marketing sheen to give to their business plans and earnings forecasts.

The EC asks stakeholders if it would free smaller companies of some onerous obligations to remove the mandate for a prospectus for follow-on offerings. Instead it would allow them to point to existing info in the public domain, provided they were “released pursuant to the transparency and disclosure requirements to allow sufficient investor disclosure.”

A slightly less drastic solution would be to just raise the threshold required for follow-on prospectuses, from the existing level of 10%, to 20% of existing issued share capital.

Law firm Latham and Watkins makes the still more radical proposal that only “secondary offerings of, for example, up to 50 percent of the issued share capital of the company” would necessitate a prospectus being published.

This would not, however, require regulatory approval before permission was granted to list on Multilateral Trading Facilities (MTFs). As a mitigating measure, the firm posits that the threshold be raised for fully exempt offerings.

This last caveat links us on to the proposal that standard share prospectuses should be approved before trading on MTFs. There is some concern that these marketplaces do not provide the necessary due diligence on all of the securities listed, and an objective assessment is required by a regulator who, unlike the exchange operators, has no vested interest in securing transaction fees.

Some industry commentators, however, feel that increasing the barriers to listing new securities could check growth of the vibrant MTF market in Europe.

The Pan-European Corporate Private Placement Market Guide

This set of guidelines to the process of negotiating contract terms between borrowers and professional investors in large, unlisted bond and note issuances, has already been issued and should be starting to take effect.

Noteworthy considerations to observe from a legal perspective are, firstly, the possibility of a conflict of interests between private loan and note subscription, and trading in listed securities. The mandatory disclosures of non-public information, that full knowledge of the borrower’s debt burden requires, could leave the investor open to accusations of insider dealing, if they then trade in associated listed securities.

Institutional investors in unlisted debt placements should demand loans on equal terms with borrowers’ other debts, which is why disclosure of all information concerning the borrower’s existing debt is essential.

Details of, for example, the hierarchy of priority of repayment; actions in case of a breach in covenant or non-payment of an instalment; any assets that have already been pledged as securities; these are all necessary to ensure the comparability of loan contracts, and to ensure the borrower can meet any new obligations.

The guide provides four model documents by which best practice in this area can be followed:

As regards the ‘term sheet’, the list of terms each side agrees to include in the final contract, – subject to local law, – it is advised firstly that the borrower makes a ‘negative pledge’. This restricts the borrower’s ability to create security over its assets, and thereby enshrines the ranking of the new private placement.

It should also be requested that they disclose any restrictions on disposal of assets. Financial covenants with relevant ratios form another, obvious, clause. It might also be desirable to place restrictions on mergers and corporate restructuring and change of business.

In the event of a change in control, an option should be provided for early redemption or repayment, or even prepayment, of the interest and principal due on the loan. This measure is also advised to guard against a change in the borrower’s tax characteristics.

Finally, as insurance against the future, investors should consider a “more favourable terms” clause, such that if the Borrower grants more favourable financing terms to another creditor, it must also offer the same terms to the Investors.

Banks are tightening their belts on high-risk assets.

Banks are tightening their belts on high-risk assets.

Are Europe’s corporate debt and equity markets really in dire straits?

The ECB Statistics Bulletin for 2015 does show some cause for concern, in that holdings of debt securities issued by euro area residents (non-government securities), fell from €1,360.9 billion in 2013 to €1,275.9 billion in 2014. That is on the listed assets side. As regards liabilities, debt securities issued fell also, from €2,586.50 billion in 2013 to €2,476.3 billion in 2014.

Equity and non-money market investment fund shares fell too, partly as a result of, and due to anticipation of, the ECB’s €1.1trillion QE programme which substantially increased the demand for government securities. Between 2013 and 2014, equity holdings fell from €792.1 billion to €768.4 billion.

At the same time, banks and other financials’ deleveraging is very much in evidence, as the level of capital and reserves rose during the same period, from €2,340 billion in 2013 to €2,466.9 billion in 2014.

This is perhaps reflected in the downward trend in loans to non-financial corporations (seasonally adjusted), a metric which includes loans issued by non-MFIs (monetary financial institutions). The total value fell from 2013 to 2014, from €4,354.1 to €4,282.1billion, slightly recovering in the first two months of 2015 to an average of €2,177.5 billion. This pattern of recovery is mirrored when you break down the loan total into 1-5 year loans, and for loans over five years.

The only increase was in short-term loans (up to 1 year), showing some appetite for low-risk corporate debt.

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