Ashurst Quarterly Debt Capital Markets Update - Q3 2020

The Coronavirus/COVID-19 pandemic continues to dominate the news and specific information about this can be found on this dedicated page of the Ashurst website: Coronavirus and Financial Considerations. In addition to this, we have a number of developments to report on in this edition of specific interest to debt capital market participants. Many of these concern LIBOR Transition:

• Bloomberg starts publishing adjusted RFRs
• ECB launches consultation on compounded €STR rates and daily indices
• Working Group on Sterling RFRs paper on dealing with legacy transactions

Also noteworthy are: 

• MiFID II product governance regime: an exemption for bonds with make-whole clauses?
• Prospectus Regulation: European Commission proposes amendments
• UK Government proposes extension to transition period for third-country benchmarks to 31 December 2025
• Prospectus Regulation - new delegated regulations
• ECB to accept sustainability-linked bonds as collateral
• Brexit: FCA completes legislative framework for UK's post-transition period prospectus regime

Bloomberg starts publishing adjusted RFRs

On 21 July 2020, Bloomberg and ISDA announced that Bloomberg Index Services Limited (BISL) has begun calculating and publishing adjusted versions of various risk-free rates (RFRs). 

Calculations published by BISL include the adjusted RFR (compounded in arrears), the spread adjustment and the ‘all in’ IBOR fallback rates (that is, the adjusted RFR plus the spread adjustment) for the following IBORs across various tenors:

• the Australian dollar Bank Bill Swap Rate (BBSW);
• the Canadian Dollar Offered Rate (CDOR);
• EURIBOR; and
• Euro LIBOR, HIBOR, Sterling LIBOR, Swiss franc LIBOR, Euroyen TIBOR, Yen LIBOR, Yen TIBOR and US Dollar LIBOR.

ECB launches consultation on compounded €STR rates and daily indices

On 24 July 2020 the European Central Bank (ECB), as administrator of the euro short-term rate (€STR), launched a public consultation on whether the ECB should publish compounded €STR rates and daily indices. 

While the ECB notes that no discontinuation of EURIBOR is foreseen, the ECB suggests that the availability of compounded rates for the euro, similar to those now being published for SOFR and SONIA, will facilitate the development of corresponding markets for the euro and therefore facilitate consistency in the way benchmarks are used across major markets. They may also be used in contractual fall-back provisions by users of the EUR LIBOR and EURIBOR who are required to prepare in their contingency planning for a scenario in which EUR LIBOR and the EURIBOR may cease to exist.

The consultation closed on 11 September 2020.

Working Group on Sterling RFRs paper on dealing with legacy transactions

On 10 September 2020 the Working Group on Sterling RFRs published a paper describing the issues around the transition of GBP LIBOR referencing bonds to alternative RFRs. Amongst other things the paper describes:

• The UK government's proposals to legislate to amend the UK Benchmarks Regulation regime, rather than directly to impose legal changes on LIBOR-referencing contracts that are governed by English law;
• How to transition legacy bonds by way of consent solicitation;
• Challenges with consent solicitation;
• The different approach for legacy bonds governed by New York law; and
• The various forms of fallback language typically seen in most bond terms and conditions and how it affects legacy bonds. 

MiFID II product governance regime: an exemption for bonds with make-whole clauses?

On 24 July 2020 the European Commission published a Capital Markets Recovery Package in the context of COVID-19. As part of this, there are certain proposed “quick fixes” to MiFID II (2014/65/EU) which are designed to "[facilitate] investments in the real economy and [allow] for a rapid recapitalisation of European companies". One of these proposed changes to the product governance regime will be of particular interest to many debt capital market participants. 

The product governance regime introduced by MiFID II is found primarily in Articles 16(3) and 24(2) of MiFID II and is given effect in the UK by the Product Intervention and Product Governance Sourcebook (PROD) which forms part of the FCA Handbook. The Commission proposal in this context is simply a blanket exemption from the product governance regime for "corporate bonds with make-whole clauses". However neither of the expressions "corporate bond" or "make-whole clause" is defined in the proposal.

Prospectus Regulation: European Commission proposes amendments

On 24 July 2020 the European Commission published a proposal to amend the Prospectus Regulation supplement notification requirements to provide:

• Increased clarity as to which investors a financial intermediary must contact in relation to the publication of a prospectus supplement;
• Additional time for financial intermediaries to notify investors following the publication of a supplement; and
• Extension of the time period during which investors may withdraw their acceptances after publication of a supplement.

The Commission also proposes further amendments including a new short-form "EU Recovery Prospectus" for fungible equity offerings and an increase in the threshold in relation to the prospectus exemption for certain non-equity securities issued in a continuous or repeated manner by credit institutions. For more information read our briefing here.

UK Proposes extension to transition period for third-country benchmarks to 31 December 2025

After 31 December 2020, the UK will have its own benchmarks regulatory framework, similar to that of the EEA. The draft framework contains transitional provisions for non-UK benchmarks, permitting them to be used in the UK without specific authorisation until the end of 2022. In view of concerns about limitations on UK supervised entities' access to non-UK benchmarks thereafter, the UK government is proposing an extension to the transition period for non-UK benchmarks from 31 December 2022 to 31 December 2025. For more information read our briefing here.

Prospectus Regulation - new delegated regulations

On 14 September 2020 the following two Commission delegated regulations amending the Prospectus Regulation regime were published in the Official Journal. They are essentially a tidying-up exercise (as proposed by the Commission in June 2020) to correct certain mistakes in the Prospectus Regulation regime:

• Commission Delegated Regulation (EU) 2020/1273 amending and correcting Commission Delegated Regulation (EU) 2019/980 (the PR Regulation); and
• Commission Delegated Regulation (EU) 2020/1272 amending and correcting Commission Delegated Regulation (EU) 2019/979 (the Prospectus RTS Regulation).

These new Regulations came into force on 17 September 2020, save for a number of provisions which are retroactive to 21 July 2019. There are also provisions which confirm that any affected prospectuses that have been approved between 21 July 2019 and 16 September 2020 will continue to be valid until the end of their validity notwithstanding any changes otherwise made by these Regulations.

Perhaps the most significant changes relate to convertible and exchangeable bonds. When using the Prospectus Directive regime as a template to draft the PR Regulation the Commission decided to change all references to shares, debt and derivative securities to references to equity and non-equity securities. An unintended result of this drafting change was to change many of the disclosure requirements relating to convertible and exchangeable bonds from non-equity requirements to equity requirements. These amendments will effectively restore these disclosure requirements to those of the Prospectus Directive regime. 

As these changes come into force and are "operative" before 31 December 2020 they will be effective in UK law and with effect from that day they will form part of the UK's "retained EU law".

ECB to accept sustainability-linked bonds as collateral

On 22 September 2020 the European Central Bank (ECB) announced that, with effect from 1 January 2020, debt securities with coupon structures linked to certain sustainability performance targets will become eligible as collateral for Eurosystem credit operations and also for Eurosystem outright purchases for monetary policy purposes, provided they comply with all other eligibility criteria.

To be eligible the coupons must be linked to a performance target referring to one or more of the environmental objectives set out in the EU Taxonomy Regulation and/or to one or more of the United Nations Sustainable Development Goals relating to climate change or environmental degradation.

Brexit: FCA completes legislative framework for UK's post-transition period prospectus regime

On 30 September 2020 the United Kingdom Financial Conduct Authority (FCA) made the Technical Standards (Prospectus Regulation) (EU Exit) Instrument 2020 (FCA 2020/50), thereby completing the legislative picture for the UK's prospectus regime in the period immediately following the end of the transition period provided for by the UK's withdrawal agreement with the EU (currently scheduled for 31 December 2020). This instrument amends the onshored version of the EU Prospectus RTS Regulation ((EU) 2019/979) to seek to ensure that it operates effectively in a UK-only environment.

Authors: Anna Delgado, partner; Alex Biles, partner; Francis Kucera senior consultant; Tim Morris, expertise consultant