Ashurst Quarterly Debt Capital Markets Update for 2020

The Coronavirus/COVID-19 pandemic seems to have dwarfed all other considerations in recent months. While health and safety are currently at the forefront of everyone's minds there are a many other considerations for capital market participants. Information on these can be found on this dedicated page of the Ashurst website: Coronavirus and Financial Considerations.

Apart from this, we have a number of other developments to report on in this edition. Many of these concern LIBOR Transition:

• ARRC Announces Recommendation of a Spread Adjustment Methodology for Cash Products
• ARRC statement on use of SOFR Index in FRN Ts&Cs
• Bank of England Views COVID-19 as Demonstrating Need to Press Ahead with LIBOR Transition
• ICMSA Bulletin: Timeline of a Consent Solicitation
• SONIA Compounded Index and SONIA Period Averages
• Proposed New Powers for the FCA in Respect of Tough Legacy Contracts

Also noteworthy are:

• ESMA updates Q&A on its Guidelines on Alternative Performance Measures to discuss the impact of COVID-19
• FCA and PRA Confirmations Concerning Electronic Signatures
• ICMA Revised Note on Prospectus Legend Required by Article 29(2) of the EU Benchmarks Regulation
• Passporting a Prospectus Regulation compliant Prospectus into Switzerland
• Sustainability-Linked Bond Principles Released
• EU Taxonomy Regulation Published in the Official Journal
• Brexit – Onshoring Climate Transition Benchmarks and Paris-aligned Benchmarks
• Corporate Insolvency and Governance Act 2020

LIBOR Transition

ARRC Announces Recommendation of a Spread Adjustment Methodology for Cash Products

On 8 April 2020 the ARRC announced it had reached agreement on a spread adjustment methodology for cash products referencing USD LIBOR and that it plans to release the details of the methodology shortly. The ARRC’s recommended methodology is intended for USD LIBOR contracts that have incorporated the ARRC’s recommended hardwired fallback language or for legacy USD LIBOR contracts where a spread-adjusted SOFR can be selected as a fallback.

The ARRC is recommending a spread adjustment methodology based on a historical median over a five-year lookback period calculating the difference between USD LIBOR and SOFR. This matches the methodology recommended by ISDA for derivatives and would make the ARRC’s recommended spread-adjusted version of SOFR comparable to USD LIBOR and consistent with ISDA’s fallbacks for derivatives markets.

ARRC Statement on Use of SOFR Index in FRN Ts&Cs

On 6 May 2020 the ARRC published a statement to provide market participants with information about how the New York Fed’s published SOFR Index may be referenced in the terms and conditions of FRNs. The statement seeks to encourage use of the SOFR Index for this purpose and includes:

• actual text describing the mechanics of the interest calculation (plus all necessary definitions) which can be inserted in terms and conditions of an FRN; and

• fallback language to cover the situation where Compounded SOFR ceases to exist or be published or be representative of the market it seeks to measure.

Bank of England Views COVID-19 as Demonstrating Need to Press Ahead with LIBOR Transition

For anybody thinking that the COVID-19 pandemic and its effects may lead to some sort of postponement of the transition away from LIBOR to RFRs it is worth noting this speech by Andrew Hauser, Executive Director, Markets, at the Bank of England given on 4 June 2020.

On the subject of LIBOR transition he points out that, as the crisis unfolded through March, April and May, demand for cash grew, but supply failed to respond, causing sterling money market rates to rise sharply not only at longer tenors but also in overnight repo rates. He describes this as a particularly serious sign of dysfunction and identifies two key sets of policy actions which helped to ease pressure on money market rates.

He contrasts this with term LIBOR measures which took much longer to subside, in both dollar and sterling markets, saying that in part it reflected the persistent illiquidity in the market for unsecured bank paper but also the fact that, throughout the crisis, LIBOR was based on few if any direct underlying transactions. He describes this as a "wholly unsatisfactory basis" for a benchmark that still underpins a substantial share of global corporate borrowing, a situation which "underscores the pressing need to complete the transition away from LIBOR by end-2021". To emphasise this point, he notes that volumes underpinning SONIA rose sharply over the same period as investors sought safer havens.

ICMSA Bulletin: Timeline of a Consent Solicitation

On 10 June 2020 ICMSA published a bulletin which in 8 pages gives a useful overview (and timeline) of the typical consent solicitation process for notes in global form held in Euroclear and/or Clearstream, Luxembourg. One thing which the bulletin seeks to stress is how much time is taken up by a typical consent solicitation process. In the context of the need to transition legacy FRNs away from LIBOR by the end of 2021 and the potential volume of affected issues, the bulletin urges preparation sooner rather than later.

SONIA Compounded Index and SONIA Period Averages

On 11 June 2020 the Bank of England announced that, in response to near unanimous support for the proposals, it anticipates it will begin publishing a SONIA Compounded Index in early August. However it will not proceed for the time being to produce SONIA period averages, largely due to very mixed or even negative feedback on this proposal.

Proposed New Powers for the FCA in Respect of Tough Legacy Contracts

On 23 June 2020, the UK government and the FCA made a number of announcements regarding planned amendments to the UK Benchmark Regulation. The government intends to bring forward legislation that will give the FCA enhanced powers to assist with the transition from LIBOR.

Among other things, the government intends to provide powers for the FCA to compel an administrator to change the methodology of a non-representative critical benchmark where action is necessary to protect consumers and/or to ensure market integrity. One consequence of this may be that, if LIBOR becomes non-representative, the FCA will be able to compel IBA to change its methodology and produce something akin to LIBOR ("synthetic LIBOR") for a certain period for use in tough legacy contracts (but not for general use).

Other Noteworthy Matters

ESMA updates Q&A on its Guidelines on Alternative Performance Measures to discuss the impact of COVID-19

On 5 October 2015 ESMA published Guidelines on Alternative Performance Measures (05/10/2015| ESMA/2015/1415) providing guidance relating to the use of alternative performance measures (APMs) in any prospectuses under the Prospectus Regulation (then Directive) regime or regulated information published after 3rd July 2016.

These Guidelines are enhanced by a Questions and Answers (Q&A) document published by ESMA from time to time, the most recent version of which was published on 17 April 2020 (ESMA 32-51-370). This updated version contains a new Q&A 18 on the Application of the APM Guidelines in the context of COVID-19.

FCA and PRA Confirmations Concerning Electronic Signatures

On 20 April 2020 the UK Financial Conduct Authority (FCA) published a confirmation that its rules do not explicitly require wet-ink signatures in agreements, nor do they prevent firms from using electronic signatures in agreements, and that firms may use electronic signatures for all interactions with the FCA. This was followed by a similar confirmation from the Prudential Regulation Authority (PRA) on 2 June 2020.

ICMA Revised Note on Prospectus Legend Required by Article 29(2) of the EU Benchmarks Regulation

On 20 May 2020 ICMA circulated to its Primary Documentation Group a revised version of its note on Article 29(2) of the EU Benchmarks Regulation (previously most recently published in August 2018). Amongst other things, this version, now available on the Other ICMA primary documentation page of ICMA's website:

• contains refinements to the suggested explanatory statement that may be used in prospectuses where the administrator does not appear on ESMA’s BMR register;
• updates and clarifies the description of ESMA's BMR registers; and
• updates references to the Prospectus Directive to refer to the Prospectus Regulation.

Passporting a Prospectus Regulation Compliant Prospectus into Switzerland

With effect from 1 June 2020, the Swiss regulator FINMA has approved both SIX Exchange Regulation AG and BX Swiss AG to act as prospectus reviewing body (Review Body) pursuant to the Swiss Federal Financial Services Act (FinSA). One consequence of this is that, according to the list of recognised countries and competent local supervisory authorities published by the Review Body, prospectuses approved in an EU/EEA Member State for EU Prospectus Regulation purposes are deemed approved also for FinSA purposes. Therefore subject to compliance with Swiss publication and filing requirements, such a prospectus can now be used for an offer of securities to the public in Switzerland and/or an application for admission of securities to trading on a Swiss trading venue.

Sustainability-Linked Bond Principles Released

At the Annual General Meeting of the Green & Social Bond Principles held on 9 June 2020, the Executive Committee announced:

• the release of the Sustainability-Linked Bond Principles (SLBP); and
• a 2020 update of the Social Bond Principles (providing expanded social project categories and additional target populations, and also incorporating recent guidance for social bonds addressing the COVID-19 crisis).

The Green Bond Principles and Sustainability Bond Guidelines remain otherwise unchanged (2018 versions remain applicable).

EU Taxonomy Regulation Published in the Official Journal

The EU Taxonomy Regulation ((EU) 2020/852) was published on 22 June 2020 in the Official Journal and will therefore enter into force on 12 July 2020. The parts of it that relate to climate mitigation and adaptation objectives will apply from 1 January 2022 with the remainder applying from 1 January 2023.

This Regulation is a core element of the EU's Action Plan on Financing Sustainable Growth published in March 2018. It is intended to establish uniform criteria for determining whether an economic activity qualifies as environmentally sustainable for the purposes of establishing the degree to which an investment is environmentally sustainable. For more information see our briefing here.

Brexit – Onshoring Climate Transition Benchmarks and Paris-aligned Benchmarks

The Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2020 were made on 29 June 2020 and, amongst other things, amend earlier Regulations which, with effect from 31 December 2020 (IP completion day), are designed to ensure that the regime for financial benchmarks derived from the EU Benchmarks Regulation continues to operate effectively in the UK after that date. The amendments are to give effect in retained EU law to changes to the EU Benchmarks Regulation regime which include new categories of low carbon benchmarks ("climate transition benchmarks" and "Paris aligned benchmarks") and extend existing rules on benchmark transparency in relation to Environmental, Social and Governance ("ESG") factors.

Corporate Insolvency and Governance Act 2020

The Corporate Insolvency and Governance Act 2020 received royal assent on 25 June 2020 introducing substantial permanent and temporary changes to the UK's insolvency and restructuring regime designed to help businesses survive the COVID-19 economic crisis. For more information read our full briefing here.