Debt Capital Markets Update Q2 2016

Welcome to the second edition of the Ashurst Quarterly Debt Capital Markets Update in which we summarise the key developments in debt capital markets in the second quarter of 2016.

We have a number of different developments to report on in this edition:

• BREXIT

• Green Bond Principles and Social Bonds
• Issuer Undertakings Regarding Listings in Programme Documentation
• EU Market Abuse Regulation
• Bank Recovery and Resolution Directive – Contractual Recognition of Stays
• ESMA Q&A – 24th updated version
• ESMA Guidelines on Alternative Performance Measures
• ESMA Statement on "bail-in-able" Securities

Brexit

On 24 June 2016 the result of the United Kingdom's referendum on remaining in or leaving the European Union was declared with the majority being in favour of leaving. This result has already had major political and economic consequences in the United Kingdom and elsewhere and will continue to do so for the foreseeable future. However no laws have changed as a consequence of the referendum nor is there any certainty over whether or how any laws will change or indeed if any laws will change at all as a consequence of the referendum. The sole purpose of the referendum was to answer a political question and there will be no changes in any laws, nor any new laws, until a number of further political actions have been taken.

Until the political situation is resolved and the UK government develops a policy on implementation, the referendum result is unlikely to have any impact on the law and practice applicable to the international capital market. Assuming a new and effective UK government emerges which is committed to implementing the referendum result, because of the design of the treaty mechanism for a member state to exit the European Union, there may still be a significant period before any changes in applicable law or practice are developed or implemented.

However for any issuer of securities, it is important to consider in the light of that issuer's circumstances whether it is necessary to make some additional disclosure to actual or potential investors concerning the referendum result and its implications for the business of the issuer or its group. In this context we are already seeing competent authorities asking for, and issuers including, a specific risk factor in their disclosure documents discussing the UK referendum result and its implications for them.

Green Bond Principles and Social Bonds

On 16 June 2016, the International Capital Markets Association (ICMA) published a revised version of the Green Bond Principles. In addition, it published a new guidance note for issuers of social bonds.

2016 Update of Green Bond Principles

The updated Green Bond Principles continue to be based on the same four core components (Use of Proceeds; Process for Project Evaluation and Selection; Management of Proceeds; and Reporting). However in the 2016 updated version, a particular effort has been made to recommend best practice on information sharing and external reviews including through proposed templates. This is designed to help investors, and the market generally, to establish the alignment of issuances with the Green Bond Principles.

Social Bonds

ICMA also announced that, alongside the development of the Green Bond market, a related bond market aimed at financing projects with social objectives, or with a combination of social and environmentally sustainable objectives has emerged.

The guidance note for issuers of social bonds (which can be found in the Green Bond section of the ICMA website) has been developed to facilitate the application of the Green Bond Principles on transparency and disclosure to the emerging Social Bond market. The aim of the guidance note is to ensure that issuers are better able to anticipate and fulfil the information expectations of investors. It also assists underwriters by promoting the expected disclosure of information and methodology.

The Green Bond Principles are published on the ICMA website which can be found at: www.icmagroup.org.

Issuer Undertakings Regarding Listings in Programme Documentation

It is common practice for subscription agreements in relation to debt issues and programme agreements in relation to debt programmes to contain undertakings from the issuer to use its reasonable efforts to obtain a listing of debt on a specified stock exchange and thereafter, if the issuer can no longer reasonably maintain such listing, use its best efforts to obtain and maintain a listing for the debt on an alternative stock exchange with the consent of the managers or dealers being required in relation to such alternative listing.

At a recent meeting of ICMA's Legal & Documentation Committee, it was agreed that issuer undertakings with regards to listings in programme agreements should be amended to provide that the issuer must notify the dealers or relevant lead manager of a change in listing as opposed to obtaining their consent for the change.

EU Market Abuse Regulation

On 28 April the FCA published its Policy Statement on Implementation of the Market Abuse Regulation (2014/596/EU) ("EU MAR") which took effect across the EU on 3 July 2016. The FCA Policy Statement contains the text of the Market Abuse Regulation Instrument 2016 by which, with effect from 3 July 2016, the FCA Handbook was amended.

The principal amendments to the FCA Handbook from a debt capital markets perspective include:

• the Disclosure Rules (in DTR 1 (Application and purpose) and DTR 2 (Disclosure and control of inside information by issuers)) are deleted and replaced with ‘Disclosure Guidance’. All provisions of DTR 1 and 2 which are inconsistent with or simply overlap with provisions of EU MAR are deleted; and
• an issuer whose debt securities are admitted to trading on the London stock exchange's PSM (which is a "multilateral trading facility" (MTF) not a "regulated market") is now subject to Articles 17 and 18 of EU MAR.

The requirements concerning disclosure of inside information and maintenance of insider lists are now found in Articles 17 and 18 of EU MAR not DTR 2.

Article 5 of EU MAR and delegated regulations made under it will afford a safe harbour for stabilisation activities in very much the same way as the current Buy Back and Stabilisation Regulation ((EC) No 2273/2003) – which was repealed as from 3 July 2016.

For more information, please see our previous Ashurst briefing here. The FCA Policy Statement on Implementation of the Market Abuse Regulation can be found at (PS16/13).

Bank Recovery and Resolution Directive – Contractual Recognition of Stays

As discussed in our Quarter 1-2016 Update, the Bank Recovery and Resolution Directive ("BRRD") gives national regulators powers to manage failing banks and other in-scope institutions at an early stage by using the bank-bail-in tool and Article 55 of BRRD aims to ensure the power is given effect in contracts governed by the law of a non-EEA country. BRRD also gives national regulators powers to suspend termination rights of any party to a contract with an in-scope institution and to suspend payment or delivery obligations of an in-scope institution and it provides that resolution measures are not allowed to constitute a trigger for termination rights in relation to an in-scope institution ("Resolution Stays" - Articles 68–71). In respect of Resolution Stays, however, there is no requirement equivalent to Article 55.

The Financial Stability Board (FSB) has recognised this issue and in November 2015, published "Principles for Cross-border Effectiveness of Resolution Action" which state that while statutory frameworks for cross-border recognition of resolution measures should remain the ultimate objective, since these will take time to develop, FSB members have committed to promote, by way of regulation or other enforcement measures, contractual approaches to recognition of resolution measures. In the UK, the Prudential Regulation Authority (PRA) has given effect to the FSB Principles in relation to Resolution Stays through amendment to the PRA Rulebook, which came into effect on 1 June 2016. This requires that any in-scope institution which after 1 June 2016 creates a new obligation or materially amends an existing obligation which, in either case, arises under a relevant contract which is governed by the law of a non-EEA country must include in that contract an express contractual recognition of the effectiveness of Resolution Stays.

The Financial Stability Boards Principles for Cross-border Effectiveness of Resolution Action can be found at "Principles for Cross-border Effectiveness of Resolution Action". The amendments to the PRA Rulebook can be found at PRA Rulebook: CRR Firms and Non-Authorised Persons: Stay in Resolution Instrument 2015.

ESMA Q&A – 24th updated version

On 6 April 2016 the European Securities and Markets Authority (ESMA) published its Questions and Answers on Prospectuses - 24th updated version – April 2016.

This version adds two new Questions and Answers to the previous version:

1. Q.97 deals with capitalisation and indebtedness statements, which are only required for prospectuses for equity securities, and the circumstances in which an additional column may be added to the statement to illustrate recent complex changes or future significant changes; and
2. Q.98 deals with an issuer wanting to continue an offer beyond the validity of a base prospectus (where the issuer files final terms prior to the end of the base prospectus validity and the offer period extends beyond the base prospectus validity).

ESMA Guidelines on Alternative Performance Measures

From 3 July 2016, new ESMA Guidelines apply to alternative performance measures (APMs) disclosed by issuers (or persons responsible for the prospectus) when publishing regulated information or prospectuses.

On 5 October 2015 ESMA published its Guidelines on Alternative Performance Measures (05/10/2015| ESMA/2015/1415). These guidelines do little more than codify good practice relating to the use of alternative performance measures (APMs) in any prospectuses under the Prospectus Directive or regulated information (annual and half yearly reports under the Transparency Directive and ad hoc disclosures under the Market Abuse regime).

ESMA's guidelines can be found at Guidelines on Alternative Performance Measures.

ESMA Statement on "bail-in-able" Securities

On 2 June 2016 ESMA published a statement reminding banks and investment firms of their responsibilities to act in clients’ best interests when selling them "bail-in-able" securities. ESMA noted that a significant amount of "bail-in-able" securities will be issued by banks and other financial institutions and that they will usually be offered by banks and other financial institutions directly to their own clients or through other group entities to their clients (self-placement). ESMA notes, in these circumstances, the obligation for intermediaries to act in the best interest of their clients should not be compromised as a result of "prudential pressures" on the issuer.

ESMA is concerned that investors and in particular, retail investors, are unaware of the risks they may face when buying these securities. Risks entailed in "bail-in-able" securities and in their distribution to clients identified by ESMA include: credit/counterparty risk; liquidity risk; and concentration risk.

ESMA's statement emphasises that firms must comply with their obligations under MiFID (2004/39/EC ) and has made clear that firms should ensure that they have met the detailed disclosure requirement even for previously issued securities. So firms will need to review the previous disclosures against ESMA's new guidance and, potentially, re-contact investors with upgraded disclosures.

The ESMA statement can be found at: ESMA 2016/902.