Debt Capital Markets Update Q2 2019

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

• Brexit and the LMA recommended form of bail-in clause and users' guide
• A users' guide to SOFR from the ARRC
• ARRC recommendations regarding more robust fallback language for new issuances of LIBOR floating rate notes
• Transition from EONIA to €STR - working group on euro risk-free rates third consultation
• EMMI authorised as administrator of EURIBOR
• ECB launches consultation on potential Eurosystem initiative (EDDI) for the issuance and initial distribution of debt securities in the EU
• Green Bond Principles, the Social Bond Principles and the Sustainability Bond Guidelines - new publications offering complementary guidance
• PRIIPs Regulation - Commission declines to give guidance on scope
• Prospectus Regulation - change in control of publication of a prospectus
• Prospectus Regulation - Delegated Regulations published in the Official Journal
• Prospectus Regulation – new data submission requirements delayed

Brexit and the LMA recommended form of bail-in clause and users' guide

On 10 April 2019, the Loan Market Association (LMA) published an updated version of "The Recommended Form of Bail-in Clause and Users' Guide" relating to Article 55 of the Bank Recovery and Resolution Directive (BRRD). This addresses documents which are governed by the law of a non-EEA country. Article 55 of the BRRD requires in-scope financial institutions to include a Bail-in Clause in almost every document to which they are a party and which is governed by the law of a non-EEA country. The updated form of Bail-in Clause is intended to allow for the UK's departure from the EU on a "no-deal" basis and the revised Users' Guide provides supplemental guidance on the impact of a no-deal Brexit in relation to contractual recognition of bail-in requirements.

A users' guide to SOFR from the ARRC

The US working group on LIBOR transition, the Alternative Reference Rates Committee (ARRC) established by the New York Federal Reserve, has published a very useful Users' Guide to SOFR, the Secured Overnight Financing Rate, which it is recommending as the new, risk free rate which the market should adopt to replace US$ LIBOR.

The Guide is intended to help explain how market participants can use SOFR in cash products. In particular, those who are able to use SOFR are urged not to wait for forward-looking term rates in order to transition from US$ LIBOR to SOFR, and the Guide lays out a number of considerations that market participants interested in using SOFR will need to consider.

ARRC recommendations regarding more robust fallback language for new issuances of LIBOR floating rate notes

On 25 April 2019, the ARRC published their recommended contractual fallback language for US$ LIBOR denominated floating rate notes. The ARRC recommendations contain contractual fallback language (with related guidance) for voluntary use in new contracts that reference US$ LIBOR and define the triggers (cessation and pre-cessation) that start the transition away from LIBOR. The recommended language also sets out a "waterfall" approach to determine the SOFR-based successor rate and spread adjustment that would apply to the successor rate.

Transition from EONIA to €STR - working group on euro risk-free rates third consultation

On 15 May 2019, the working group on euro risk-free rates published its third consultation: EONIA to €STR Legal Action Plan.

The working group recommends that market participants consider replacing EONIA with €STR as a reference rate for all products and contracts and make all operational adjustments necessary for using €STR as their standard benchmark as soon as possible. In particular, it is recommended that new contracts referencing EONIA include robust fallback provisions and an acknowledgement that references to EONIA will be understood to be references to EONIA as modified after the change to its methodology on 2 October 2019 (the first publication date of €STR).

The working group also recommends that, after 2 October 2019, whenever operationally feasible, market participants should consider no longer entering into new contracts referencing EONIA, in particular new contracts maturing after 31 December 2021.

For legacy contracts referencing EONIA and maturing after 31 December 2021, market participants should consider replacing EONIA as a primary rate as soon as possible or embedding robust fallback clauses with reference to the recommended fallback rate for EONIA.

On 31 May 2019, the ECB provided the market with a one-off calculation of the spread between €STR and EONIA. This spread will remain fixed until the final discontinuation of EONIA on 3 January 2022. EMMI (the administrator of EONIA) proposes to modify the current EONIA methodology to become €STR plus this fixed spread from 2 October 2019. This is designed to achieve a transition from EONIA to €STR in a smooth manner.

EMMI authorised as administrator of EURIBOR

On 3 July 2019, EMMI announced that it has been granted authorisation by the Belgian Financial Services and Markets Authority under Article 34 of the Benchmarks Regulation ((EU) 2016/1011) (BMR) for the administration of EURIBOR.

ECB launches consultation on potential Eurosystem initiative (EDDI) for the issuance and initial distribution of debt securities in the EU

On 28 May 2019, the ECB launched a public consultation on a potential Eurosystem initiative regarding a mechanism for the issuance and initial distribution of debt securities in the EU.

The consultation seeks to explore the possibility to support a harmonised system for issuance and distribution of debt instruments in the EU, for example by:

• standardising market conventions relating to the consistent usage of terminology in term sheets, rounding conventions, the corporate action information flow, timelines and processes, etc.; and
• establishing a European market infrastructure service (current working title: European Distribution of Debt Instruments (EDDI), envisaged as a centralised service interlinking issuers and CSDs to facilitate the pre-issuance and initial distribution of debt securities in the EU.

The consultation closes on 9 July 2019.

Green Bond Principles, the Social Bond Principles and the Sustainability Bond Guidelines - new publications offering complementary guidance

At its 5th Annual General Meeting and Conference of the Green & Social Bond Principles held in Frankfurt on 13 June 2019, the Executive Committee announced a number of new publications providing key guidance to complement the Green Bond Principles, the Social Bond Principles and the Sustainability Bond Guidelines:

• Handbook - Harmonized Framework for Impact Reporting;
• Green Project Mapping; and
• Guidance Handbook.

Updated 2019 editions of Green and Social Bonds: A High-Level Mapping to the Sustainable Development Goals and Working Towards a Harmonized Framework for Impact Reporting Social Bonds have also been published.

PRIIPs Regulation - Commission declines to give guidance on scope

By a letter dated 19 July 2018, the chairmen of the joint committee of the European Supervisory Authorities (ESAs) wrote to the Commission expressing their concern at the effect of the PRIIPs Regulation on the European bond market and in particular that the lack of clarity over which types of debt securities fall within the scope of the PRIIPs Regulation is leading the market to deny access to retail investors to almost all debt securities.

By a letter published on 28 May 2019 the Commission responded that:

• it is up to the Court of Justice of the European Union to provide binding interpretations of European Union law;
• the assessment whether a particular bond is within scope or not is to be performed on a case-by-case basis and should consider all features of the bond, regardless of the bond's type or name; and
• it is neither feasible nor prudent to agree beforehand and in abstract terms whether some categories of bonds fall within scope or not.

Prospectus Regulation - change in control of publication of a prospectus

Under the Prospectus Regulation regime the position regarding publication of a prospectus remains very much the same as under the Prospectus Directive regime but with one additional feature. This is that the home Member State competent authority has an independent obligation to publish every prospectus it approves (Article 21(5)). This raises the potentially awkward possibility of a competent authority publishing a prospectus or prospectus supplement before it is published by the issuer (which, for example, may be important if the prospectus or prospectus supplement contains inside information). In order to seek to avoid this, in its policy statement 19/12 published on 31 May 2019 the FCA proposes to make the following rule in its new PRR sourcebook (PRR 3.2.6 G):

“The FCA will upload documents to the system identified by the FCA on its website as the national storage mechanism for regulatory announcements and certain documents published by issuers. The FCA will upload prospectuses and related documents it approves after 6 p.m. on the working day following the day on which it approved the document.”

It remains to be seen if other competent authorities adopt similar rules.

Prospectus Regulation - Delegated Regulations published in the Official Journal

On 21 June 2019 the following Delegated Regulations made under the Prospectus Regulation were published in the Official Journal:

• Commission Delegated Regulation (EU) 2019/980 of 14 March 2019 supplementing the new Prospectus Regulation regarding the format, content, scrutiny and approval of prospectuses and repealing the current Prospectus Regulation; and
• Commission Delegated Regulation (EU) 2019/979 supplementing the new Prospectus Regulation regarding regulatory technical standards on key financial information in the summary of a prospectus, the publication and classification of prospectuses, advertisements for securities, supplements to a prospectus, and the notification portal.

Both of these Regulation will apply from 21 July 2019. For more information, see our briefing: The New Prospectus Regulation Regime - All Final Regulations Now Published.

 

Prospectus Regulation – new data submission requirements delayed

Earlier this year the FCA explained that from 21 July 2019 it will be required to report data to ESMA on its prospectus review activities and it therefore proposed new rules (PRR 3.2.7-8) to require issuers to provide the relevant data. On 5 July 2019, the FCA announced that:

• ESMA has now advised EU authorities that it does not require the full data set to be submitted at present (pending system changes that are unlikely to be completed until mid-2020); and
• in light of this, the FCA has decided to delay the implementation of changes to its ESS system that would enable it to collect the data and therefore issuers and their advisers should continue to use existing processes.

Visit our Finance Hub for analysis and commentary on developments affecting global financial markets, including the new Prospectus Regulation, PRIIPs/KID, EMIR and LIBOR transition.