Ashurst Quarterly Debt Capital Markets Update Q1 2019

Welcome to the second edition of the Ashurst Quarterly Debt Capital Markets Update for 2019. In this edition we summarise the key developments in debt capital markets in the first quarter of 2019, dealing first with Brexit-related topics and then with others.

Brexit

• New ESMA Q&As regarding the Prospectus Directive and Brexit
• Brexit and accounting standards applicable to UK-incorporated companies
• London stock exchange listing and ECB eligible collateral
• Brexit and amendments to the London stock exchange primary market rulebooks
• ICMA standard language, selling restrictions, legends

Others

• FCA consultation on Prospectus Regulation and changes to the FCA Handbook

• LIBOR transition and contractual fallbacks
• Goodbye UKLA
• EONIA transition and EURIBOR reform - extension of Benchmark Regulation transition deadline
• Proposed EU delegated regulation on the format and content of prospectuses and their regulatory scrutiny
• European Commission draft RTS on key financial information in the summary of a prospectus, advertisements, supplements, etc.
• ESMA Q&As on the new Prospectus Regulation
• ESMA Guidelines on risk factors under the new Prospectus Regulation

New ESMA Q&As regarding the Prospectus Directive and Brexit

On 31 January 2019 ESMA issued two new Q&As regarding the Prospectus Directive, Q&A 103 and 104. Both Q&As are only relevant in the event that the UK exits the EU with no withdrawal agreement in place.

Q&A 103 deals with issuers which currently have elected the UK as their home member state for prospectus approval purposes under Article 2(1)(m)(iii) of the Prospectus Directive and wish to offer securities to the public or be admitted to trading in the EEA after exit day. ESMA proposes to allow any such issuer to "reset" its home member state as though its offer securities to the public or admission to trading in the EEA after exit day is its first for these purposes.

Q&A 104 provides that prospectuses approved by the UK FCA and passported to one or several EEA member states before the exit day can no longer be used to offer securities to the public or admit securities to trading on a regulated market within the EEA after exit day. This is in contrast to the UK's proposals to grandfather after exit day any prospectus passported into the UK before exit day. It also provides that after exit day the UK will lose its competence to approve any prospectus or prospectus supplement for Prospectus Directive purposes and to operate the Prospectus Directive's passporting mechanism.

Brexit and accounting standards applicable to UK-incorporated companies

Currently the IAS Regulation requires any company which is incorporated in an EEA member state, which is obliged to prepare consolidated accounts and which has any securities admitted to trading on a regulated market to use EU-endorsed International Financial Reporting Standards (EU-IFRS) for the preparation of their consolidated accounts. Member states may also either permit or require other companies to prepare their consolidated and/or non-consolidated accounts using EU-IFRS.

The UK Government has stated that it is in the UK’s interest to maintain convergence with IFRS after exit day as IFRS are used as the basis for preparing company accounts globally, in over 140 jurisdictions including 15 out of the 20 G20 countries. Accordingly the UK Government has published The International Accounting Standards and European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2019 which provide for a national framework for endorsement and adoption of IFRS after departure from the EU.

London stock exchange listing and ECB eligible collateral

On 25 February 2019 the London stock exchange published a notice which describes how it proposes, for both outstanding and new issues, to avoid any question of the London stock exchange ceasing as a result of Brexit to be an "accepted market" for the purposes of "eligible collateral" for Eurosystem monetary policy and thereby bonds admitted to trading on the London stock exchange ceasing to meet the ECB's eligibility criteria.

It will do this by utilising its affiliate BondVision. This is a Multilateral Trading Facility (MTF) included in the list of “accepted markets” recognised by the ECB and organised by Monte Titoli. The notice says the process of admission of bonds to BondVision is automatic and without recourse to the issuer.

Brexit and amendments to the London stock exchange primary market rulebooks

On 7 March 2019 the London stock exchange published Market Notice N04/19 giving details of its proposed changes to its rulebooks that will apply in the event that no transitional or other agreement is reached before the UK withdraws from the EU. These amendments are designed to allow the exchange to continue to operate its markets effectively and meet its regulatory obligations.

ICMA standard language, selling restrictions, legends

On 15 March 2019 ICMA circulated to its Primary Documentation Group drafts of suggested updates to various forms of ICMA standard legends and clauses which are intended for use after the UK exits the EU. These suggested updates are intended as a tool to assist market participants' thinking in considering how to approach post-Brexit activity.

FCA consultation on Prospectus Regulation and changes to the FCA Handbook

On 28 January 2019 the FCA launched a public consultation (CP19/6) concerning changes it is proposing to its Prospectus Rules sourcebook to ensure consistency with the Prospectus Regulation when this Regulation becomes fully applicable (from 21 July 2019) and the existing Prospectus Directive and associated EU measures made under it are repealed.

The proposals put forward in this consultation will only be relevant if the withdrawal agreement between the UK and the EU comes into effect giving rise to an "implementation period" lasting until 31 December 2020 (or later) during which EU law will continue to apply in the UK (and therefore the Prospectus Regulation will apply in full and become directly applicable in the UK from 21 July 2019).

If the UK exits the EU without any withdrawal agreement and the implementation period therefore does not come into effect the consultation says the FCA will not proceed with these proposals but instead will put forward revised proposals if and when the UK government decides to proceed with the implementation of the Prospectus Regulation.

The consultation closed on 28 March 2019. We now wait to see the FCA's final proposals and in particular whether the Prospectus Regulation becomes fully applicable in the UK.

LIBOR transition and contractual fallbacks

Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, gave an important speech at the ISDA Annual Legal Forum on 28 January 2019 concerning LIBOR transition and contractual fallbacks. Among the important points to note from his speech are:

• IBA, the administrator of LIBOR, may announce in advance a date after 31 December 2021 on which it will cease the publication of particular currency-tenor combinations. However it may come under considerable commercial pressure not to do this and at this point, if banks leave the LIBOR panels, the problem of capturing enough transactions to underpin robust calculation of the rate may become severe and the requirements of the European Benchmark Regulation may become relevant. Amongst these requirements, is a clear and unambiguous requirement for not only the administrator, but also for the supervisor of the benchmark administrator to assess the capability of a critical benchmark to be representative of an underlying market and economic reality.
• In these circumstances, the end-game for LIBOR may include an assessment by the FCA that one or more panels have shrunk so significantly in terms of number of banks or the market share of the banks remaining, that it no longer considers the relevant rate capable of being representative.
• It seems essential to consider this scenario when choosing the design of fallback triggers.

Goodbye UKLA

In its Primary Market Bulletin No 20 published in February the FCA announced that, for the sake of clarity, it will begin phasing out the name ‘UK Listing Authority’ or ‘UKLA’. The FCA is gradually removing the name "UKLA" from its website and other external communications and will instead refer to the FCA’s ‘primary market’ functions.

The FCA say that there is no need now to revise documents just to remove references to the UKLA but they ask that when updating templates/documents for other reasons, market participants should phase out the terms UKLA or UK Listing Authority.

EONIA transition and EURIBOR reform - extension of Benchmark Regulation transition deadline

In a press release on 25 February 2019 the European Commission announced that a political agreement has been reached to extend the transitional period under the Benchmark Regulation for two years, until 31 December 2021, for critical benchmarks. It is expected that the European Parliament and Council will now move to formally adopt appropriate legislative measures to give effect to this extension.

Proposed EU delegated regulation on the format and content of prospectuses and their regulatory scrutiny

On 14 March 2019 the European Commission published a revised draft of its delegated regulation supplementing the new Prospectus Regulation regarding the format, content, scrutiny and approval of prospectuses. This is the final draft, subject to the right of the European Parliament or the Council to express objections.

European Commission draft RTS on key financial information in the summary of a prospectus, advertisements, supplements, etc.

On 14 March 2019 the European Commission published the draft text of its delegated regulation supplementing the new Prospectus Regulation with regard to 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.

ESMA Q&As on the new Prospectus Regulation

On 27 March 2019 ESMA published its first Q&A document in relation to the new Prospectus Regulation. This Q&A document is similar to but separate from the Q&A document which ESMA publishes in relation to prospectuses under the Prospectus Directive regime. Q&A 2.1 provides that the current ESMA Q&As relating to prospectuses (and the ESMA update of the CESR recommendations) should be applied to prospectuses drawn up under the Prospectus Regulation to the extent they are compatible with the Prospectus Regulation. The new Q&A document also contains useful guidance on the grandfathering provisions of the new Prospectus Regulation.

ESMA Guidelines on risk factors under the new Prospectus Regulation

On 29 March 2019 ESMA published its Final Report (ESMA31-62-1217) on its proposed guidelines on risk factors under the new Prospectus Regulation. The final guidelines are set out in Annex II to the Report together with explanatory text and will become effective on a date (expected to be 21 July 2019) which is two months after their publication on ESMA’s website. These guidelines follow closely the draft guidelines set out in ESMA's Consultation Paper dated 13 July 2018 (see our briefing).

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.