Debt securities- Listing of Debt Securities PDF

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Notes on the Listing of Debt Securities....

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BDF8

Debt Securities (2): Listing Subscription Agreement The Subscription Agreement is a CONTRACT between the issuer, the lead manager and the co-managers which RECORDS the basis on which the ISSUER WILL SELL, and the MANAGERS WILL BUY, the bonds on issue. Will cover ✔ Conditions precedent ✔ Pricing ✔ Fees and commissions of managers ✔ Issuer’s costs and expenses ✔ Reps and warranties from issuer to managers [that information in any prospectus is correct] ✔ Rep from managers – will comply all applicable selling restrictions ✔ Force majeure clause

Main obligations of each party Obligations of Managers Agreement by the managers (Clause 2)

Clause 2.1: Subscription: Managers jointly & severally agree to subscribe and pay for the bonds at the Issue Price. • This means that – whilst the managers will decide between themselves how many bonds they each subscribe for – their liability is not limited to this amount – the SA allows an issuer to require any one manager to subscribe for the entire bond issue if necessary i.e. they are each joint & severally liable i.e. individually liable for the whole amount, and liable together as a group. • Contrast with syndicated loan facility agreement (FA) where the banks are simply severally liable (liable for only their respective obligations). Clause 2.2: Restrictions: A set of terms are set out in the Schedule which the managers must abide by. Includes: - How the bonds will be sold and marketed - Sort of jurisdictions you can and cannot sell in • Note: that these representations are made severally but NOT jointly (i.e. you only sue whoever made the representation) Clause 2.3: Agreement among the Managers – directs the reader to the separate “Agreement among Managers” document (see para 19.3.7) . - NB: this agreement is only severally liable. If anyone doesn’t subscribe, the Lead Manager will re-assign that.

Clause 8.2

Pay the net subscription to the issuer = Re-iterates that managers will pay and deliver the bonds. - Delivery against Payment (“DvP”): when the depositary receives the bonds and it debits the lead managers accounts – See page 246 for chart of explanation • Meaning: Payment of the subscription price for the bonds made against delivery at closing - NB. Everything happens simultaneously

Main obligations of the issuer Obligation to issue Clause 1

- Clause 1.1: Agreement to issue the bonds - Clause 1.2: Provide a trust deed and paying agency agreement. - Clause 1.3: To prepare the prospectus and authorise manager to distribute

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Listing Requirements Clause 4

Undertakings by Issuer Clause 6

Clause 8.1 Clause 10 Clause 13 Clause 14

• Manager will want the bonds to be listed to ensure that they are marketable (more liquid as tradable) - Clause 1.4: Confirm the arrangement for the announcement of the bonds by the Lead Manager - Clause 4.2: To make application and apply for listing - Makes clear that the ultimate responsibility is with the issuer - It’s the directors way of delegating liability to the issuer - Clause 4.3: To get prospectus approved by UK Listing Authority - Clause 4.5: Maintain listing - 6.1 - Deliver prospectus - 6.2 - Responsible for supplementary prospectus - 6.3 - Not to make announcements without managers consent - 6.6 - Pay all applicable taxes - 6.8 - Deliver the bonds - 6.9 - Provide financial information - deliver the Temporary Global Note (important for lock-up periods in e.g. US) - To pay expenses and costs in connection with preparing Bonds, Prospectus etc. - Communications - No fiduciary duties - acknowledges that there is no duty of care between the managers and the issuer.

How is the bank protected by terms of agreement? Protection of the banks (managers) Warranties and Representations (Clause 5)

Undertakings by the Issuer (Clause 6)

- Issuer provides the bank with a series of W&Rs – which are indemnified (5.3 below). - e.g. that all info provided is correct; Bonds are correctly authorised. - Note: The representations and warranties are much more limited than in a facility agreement because the purpose is a different one - they are also repeated less frequently and are more difficult to trigger • Period of relationship is shorter - Managers are not long term lenders (only until closing) and subscription agreement not addressed at them - so the representations are very basic: e.g. complied with all the relevant laws etc. • Terms and conditions (inc reps and warranties) are in the note itself – this is protection for the actual bondholders (and also in the prospectus e.g. Carnival issue) - 5.1.1 valid incorporation, 5.1.2 contracts, 5.1.3 valid bonds etc., 5.1.6 valid prospectus, 5.1.8 litigation, 5.1.9 no events of default - Clause 5.1.7(b): MAC Clause: Any changes, up to issuer to update the information. - Clause 5.1.10: In other jurisdictions there are selling restrictions, so remember this. - Clause 5.2: The Warranties and Representations are given at the date of the agreement and repeated at the date of Prospectus publication and/or any supplement is published. • They are NOT repeated afterwards….WHY? Because the bonds will be in the secondary market and the managers do not take responsibility for this. • NB: Lead Managers are concerned that the UK Listing Authority has approved the prospectus, otherwise cannot sell them. Need to make sure bonds are listed (so relevant applications need to be made). IF not done, cannot sell the bonds on the secondary market. - Clause 5.3: Indemnity. If the managers suffer loss as a result of incorrect representations, the issuer will reimburse them. Onus on the issuer to make sure everything is absolutely correct. e.g. Issuer undertakes to deliver to the managers the Prospectus - Clause 6.9: Outlines some limited cause of action even after the closing date

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BDF8 Conditions Precedent (Clause 7)

Termination (Clause 11)

Survival of representations and obligations (Clause 12)

- Provides a series of obligations Issuer must meet before the Managers are obliged to subscribe for the bonds. (if these are not complied with, manager cannot be in breach if do not take the bonds on) - NB: Lead Manager can waive these CPs (with the exceptions of listing and contracts 7.1.1 and 7.1.2) • contra the facilities agreement under which Bank will not waive point that the managers will not hold on to the bonds - Outlines the Managers’ ability to terminate the agreement. States that: ▪ 11.1.1 Up until payment of the subscription money, the bank can terminate the agreement if any of the warranties, representations or condition precedents are breached. ▪ Right to terminate regardless of what has happened previously. - Overall a very important clause for the managers. Essentially risk cover up until closing 11.1.3: Force majeure clause - Very subjectively drafted (in the manager’s opinion...) Note: Just-in-case provision (for political, financial or economic changes). There is a REAL reputational issue if you were to rely on it. Therefore very unlikely to be used (e.g. even during 9/11 hardly any bank relied on it) - The protection mentioned above will continue in full force and effect beyond the completion of the subscription and issue of the Bonds. This is to ensure that if any Bondholders (who obtained the bonds from the Manager on the secondary market) were to sue the Manager because there was a breach of the Bonds T&Cs, the Manager could still sue the issuer for breach of warranty = relevant to expenses etc post-issue. - NB: new T&Cs (in the notes themselves) provide their own protection to the BHs for the duration of the life of the bonds i.e. until they are fully repaid. • Contrast this with Syndicated Loan Facilities: Under a Loan Facility the FA governs the entire transaction – therefore it is the FA which sets out protection for the entire duration of the loan. The Warranties and Representations given at the start of the facility are repeated throughout the duration – normally at the start of every interest repayment.

Costs of issue Who bears the costs of the issue? THE ISSUER Expenses Clause 10

The Issuer is to pay both: - Cl.10.1 – Cost of Issuing and Listing the Bonds; • Printing of the bonds • Advertising and marketing • Prospectus • Issuing etc - Cl. 10.2 – Payment to 3Ps e.g. TT and PA or FA. • Issuer is also to reimburse Managers for all their “reasonable expenses”.

Clause 11

Even if the agreement is terminated because of one of the reasons in the agreement, the issuer remains liable for the costs above

Tax Clause 6.6

- Issuer pays taxes

Concession Clause 9

- Issuer pays manager a commission and concession

Financial Services and Markets Act 2000 (“FSMA”) and the Prospectus Rules The required level of disclosure for a prospectus relating to an issue of debt securities. Bonds aren't usually traded on the market, but are instead listed to show the issue has met the requirements

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BDF8 of the exchange and regulatory requirements (more protected, comfort) – this encourages investment as some investors can only invest in listed securities and prestige of listing, raising profile and credibility

Summary of procedure: 1. If you want to list your bonds you need admission to the official list 2. To get on the official list you need admission to trading (LR 2.2.3) e.g. listed on the LSE (regulated) or PSM (unregulated). 3. If you want to offer to the General public you must satisfy s. 85(1) *START POINT IN EXAM* 4. To get admission to trading you must satisfy s. 85(2) 5. If you satisfy s.85(1) or (2) and no exception applies, you will need a prospectus. 6. If I need a prospectus, what are the content requirements? 7. What is the format of the prospectus? 8. Who is responsible for the prospectus? 9. How can the company keep costs down? Note: - Unless the question in the exam tells you specifically to consider the PSM you would always assume that listing is with regard to Main Market Listing. - Alternatively, you may get a client who is not sure where and how to list. In such a scenario you can flag up the PSM alternative.

Step 1: Admission to the Official List (UKLA – part of FCA) ❖ To obtain admission to the official list, you must satisfy Legal Requirements for a London Listing, including: comply with Listing Rules, Prospectus Regulation Rules and Disclosure and Transparency Rules. • If a bond issue complies with the Listing Rules, it will be eligible for admission to trading . • Debt securities are only subject to the rules on standard listing: LR 2, 3, 4, 17, 18, 19 ❖ Listing rules can provide that securities may not be admitted to the official list unless: • s. 79 FSMA 2000 (a) Listing particulars have been submitted to, and approved by, the competent authority and published, or (b) in such cases as may be specified by listing rules, such document… as may be so specified has been published.

Requirements for Listing NB: rules that are likely to be the MOST relevant in an action are marked with an *

Rule

Heading

2.1.1 R

Application

2.1.2 G

Right of refusal

2.2.1 R

Incorporation

2.2.2 R

Validity

Requirement This chapter applies to all applicants for admission to listing (unless otherwise stated) The FCA may not grant application for admission unless it is satisfied that the requirements of the listing rules are complied with and any special requirement is complied with. Applicant must be... - Duly incorporated; - Operating in conformity with its constitution How will this requirement be satisfied? See subscription agreement. Initial due diligence and legal opinion at closing will also give comfort on this. Securities must... - Conform with the law of the applicant’s place of incorporation; - Be duly authorised according to the requirements in the applicant’s constitution;

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BDF8 and - Have any necessary statutory or other consents How will this requirement be satisfied? - Check the memorandum and articles of association and ensure all necessary board resolutions are obtained. Legal opinion at closing will also give comfort on this. 2.2.3 R*

2.2.4(1) R

Admission to Trading

Securities must be admitted to trading on an RIE’s market for listed securities i.e. MM or PSM.

Transferability

How will this requirement be satisfied? - The stock exchange makes the decision as to whether to admit securities for trading. The FCA in its capacity as UKLA makes the decision as to whether to admit the securities to the Official List. Securities must be freely transferable How will this be satisfied? - Prospectus will have a provision which holds (for bearer bonds): - “Title: title to the bonds and coupons passes by delivery. The holder of any bond or coupon be treated as its absolute owner for all purposes [...]” - The terms of the issue will include a similar provision.

2.2.7(1)(b)R* 2.2.9 2.2.10 R*

Market Capitalisation Whole Class Prospectus

2.2.11 R

Listing Particulars

3.2.2 R

Method of application Debt securities 48 Hours documents

3.4.1 R 3.4.4 R

4.1.1 R

Application

4.1.3 R

Listing Particulars Content of Listing Particulars

4.2.1 G

Aggregate market value of the securities (i.e. total value of bonds issued) must be at least £200,000. The application for listing must relate to all securities of the same class Applies where a Prospectus is required: - A prospectus must have been approved by the FCA (UKLA) [or another EEA State with relevant competent authority with relevant ‘passporting’ requirements] and published in relation to the securities OR Applies where Listing Particulars are required: - Listing Particulars for the securities must have been approved by the FSA and published in accordance with LR 4. Important: - You only need listing particulars if you want to list on the Professional Securities Market (PSM) – never otherwise. Application for listing An applicant for admission must apply to the FCA by submitting the documents required under LR 3.4 – 3.5 as well as pay the applicable fee An issuer of debt securities must comply with 3.4.4 – 3.4.6 Following must be submitted to the FCA (by midday two business days before the FCA will consider application): - Completed Application for Admission of Securities to the Official List - Approved prospectus or listing particulars (or copy approved by another Member State – ‘passporting’); • Written confirmation of the number of securities to be issued Listing particulars for the PSM This section applies to an issuer that has applied for the admission of: - Securities specified in Art 1(2) Prospectus Regulation - Any other specialist securities for which a prospectus is not required An issuer must make that listing particulars for securities referred to in LR 4.1.1 R are approved by the FCA and published in accordance with LR 4.3.5 R Listing particulars must include: - All such information as investors and their prof. advisers would reasonably require; AND - Reasonably expect to find - For the purpose of making an informed assessment of: • The assets and liabilities, financial position, profit and losses, and

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BDF8 4.2.4 R

4.2.8 R 4.2.12 G

Minimum information to be included in listing particulars English Language Responsibility for the listing particulars

prospects of the securities • The rights attaching to the securities 1. For an issue of bonds = the minimum information required by the annexes applicable to debt and derivative securities

Listing Particulars must be in English As outlined in Part 3 of FSMA (Official Listing of Securities) Regulations 2001 sets out the persons responsible for listing particulars. In particular: - Reg. 6 = specifies general liability - Reg. 9 = modifies reg. 6 with regard to specialist securities

Step 2: Admission to trading on one of the two markets ❖ In order to satisfy LR 2.2.3R, securities must be admitted to trading on one of the LSE’s two trading markets (MM or PSM). ➢ In order to do this, the Issuer must satisfy Section 85(2) FSMA 2000: ■ It is unlawful to request the admission of transferable securities to which this subsection applies to trading on a regulated market situated/ operating in the UK unless an approved PROSPECTUS has been made available to the public before the request is made. ➢ If the Issuer is issuing bonds to the general public, Sec. 85(1) FSMA 2000 must ALSO be satisfied: ■ It is unlawful for transferable securities to which this subsection applies to be offered to the public in the UK unless an approved PROSPECTUS has been made available to the public before the offer is made.

Step 3-6: Is a prospectus required? A prospectus approved by the UKLA is required if a bond issue is to ✔ be offered to the public; or ✔ admitted to trading on the Main Market Unless an exception to both criteria apply.

SECTION 85(1): OFFERS TO PUBLIC It is unlawful for transferable securities to which this subsection applies to be OFFERED TO THE PUBLIC in the UK unless an approved prospectus has been made available to the public before the offer is made.

Apply to the facts to show this applies

- Transferable securities = s.102A(3) – anything as defined in Article 4(1)(44) of MIFiD II (includes debt securities i.e. bonds) - Offer to the public = s.102B(1) – communication to any person which presents sufficient information on the transferable securities to be offered and the terms on which they are offered, to enable an investor to decide to buy or subscribe in those securities. ➔ Communication may be made in any form and by any means (s102B(3)) - In the UK = s.102B(2) = if the offer is made to a person in the UK then it is an offer to the public in the UK - Prospectus must be approved by competent authority i.e. FCA– s.85(7)

Exemptions s.86(1) *These only apply to 85(1)

When is it not an offer to the public? Exemptions are found in Art 1(4) Prospectus Regulation and referenced in s.86 FSMA ➔ Art 1(4)(a) - Offer is made to or directed towards qualified investors only (e.g. governments, central banks, and institutional investors such as investment banks, insurance companies, investment firms and pensions funds)

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BDF8 ➔ Art 1(4)(b) - Offer directed at fewer than 150 people (who are not qualified investors) per EEA state ➔ Art 1(4)(c) - Securities have a minimum denomination of €100K or more ➔ Art 1(4)(d) - Minimum consideration which may be paid by any person pursuant to securities offer is at least €100K (ie. Everyone must at least pay €100k for this exemption to count – aimed at institutional investors) ➔ s86(1)(e) FSMA - Total consideration is less than €8 million [or equivalent] (highly unlikely)** -

s.85(5) These are very unlikely – not that relevant, but state none apply

OR exempt as prospectus approved by competent authority in another MS (passporting) When is a prospectus not required? - bonds which are exempt: VERY LIMITED EXCEPTIONS - usually not relevant for a corporate bond issue - just state that they don’t apply - Certain exempt securities are listed in the Prospectus Regulation, the Prospectus Regulation Rules (PRR) sourcebook and also in Sch 11A to the FSMA 2000. - s85(2) FSMA outlines that securities which fall under Art(2) Prospectus Regulation (relates to very specific types of bond issue e.g. one guaranteed by an EEA government or local authority) or Art 1(3) do not have to produce a prospectus.

SECTION 85(2): REGULATED MARKET OR OPERATING IN UK It is unlawful to request admission of transferable securities... to trading on a REGULATED MARKET SITUATED OR OPERATING IN THE UK unless an approved prospectus has been made available to the ...