Ashurst Quarterly Debt Capital Markets Update Q2 2021

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

• UK issuers and Transparency Directive accounting standards: ESMA public statement 
• USD LIBOR tough legacy legislation signed into law
• Syndicated distribution of debt securities via Euroclear and Clearstream - new DvP model
• Financial Services Act 2021: the UK Benchmarks Regulation, tough legacy and the UK PRIIPs KID regime
• ESMA publishes revised Q&As on the EU Prospectus Regulation
• Working group on €RFRs publishes recommendations on EURIBOR fallbacks
• Working Group on £RFRs recommends successor rate for FRN fallbacks
• Liability to qualified investors arising out of an inaccurate prospectus - CJEU decision
• Green & Social Bond Principles 2021 edition issued
• FCA consults on adopting and adapting ESMA guidance
• FCA proposes calculation methodology for synthetic sterling and Japanese yen LIBOR

UK issuers and Transparency Directive accounting standards - ESMA public statement

As the UK was (or was treated as) an EEA member state until IP completion day but is now a non-EEA country, ESMA issued a public statement on 31 March 2021 (ESMA32-61-1156) in which it sought to clarify the application of the Transparency Directive  requirements for accounting standards to UK issuers with securities admitted to trading on regulated markets in the EEA.

Briefly:

• With effect from 31 December 2020 an issuer incorporated in the UK with securities admitted to trading on a regulated market in an EEA member state must file and publish an annual report in accordance with the requirements of the Transparency Directive as implemented in the national law of its home member state for Transparency Directive purposes (absent an exemption).
• This obligation is in addition to any corresponding obligations it may have under UK law.
• For an issuer which prepares consolidated financial statements this is unlikely in practice to be a anything more than a small additional administrative burden.
• For an issuer which does not prepare consolidated financial statements and uses UK GAAP, it may be necessary to restate its financial statements in accordance with EU-endorsed IFRS or UK-endorsed IFRS.

USD LIBOR tough legacy legislation signed into law

On 6 April 2021, the State of New York's legislative solution to the problem of "tough legacy" USD LIBOR contracts, securities, and instruments was signed into law, with immediate effect.  The new law largely replicates draft proposals published by the Alternative Reference Rates Committee (ARRC) last year, and amends the New York General Obligations Law to introduce new statutory provisions that will apply upon the discontinuation or loss of representativeness of USD LIBOR.  For more information see this Ashurst briefing.

Syndicated distribution of debt securities via Euroclear and Clearstream - New DvP model

On 21 April 2021 the two International Central Securities Depositories (ICSDs), Euroclear and Clearstream, announced their intention to implement a new model for the traditional delivery versus payment (or DvP) closing of syndicated new issues of debt securities.  The exact implementation date still needs to be determined but the ICSDs say it will be in late 2021 and they will communicate it to the market as soon as a mutually agreed timeline has been reached, together with specific terms and conditions and account opening/migration forms.  The ICSDs announcement says that after the migration weekend, it will no longer be possible to close a new issue under the current DvP model.

The principal differences between the current model and the new model will revolve around a new requirement for each lead manager to open a "commissionaire account" with one of the ICSDs.  This commissionaire account will be governed by Belgian law (in the case of Euroclear) or Luxembourg law (in the case of Clearstream) and will be for the benefit of the lead manager but will grant the issuer third party rights under a third-party beneficiary clause (‘stipulation pour autrui’).

Financial Services Act 2021: the UK Benchmarks Regulation, tough legacy and the UK PRIIPs KID regime

On 29 April 2021, the Financial Services Act 2021 received Royal Assent. The Act is an omnibus piece of legislation that amends several elements of the UK's financial services legislative framework to reflect the UK's new status outside the EU, including the UK Benchmarks Regulation and the UK PRIIPs Regulation. 

See these Ashurst briefings for a discussion of the impact of the Act on the UK Benchmarks Regulation and the UK PRIIPs Regulation.

• UK Benchmarks Regulation and tough legacy: Financial Services Act 2021 enacted
• UK PRIIPs KID regime comes into focus: Financial Services Act 2021.

ESMA publishes revised Q&As on the EU Prospectus Regulation

On 5 May 2021 ESMA published a revised version of its Q&As on the EU Prospectus Regulation (ESMA/2019/ESMA31-62-1258). It which includes three new Q&As:

1. New Q&A 8.5 confirms that the publication of new audited annual financial statements during the period of validity of a prospectus relating to non-equity securities does not automatically trigger the obligation to produce a supplement;
2. New Q&A 14.3 confirms that the requirement under Article 4(1) of the EU CRA Regulation  applies to any credit rating included in a prospectus, regardless of whether or not it is required by the EU PR Regulation ; and
3. New Q&A 6.2 confirms that global depository receipts (GDRs) over shares will usually constitute non-equity securities.

Working group on €RFRs publishes recommendations on EURIBOR fallbacks

On 11 May 2021, the working group on euro risk-free rates published its recommendations addressing events that would trigger fallbacks in EURIBOR-related contracts, as well as €STR-based EURIBOR fallback rates (rates that could be used if a fallback is triggered). 

While there is currently no plan to discontinue EURIBOR (in contrast to LIBOR), the development of more robust fallback language addresses the risk of a potential permanent discontinuation and is in line with the requirements of the EU Benchmarks Regulation for supervised entities that use benchmarks to produce and maintain robust written plans setting out the actions that they would take in the event that a benchmark materially changes or ceases to be provided.

Working Group on £RFRs recommends successor rate for FRN fallbacks

Certain contractual fallbacks from GBP LIBOR to risk-free rates in terms and conditions of debt securities typically envisage an issuer appointing an independent adviser to select (or to advise the issuer in the selection of) a successor rate on the basis of (a) any formal recommendations made by a relevant nominating body or (b) if no such recommendations have been made, customary market practice.  A successor rate formally recommended by a relevant nominating body would remove the need for the issuer or independent adviser to exercise discretion in determining the successor rate in transactions containing the relevant fallback language.

Following a public consultation earlier this year, on 18 May 2021 the working group on sterling risk-free reference rates issued a statement recommending the use of overnight SONIA, compounded in arrears as the successor rate recommended to replace GBP LIBOR for the purposes of the operation of fallbacks in bond documentation that envisage the selection of a recommended successor rate.

In addition, a majority of the responses to the consultation concluded that any further detail on the conventions to be used to accompany the recommended successor rate, such as use of observation lag or shift, should be left to the issuer to agree on a case-by-case basis.

Liability to qualified investors arising out of an inaccurate prospectus - CJEU decision

On 3 June 2021 the Court of Justice of the European Union (CJEU) gave its ruling in the case of Bankia SA v Unión Mutua Asistencial de Seguros (Case C-910/19).  Briefly, this case concerned an inaccurate share prospectus approved under the Prospectus Directive  and the questions:

• Can a qualified investor bring an action on the prospectus?
• Is liability to be determined on the basis of the information in the prospectus or could other knowledge of the qualified investor be relevant?

In its ruling, the CJEU confirmed the opinion of the Advocate General delivered on 11 February 2021 as follows:

• Article 6 of the Prospectus Directive, in the light of Article 3(2)(a), must be interpreted as meaning that, where an offer of shares to the public is directed at both retail and qualified investors, and a prospectus is issued, an action for damages arising from the prospectus may be brought by qualified investors, despite the fact that is not necessary to publish a prospectus where the offer is made exclusively to qualified investors.
• Article 6(2) of the Prospectus Directive must be interpreted as not precluding, in the event of an action for damages being brought by a qualified investor on grounds of an inaccurate prospectus, that investor's awareness of the true situation of the issuer being taken into consideration.

Although the Prospectus Directive has now been repealed and replaced by the EU Prospectus Regulation, there do not appear to be any material differences between these provisions of the Prospectus Directive and the corresponding provisions of either the EU Prospectus Regulation or the UK Prospectus Regulation.