Kvetoslav Krejci of White & Case -
This summer brings some good news for companies in Central and Eastern Europe that are looking to raise finance in Europe's capital markets.
Traditionally, raising finance in the capital markets was often cumbersome and bank financing was accordingly often the preferred (or even the only) option for many companies. However, European institutions have finally completed their review of the Prospectus Directive regime and have published what are likely to be the final changes.
The purpose of the Prospectus Directive is to harmonise requirements for the drawing up, approval and distribution of bond prospectuses, and to establish a series of requirements that issuers need to follow in terms of the content and format of the documentation given to investors. There are two basic scenarios where a prospectus is required: first, when securities are admitted to trading on a regulated market; and second, when an offer of securities is made to the public.
When the Prospectus Directive was adopted back in 2003, its principal objectives were to enhance the protection of investors through the provision of high-quality, consistent information and to improve the efficiency of the single market. The key innovation brought about by the Prospectus Directive for companies at that time was that a prospectus approved in one member state of the EU is valid across the bloc, giving issuers a "passport" across the capital markets of the EU. With the new changes issuers should benefit from greater legal certainty, increasing market confidence in raising capital.
Those that have already issued debt will need to bear the brunt of the amendments and are likely to face a somewhat painful process when updating their documentation in accordance with the new rules at their next update anniversary, as the market and the EU's regulators get to grips with the altered landscape.
For new bond issuers targeting sophisticated investors with their securities, however, there is better news. If an issuer does not target "the public" with its bond issue, but professional investors, things are much easier now. There have been a few changes to the exemptions from the obligation to publish a prospectus, such as no prospectus being required in the event a securities offer is addressed to investors who acquire securities for a total consideration of €100,000 per investor and if a securities offer with a denomination per unit of at least €100,000 is made. The market has already largely moved to use these bond denominations in practice, due the changes in the Transparency Directive which were published in December 2010. We can be confident that market dynamics will adjust to the requirements of the new regime sooner rather than later. The change may be slightly annoying for banks who buy blocks of securities in order to sell them on to multiple accounts, as it gives them less flexibility to spread their holdings over those accounts, but there has not been huge market backlash about the change in practice.
This private placement exemption was rarely used in primary market issuance due to the practical concerns that tend to arise when multiple managers are making offers on a transaction, as parties want to "count" investors through the gate to make certain that the threshold is not breached and the exemption lost. However, it is often helpful in liability management exercises where securities have found their way into the hands of "non-qualified investors" in the secondary market and an exchange offer needs to be undertaken. Being able to target now 150 people per member state rather than the previous number of 100 may assist in these exercises at the margins.
Small business benefits
If you are a small or medium-sized enterprise, then the so-called "proportionate" disclosure regimes have been established. This means that if such an issuer chooses to use the optional regime, it may include in its bond prospectus only one year of historical financial information (not the usual two years). One might question whether this regime will be used much in practice, as investors are likely to want more than simply a year's snapshot on a company's financial health and, obviously, if the transaction is being sold into the US pursuant to the respective applicable rule, investors will demand significantly more financial information than just one year's historical numbers.
There is also good news for governments that need to issue debt: sovereign issuers in the European Economic Area (EEA) are now exempt from the obligation to produce a Prospectus Directive-compliant prospectus. The amendments now also exempt state guarantors from providing disclosure about themselves in circumstances where the member state's guarantee is not "unconditional and irrevocable," and the securities benefiting from such a guarantee would otherwise be within the scope of the Prospectus Directive. Any issuer, including an EEA sovereign who is exempt from the obligation to produce a prospectus, must however now include a sentence in any advertisement they issue regarding their offer of securities, stating that no prospectus is required to be prepared.
The changes relating to offerings that involve a retail component are more far-reaching and will add time and pain to programme updates, but standalone wholesale debt issuers have come off remarkably well from the reforms.
Current experience with listing authorities suggests they are still getting to grips with the regulatory changes and the initial deals that come in front of them are being very carefully examined and more heavily commented upon than usual. But no doubt as everyone becomes more familiar with the provisions, we will return to smoother running. Having said that, not content with leaving things as they are the European Commission is constantly looking to see how the regulations can be revised to improve disclosure to investors and have now turned their attention to the disclosure regime for convertible securities. We await to see what changes will be proposed here.
Will the changes actually make life for companies easier? The current revisions to the Prospectus Directive to a large extent cement existing market behaviour and we can expect that the impact will be rather intangible. However, it should provide increased market confidence in capital raising on the part of issuers. Professionals expect that the extension of some of the exemption thresholds in the Prospectus Directive will increase the number of fundraisings throughout the CEE region and the fact that unquoted companies do not require a full prospectus should be particularly of benefit for smaller companies wishing to reduce the associated expense and administration. Last but not least, more companies should be able to offer shares to their employees without triggering the requirement of issuing a prospectus.
So the changes are all in place now. But finding willing investors is not something that the even best legislation can do on its own.
Kvetoslav Krejci is a partner at White & Case in Prague
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