Lessons from Country Experiences in Primary Market Regulations of Corporate Bonds Clemente del Valle Tamuna Loladze

Transcription

1 Lessons from Country Experiences in Primary Market Regulations of Corporate Bonds Clemente del Valle Tamuna Loladze April 2012

2 Outline Key features of the corporate bond market Importance of flexibility in primary market regulations Hybrid offer regime Hybrid offer regime - select country cases 2

3 Key features of non-govt (NG) bond market Low liquidity, in part due to: Low fungibility High fragmentation Value less affected by firm-specific information because future cash flows are predefined, which results in lower trading activity Dominance of professional investors Low liquidity entails higher risk of investing Larger portfolios allow greater diversification of risk Less liquid, more complex instruments require greater knowhow and resources to analyze investments Given the relatively illiquid nature of corporate bonds, primary market development i.e., increasing supply of instruments is a key building block of developing corporate bond markets 3

4 Difference between equity and corporate bonds Equity Corporate Bonds Heterogeneity One form of equity per issuer Many different types of bonds per issuer Fungibility New issues fungible with outstanding shares Issuance Less frequent More frequent Price Discovery Trades carry significant info about firms prospects New issues not fungible with previous issues: different amount, coupon, maturity, and (possibly) credit rating. Trades carry some firm-specific info. Price movements mostly respond to macroeconomic developments. Maturity Infinite Finite. Most < 20years Liquidity Depends on stock type Similar pattern across bonds: high post issuance, but eventually buy-and-hold and illiquid Type of Investor Retail, mutual funds, hedge funds Dominated by institutional investors (especially pension funds and insurance companies) Regulations drafted for equity may not be relevant for NG bonds 4

5 Importance of flexibility in primary market regulations Flexibility is fundamental: For facilitating the growth of corporate bond markets For both supply-side (issuance) and demand-side (investment) regulations To facilitate easy and cost-effective access to the market, providing a viable alternative to loans However Needs to happen with increased accountability and professionalism of key players (institutional investors and intermediaries) Flexibility with Responsibility 5

6 The need for flexibility: supply-side and demandside considerations Supply Side Demand Side Issuers demand fast and cost-effective means of accessing the market Flexibility and choice in offer mechanisms help meet diverse needs of issuers recurring first time one-time (e.g., project) Investors demand different levels of protections depending on their sophistication Investment guidelines should match flexibilities introduced in issuance regulations 6

7 How to introduce flexibility in primary markets? 1. Increase efficiency of the Public Offer regime Streamline Registration Process Reduce Approval Time Introduce Fast-Track Options Reduce regulatory fragmentation (# of authorities involved) Streamline excessive documentation requirements Approval time ranges from 5 days to 3 months. Average: 25 days Adopt disclosure based approval regime Build staff technical skills to effectively review corporate bond issuance applications Shelf-registrations Well-known seasoned issuers (WKSI) Integrated disclosure e-prospectus 7

8 How to introduce flexibility in primary markets? 2. Introduce alternative issuance options Private Placements Hybrid Regimes targeted at institutional and/or high net worth investors Together with: Building professionalism of institutional investors and intermediaries Adjusting investment guidelines to allow institutional investors to take advantage of new offering channels 8

9 Hybrid issuance regime Philosophy Combines and tailors key elements of public and private offering frameworks to: Minimize the time and cost of accessing bond financing for issuers Maximize securities appeal for target investors Definition Large variety of regimes, but two main attributes: 1. Exemption from submission of a full prospectus 2. Relatively easy access to secondary market trading (OTC), subject to investor eligibility conditions 9

10 Comparison of Public, Private, and Hybrid regimes Issuance Regimes Characteristic Pure Public Pure Private Hybrid (Professional) Investor eligibility Offer documentation to the regulator / SRO No restrictions, open to all Typically restricted in number Typically restricted according to level of professionalism Often only qualified or institutional investors Full prospectus Typically none Exemption from full prospectus Sometimes short-form prospectus or basic information notice Regulatory approval Secondary market trading Continuous disclosure Antifraud provisions Required None Typically none If required, typically automatic or only a few days. Unrestricted Exchange and OTC Highly restricted If any, OTC. Typically restricted to qualified investors, but freely tradable among this group. Usually OTC Full requirements None Typically simplified requirements Apply None Typically apply 10

11 Key Considerations of the Study Hybrid Regime Does not legally exist as an official regime. Each jurisdiction has its own official law or regulation. Usually predicated on either public or private offer regime Key elements are not always contained in one regulation Combination of specific conditions stipulated in various laws and regulations that satisfy the definition is what constitutes a hybrid regime 11

12 Overview of hybrid regimes in select countries US EU Brazil Chile India Israel Malaysia Thailand Year of adoption Nature of regime Private placement Exempt public offer Key Conditions QIBs 5 possible conditions Full prospectus approval by regulator/sro Conditions for trading Continuous disclosure Antifraud provisions Exempt public offer Max. 20 QIBs Exempt public offer Qualified investors Listed private placement Max. 50 investors Private placement Qualified investors Private placement HNW and sophisticate d investors No No No No No No No* No* QIBs No Same as initial exemption conditions Yes if listed, but lighter if denom. is 100,000 QIBs after 90 day holding period Yes, but lighter Qualified investors Yes, similar to public offers None, but typically large denom. Yes, similar to public offers (to exch.) Qualified investors on separate trading syst. within exch. No HNW and sophisticate d investors Yes, but lighter Yes Yes Yes Yes Yes Yes Yes Yes Private placement HNW and institutional investors HNW and institutional investors Yes, but lighter * Issuers have to submit a simplified document to the regulator, which is subject to review in Malaysia but is automatically approved in Thailand. QIB = Qualified institutional buyer; HNW = High net worth 12

13 Relative importance of the hybrid regime Notably, in the US, 70% of high yield issues over the last 15 years have been occurring through the hybrid channel. % of Total Issuance, 2010 Malaysia India Brazil EU Thailand US Israel Chile 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: Respective country jurisdictions except for US and EU. US: Thomson Financial (Thomson One Banker-Deals Module), SIFMA, and World Bank calculations. EU: LuxSE, International Capital Market Association (ICMA) consultations, and World Bank calculations. 13

14 Hybrid issuance regime - summary Key features: Reduced initial and ongoing disclosure requirements Limited role of the regulator, if any, in the approval process Unrestricted secondary market trading for eligible investors, usually OTC Continued provision of antifraud protections by the regulator Place increased responsibility on institutional investors deemed to have sufficient know-how and resources to assess fixed-income investments. Place increased responsibility on intermediaries who carry added accountability for ensuring truthful and accurate information disclosure. 14

15 Important considerations when adopting hybrid regimes Efforts to develop and professionalize institutional investors and intermediaries, given their increased role Measures to prevent retail investors from purchasing securities offered via a hybrid regime Matching flexibilities in regulatory frameworks for institutional investors to allow them to purchase hybrid securities Hybrid regimes may be more appropriate for EMCs with a limited or bad experience with pure private regimes 15

16 Conclusion Increasing the supply of corporate bonds requires introducing flexibility into the primary market framework by both: 1. Increasing efficiency of the public offer regime 2. Providing a range of issuance options that include alternative offer mechanisms, such as hybrid regimes There is no one-size-fits all model regulations need to be tailored, taking into consideration a country s economic, market, and overall regulatory context 16

17 Hybrid Issuance Regime Select Country Cases 17

18 Brazil Nature and Relative Importance Instruction 476 (2009) Exempt public offer Percent of total issuance, 2011 (volume): 96% Percent of total issuance, 2011 (number): 96% Percent of first-time issuers, since 2009 (number): 53% Key Conditions Offers made to maximum 20 qualified institutional buyers (QIBs) Listing and Trading Can be traded among QIBs after a 90-day holding period Not listed unless issuer is a public company Traded mainly OTC Documentation and Approvals (Regulator/SRO) Exempted from: full prospectus; company registration Documents to submit: conclusion announcement, including results of the sale Relevant entity: securities regulator Time frame for submission: within 5 days after the sale Approval required: None Time frame for approval: N/A Continuous Disclosure Requirements Yes, but lighter. E.g.: not required to disclose quarterly statements; notification of material events can be done electronically Antifraud protections Apply Do not apply to pure private placement regime

19 Thailand Nature and Relative Importance Notification of the SEC No. KorYor. 40/2549 (2006) Private placement with secondary market trading Analysis of issuance (2011): Percent of total issuance (volume): 66% Of which first-time issuers: 13% Percent of total issuance (no. of issuers): 30% Of which first-time issuers: 29% Key Conditions Offers made to institutional and high net worth (HNW) investors Listing and Trading Can be traded among institutional and HNW investors Listing allowed but not common Trading mainly OTC Documentation and Approvals (Regulator/SRO) Exempted from: full prospectus Documents to submit: Registration statement and draft prospectus, both in short-form; and mandatory credit rating. Relevant entity: securities regulator and ThaiBMA Time frame for submission: To securities regulator: 1 business day before first sale. To ThaiBMA: within 30 days after first sale. Approval required: Yes Time frame for approval: 1 business day Continuous Disclosure Requirements Yes, but lighter than those for pure public offers Antifraud protections Apply but within a limited time following an offer: Investors must file a claim within 1 year from the date on which fraud was revealed but not exceeding 2 years following the effective date of the offer s registration.

20 Questions? 20

21 Thank You Clemente del Valle Tamuna Loladze 21

22 Appendix 22

23 Malaysia Nature and Relative Importance Capital Markets and Services Act (CMSA) (2007) Private placement with secondary market trading Percent of total issuance (volume): 99% Key Conditions Offers made to sophisticated and high net worth (HNW) investors Listing and Trading Can be traded among HNW and sophisticated investors Listing allowed but not common No additional requirements for listing Trading mainly OTC and reported to the exchange Antifraud protections Apply. Law (CMSA 2007) holds parties involved in issuance accountable for any misrepresentation of information SC practices strong supervision over market intermediaries Documentation and Approvals (Regulator/SRO) Exempted from: full prospectus Documents to submit: Principal Terms and Conditions; mandatory credit rating; and Information Memorandum (if issued - voluntary). Relevant entity: securities regulator Time frame for submission: prior to issuance Approval required: Yes Time frame for approval: 14 business days Continuous Disclosure Requirements Yes, but lighter if not listed. E.g., no periodic disclosure requirements, only requirement to report material events. If listed, subject to requirements of exchange

24 European Union Nature and Relative Importance Prospectus Directive (2003) Exempt public offer Percent of total issuance (volume): 65% Key Conditions Any of the following 5 conditions:* 1. Offer addressed solely to qualified investors 2. Offer addressed to fewer than 100 persons 3. Offer with a min. unit denomination of 50K 4. Offer addressed to investors who acquire a min. of 50K in securities per investor 5. Offer of securities for a total consideration of less than 100K over a 12 mo. period. * Thresholds specified are scheduled to be increased by July 2012 Listing and Trading Allowed to be traded if one of the 5 exemptions continues to apply. Often listed to become eligible for investment by institutional investors Trading mainly OTC Documentation and Approvals (Regulator/SRO) Exempted from: all documentation and approvals. If listed on a regulated market (RM): Exempted from: summary prospectus if a debt security with a min. denomination of 50K. Documents to submit: Simplified prospectus Relevant entity: securities regulator / exchange Time frame for submission: prior to listing Approval required: Yes Time frame for approval: 10 business days (20 for new issuers) Continuous Disclosure Requirements Yes, if listed on an RM Lighter requirements if min. denom. is 100K Antifraud protections No harmonized EU legislation. In case of intended deceit, securities regulator has mandate to investigate Failures in due diligence handled in civil courts

25 India Nature and Relative Importance SEBI Regulations, Issue and Listing of Securities (2008). Listed private placement Percent of total issuance, 2010 (volume): 85% Key Conditions Offers made to max. 50 investors, which can be retail or institutional Listing and Trading No stipulated conditions Typically large denomination of INR 10 million (approx. USD 200K) results in hybrid offer securities being traded exclusively by institutional investors Listed in a special segment of the exchange Trading OTC and reported on designated platforms Documentation and Approvals (Regulator/SRO) Exempted from: full prospectus Documents to submit: Simplified disclosure requirement, including mandatory credit rating Relevant entity: Exchange Time frame for submission: Prior to listing Approval required: Yes Time frame for approval: within 5 business days Continuous Disclosure Requirements Yes, the same requirements as those for public offers Disclosures must be provided to the exchange Since 2009, debt securities generally subject to lighter continuous disclosures Antifraud protections Apply. Securities regulator has the mandate to enforce SEBI Regulations, which cast responsibility on issuers and intermediaries to ensure that false or misleading statements are not made in connection to a securities offer.

26 Israel Nature and Relative Importance Securities Law, Section 15A (1968). Amendment (2005). Private placement with secondary market trading Percent of total issuance, 2010 (volume): 8% Key Conditions Offers made to institutional investors and listed on Tel-Aviv Continuous Trading (TACT) Institutional, a standalone trading system within the exchange Listing and Trading Can be traded among institutional investors on TACT Institutional. Not listed, as listing would require submission of a full prospectus Trading on TACT Institutional and reported to clearing house Documentation and Approvals (Regulator/SRO) Exempted from: full prospectus Documents to submit: Description of securities and details regarding the trust deed Relevant entity: Exchange Time frame for submission: Prior to listing on TACT Approval required: No Time frame for approval: N/A Continuous Disclosure Requirements No, only applies to reporting (public) companies Antifraud protections Apply. Section 54 of the Securities Law includes a general provision on fraud, which requires issuers and intermediaries to be accountable for the truthfulness and accuracy of information disclosed as part of a securities offer. Applies to both public and private offers

27 United States Nature and Relative Importance Regulation D (1982) and Rule 144A (1990) Private placement with secondary market trading Percent of total issuance (volume): 30% Key Conditions Offers made to qualified institutional buyers (QIBs) Listing and Trading Can be traded among QIBs Not listed, as listing would entail meeting requirements similar to public offers Trading mainly OTC and reported to TRACE Documentation and Approvals (Regulator/SRO) Exempted from: all documentation and approvals. Relevant entity: securities regulator Time frame for submission: After the first sale Approval required: No Time frame for approval: N/A Continuous Disclosure Requirements No. However, holders have the right to obtain from issuer: description of the issuer s business; and financial statements for the previous 2 years. Antifraud protections Apply through US SEC Rule 10b-5, which prohibits fraud and deceit in connection with the purchase or sale of any security SEC has the mandate to intervene in case of fraud

28 Chile Nature and Relative Importance Capital Market Reform No. 1 (MLK1) (2001) Exempt public offer Percent of total issuance (volume): 0% Key Conditions Offers made to qualified investors Listing and Trading Can be traded solely among qualified investors Listing is allowed and does not require any additional requirements Trading can take place both on-exchange and OTC Trades do not have to be reported Documentation and Approvals (Regulator/SRO) Exempted from: Full prospectus; credit rating Documents to submit: Simplified prospectus, indicating that offer is made to qualified investors Relevant entity: securities regulator Time frame for submission: At least 2 days before the first sale Approval required: No Time frame for approval: N/A Continuous Disclosure Requirements Yes, very similar to those for public offers Antifraud protections Apply