Regulation (EU) 2017/1129 (the “New Prospectus Regulation” or “PD3”) has been in effect since 21 July 2019 and the purpose of this advisory is to provide some practical insights on the application of PD3 to date to issuers of debt securities and to share our experience of some of the issues which have arisen and how such issues may be resolved. The below is not intended to be exhaustive and we welcome any queries or insights you may have.
Of the changes implemented by PD3, the update to how risk factors are to be presented is perhaps the most significant. ESMA has provided competent authorities with the power to challenge the risk factors included in a prospectus and has actively encouraged competent authorities to do so. Such authority has resulted in a fresh focus and thorough review of risk factors presented in a prospectus, with the knock-on effect of new comments being raised during the prospectus review process. Our experience to date highlights that risk factors are reviewed extensively to ensure that all risk factors are:
- limited to risks which are specific to the issuer and/or to the securities and which are material for making an informed investment decision;
- presented in a limited number of categories depending on their nature, with the most important risk factors under each category being presented first;
- assessed based on the probability of occurrence and the expected magnitude of their negative impact; and
- corroborated elsewhere in the prospectus.
Statements of Fact or Material Risks?
Please keep an eye on risk factors such as the following examples and ensure they are clearly linked to the relevance and specificity of the issuer and/or the notes:
» Macro-Economic and Market Considerations
» Legal Risks and Regulatory Risks
» Volcker Rule
» Credit Rating
» Noteholders Meetings/Change of Control/Transfer Restrictions/ Clearing Systems/Denomination of Notes
» Eurosystem Eligibility
In our experience, the above risk factors may be challenged as to whether they are statements of fact rather than actual material risk factors directly related to the transaction in hand. It is worth considering if the content of some risk factors might be more appropriately addressed, or perhaps is already addressed, elsewhere in the prospectus and therefore can be removed from the risk factor section e.g. Taxation section / Disclaimer section / Terms & Conditions of the Notes / Subscription / Transfer Restrictions.
Express a View
Please watch for statements such as “The Issuer is not in a position to express a view on the likelihood of any such contingency/risk occurring”. The Issuer is required to take a view as to potential risks and therefore statements such as this should be removed.
ESMA guidance has been considered in relation to the availability of documents mentioned in a prospectus (i.e. Transaction Documents, Trust Deed, Memorandum and Articles of Association). Each such document must be made available electronically and the website hosting such documents should be disclosed accordingly e.g. issuer website. In the case of securitisation transactions we see this rule addressed by reference to a dedicated page/section of the website of one of the transaction parties.
Validity of Prospectus
While a base prospectus has always referenced its 12 month validity, a standalone prospectus has not been required to reference validity. A statement along the following lines is now required in a standalone prospectus:
This Prospectus is valid until [*Closing Date*]. The obligation to supplement the Prospectus in the event of significant new factors, material mistakes or material inaccuracies does not apply when the Prospectus is no longer valid.
Net Proceeds and intended Use of Proceeds
PD3 requires an estimate of the net proceeds and use of proceeds to be disclosed in a statement along the following lines:
“The net proceeds of the issue of the Notes are expected to amount to [insert figure] and will be used by the Issuer to [intended use] on the
General Disclosure Requirements
In addition to the items detailed above, below is a brief summary of some further disclosure items which must be disclosed in a prospectus:
» LEI code for the Issuer;
» Website for the Issuer (if any) + disclaimer;
» Credit ratings assigned to the issuer;
» Website where documents on display are available;
» Material change statement relating to the financial performance of the Issuer;
» Issuer borrowing and funding structure and description of expected financing of issuer's activities (retail only);
» A statement on STS compliance, a warning on STS status and details of risk retention (asset-backed securities only).
We strongly recommend that issuers should factor 4 submissions in order to allow ample time to address and resolve comments that may be raised during the review process, particularly with regards to risk factors.
Originally published 20 July, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.