DCM and COVID-19

As the coronavirus (COVID-19) continues to spread across the globe, so too does the impact on the financial markets and on the economy worldwide. In this blog post we build on our previous briefings (here and here), and consider the key considerations and risk mitigants for companies wishing to access the European debt capital markets, or who have outstanding issues of debt securities listed on one of the main European markets.

What are the potential impacts, risks and considerations for those looking to issue into the European debt capital markets?

Markets

• The market is extremely volatile, with widespread closures across markets, asset classes and geographies.
• Windows for debt issuance are brief, so potential issuers need to be ready to take advantage of any moments of stability which create short market windows.

Diligence and disclosure

• There will be a need for additional due diligence on the impacts of COVID-19 on the potential issuer’s business, informing the drafting of recent development disclosures generally and risk factors in particular.
• From a prospectus disclosure perspective, each issuer will need to carefully consider the impact of COVID-19 on the assets and liabilities, profits and losses, financial position and prospects of the issuer and/or guarantor, and disclose any material or significant information relating to the impacts of COVID-19 on their prospects or financial situation.
• If listed in the EU, drafting of risk factors will be informed by the EU Prospectus Regulation and related risk factor guidelines, which require risk factors to be focused, concise, specific (ie not generic) and corroborated by the content of the prospectus. The materiality of a risk factor and the potential negative impact of that risk factor should be made clear from the disclosure. Other regulators have similar rules that will require specific content in risk factors.

Roadshows

• Roadshows should be brief and ideally conducted through electronic platforms and over the telephone – banks should consider their internal guidelines around conduct of roadshows and will need to consider availability of and access to key investors.

Contractual considerations

• Potential issuers will need to consider their ability to give customary subscription agreement representations and warranties, in light of the additional diligence and disclosure referenced above.
• All deal parties will need to consider risk allocation between signing and closing, through force majeure clauses, and material adverse change (MAC) and material adverse effect (MAE) provisions – in a standard DCM deal with a T+3 or T+5 settlement cycle, this will be a short period; absent extraordinary facts, we would not expect the usual ICMA force majeure clause to be triggered by a known issue such as COVID-19.

Transaction execution

• We expect that signing processes will be more challenging, with most organisations working from home; flexibility and agility of deal teams will be key in terms of managing transaction execution.
• Settlement processes should be considered to ensure the time periods provided for and any related definitions (for example, of business day) remain fit for purpose.
• Parties may need to be flexible in terms of certain conditions precedent requirements (for example, is it practical to deliver certified copies if the deal team is working remotely?).

Alternative sources of financing

• ECP and private placement markets may be open for some higher rated issuers, but those looking to issue private placement notes from EMTN programmes will need to consider updating disclosure and risks factors through a supplemental base prospectus prior to issuance; many of the other factors set out above would remain relevant.

What about issuers with outstanding EU listed bonds?

Ongoing disclosure obligations

• Issuers/guarantors should consider their ongoing obligations to disclose developments in the issuer’s/guarantor’s business caused by COVID-19 to the market pursuant to the EU Market Abuse Regulation and EU Prospectus Regulation. Issuers are often alive to such disclosures in relation to their listed equity but must remember to also separately monitor and notify markets for listed debt, especially when issued through subsidiaries.
• The European Securities and Markets Authority (ESMA) has published a statement (PDF) urging market participants to actively address the impact of the COVID-19 outbreak on financial markets. Issuers are expected to disclose as soon as possible any significant information relating to the impacts of COVID-19 on their prospects or financial situation; and also provide transparency on the actual and potential impacts of COVID-19, to the extent possible based on both a qualitative and quantitative assessment on their business activities, financial situation and economic performance in their 2019 year-end financial report (if these have not yet been finalised) or otherwise in their interim financial reporting disclosures.
• The UK Financial Conduct Authority (FCA) recently published Primary Market Bulletin 27, making it clear that it also expects issuers to continue to comply with their inside information disclosure obligations – an issuer’s own operational response to COVID-19 may itself meet the requirements for such disclosure. The FCA also expects issuers to continue to comply with regulatory deadlines for the publication of periodic reports, and to engage with advisers and regulators where necessary.
• Issuers should consider the need for contingency plans to minimise the impact on periodic reports – for example are there non-essential elements that can be de-prioritised?

Events of default

• Depending on the severity of the effect of COVID-19 on the issuer’s/guarantor’s business and financial performance, consider the impact on various of the events of default in the terms and conditions of the bonds. For instance, some of the older UK corporate Eurobonds retain insolvency event formulations that may be triggered should assets be less than liabilities, which may start to be challenged in times of significant prolonged stress; also consider the possibility of whether such events of default could trigger cross-defaults across other financing arrangements.
• In addition, should the relevant issuer be considering any reorganisation or restructuring driven by market stresses, consideration should be given to insolvency related events of default, as well as events of default triggered by cessations of business.

Covenants

• Consider any covenants in the terms and conditions of the bonds. Most investment grade corporate deals will not have any covenants that could risk being in breach, but for more cross over credits and for specific types of entity (such as property companies), there may be covenants that require certain financial or asset ratios to be maintained – particular care should be given to any covenant that requires a ratio be maintained in relation to a profit and loss measure such as profit, revenue or EBITDA, which can be particularly sensitive to prolonged periods of market stress.

We will be continuing to monitor developments related to COVID-19 and the debt capital markets and will update our briefings as the situation evolves; in the meantime, please do not hesitate to get in touch with your usual Freshfields’ contacts with queries.

For more detail and practical tips on managing the impacts of coronavirus, please see updates in the Freshfields coronavirus alert hub.