In August 2020, The Stock Exchange of Hong Kong Limited (“HKEx”) issued a consultation conclusion on “Review of Chapter 37 – Debt Issues to Professional Investors Only” (the “Consultation Conclusions”). It followed the publication of “Consultation Paper on Review of Chapter 37 – Debt Issues to Professional Investors Only” (the “Consultation Paper”) in December 2019. HKEx also published a guidance (the “Guidance”) on disclosures in listing documents of debt issues and issuers’ continuing obligations under Chapter 37 of the Rules Governing the Listing of Securities on Main Board of The Stock Exchange of Hong Kong Limited (the “Listing Rules”).
Chapter 37 of the Listing Rules stipulates the listing regime of debt issues (i.e. bond issuances) to professional investors only (the “Professional Debt Regime”). Such regime has been in operation for eight years, pursuant to which there is no prescribed disclosure requirement, and vetting by HKEx is limited to the fulfilment of eligibility requirements and the inclusion of the prescribed disclaimers and certain statements in the listing documents. HKEx considers that it is now appropriate to ensure that the rules and the regulatory approach continue to be supported by the market and to explore measures to enhance market quality.
For this update, we will focus on the proposals and implementation as discussed in the Consultation Conclusions.
The New Professional Debt Regime
HKEx set out in the Consultation Conclusions a summary of proposals being adopted or otherwise, their way forward. Any amendments to the Listing Rules or The Rules Governing the Listing of Securities on GEM are set out in Appendix III and Appendix IV of the Consultation Conclusions, respectively, and will come into effect on 1 November 2020.
The table below summarises the key responses from HKEx of the Professional Debt Regime:
| Area of Comments | Key Response from HKEx |
| Eligibility requirements | ● The net assets value requirement of an issuer will increase from HK$100 million to HK$1 billion.
● Corporations controlled or majority owned by central government (such as, in the case of PRC, PRC central ministries and the State-owned Assets Supervision and Administration Commission of State Council) will continue to be exempted from observing the eligibility requirements under the Professional Debt Regime (the “Eligibility Requirements”). ● A minimum issue size of HK$100 million (or equivalent in other currencies) will be introduced, other than tap issues (i.e. issues of debt securities where the subscription thereof may continue or further tranches thereof may be issued after listing has been granted). |
| Issuer statement on the intended investor market | The issuer should state explicitly on the front cover of the listing document that the intended investor market are professional investors only. |
| Publication of listing documents | ● Listing documents are required to be published on the listing date on HKEx’ website.
● Redaction of information in any published listing document is not allowed. |
| Disclosure and vetting of listing documents | ● The current disclosure and vetting approaches will continue.
● The Guidance is also issued to cover bond issuances with specified special features (which render such bonds “complex” as posted on the SFC’s website[1]) and other disclosure-related matters. ● There should not be any difference in the standards applied to high net worth investors and institutional investors in respect of debt issues to professional investors only under Chapter 37 of the Listing Rules (“Chapter 37 Debts”). Nevertheless, issuers should consider the type of information which investors would customarily expect when drafting the listing document of the Chapter 37 Debts. |
| Definition of professional investors | The definition of professional investors will include high net worth individuals, such that the definition will align with that under the Securities and Futures Ordinance (Cap 571 of Laws of Hong Kong). |
| Issuer’s or guarantor’s eligibility concerning issuance by real estate investment trust (“REIT”) | ● The eligibility of a REIT issuer or REIT guarantor will be assessed by reference to the assets and audited financials of a REIT, respectively, provided that the issuer or guarantor has recourse to the assets of the REIT to satisfy the obligations under the Professional Debt Regime.
● REIT issuers or REIT guarantors are exempted from Eligibility Requirements if the relevant REITs are listed on HKEx. |
| Enhancement of continuing obligations of issuers and guarantors under Chapter 37 | ● Issuers and guarantors should:
(1) respond to enquiries made by HKEx promptly; (2) make announcement of default or matters leading to or involving winding up and/or liquidation, which should cover contractually-appointed receivers or managers, in case they undertake any “equivalent actions” in relation to matters set out in Rules 37.47E(b) and 37.47E(c); (3) make announcement on developments after trading suspension of Chapter 37 Debts; (4) make announcement of information to avoid a false market or information having material effect on a guarantor’s ability to meet its obligations under debt securities “as soon as reasonably practicable” (as opposed to “immediately”); and (5) announce information having a material effect on their ability to meet their obligations under listed debt securities. ● Guarantors should continue to comply with the continuing obligations set out in Rule 37.44 to 37.53 of Listing Rules as a matter of existing practice. |
| Streamlining the listing application process | ● The existing requirements to submit copies of constitutional documents and resolutions as part of the listing application documents will be replaced with a requirement to provide written confirmation by the issuer (or guarantor, as the case may be) in relation to its due incorporation, capacity and authorisation, except that the issuer (or guarantor, as the case may be) remains required to submit copy of the approvals authorising the issue and listing of shares under Rule 37.35(j) of the Listing Rules, if an issue is convertible into shares.
● The existing requirement to submit last published financial statements will be replaced with a new requirement for an issuer (or the guarantor that an issuer relies in fulfilling the Issuer Eligibility Requirements) to submit its audited financial statements to evidence its fulfilment of the issuer’s Eligibility Requirements. |
| Clarify the scope of supplementary listing document | Supplementary listing document should include a pricing supplement. |
| Minor housekeeping modifications | Minor housekeeping modifications are adopted to improve clarity of the rules and correct certain typographical errors. |
Implications and Conclusion
The previous review on Chapter 37 of the Listing Rules took place eight years ago. Since then, there has been significant development in the market, with concerns on retail investors protection, and the appropriateness of disclosure of certain Chapter 37 Debts. The current review responds to the need to safeguard investors whilst maintaining an effective and appropriate listing platform for the continued development of the bond market in Hong Kong.
Some aspects of the reform, such as the enhancement of continuing obligations and other disclosure requirements, can certainly increase the compliance costs on issuers. The new Eligibility Requirements may also pose difficulty to some asset-light issuers or special purpose vehicles to list their debt securities under the Professional Debt Regime.
Having said the above, the significant market growth and expansion also reflect the attractiveness of this streamlined process of debt issuance. The current review can further strengthen public confidence and boost demand for the Chapter 37 Debts and promote overall quality of the Hong Kong debt capital market.
This article is authored by Rodney Teoh (Partner, Corporate Finance). Please contact our Rodney Teoh for any enquiries or further information.
This newsletter is for information purpose only. Its content does not constitute legal advice and shall not be treated as such. Stevenson, Wong & Co. will not be liable to you in respect of any special, indirect or consequential loss or damage.
[1] SFC Website “Non-complex and complex products”: https://www.sfc.hk/web/EN/rules-and-standards/suitability-requirement/non-complex-and-complex-products/
