In August 2020, The Stock Exchange of Hong Kong Limited (the “Exchange”) published “Guidance on Disclosures in Listing Documents and Continuing Obligations under Chapter 37 – Debt Issues to Professional Investors Only” (the “Guidance”), supplementing the consultation conclusions on “Review of Chapter 37 – Debt Issuers to Professional Investors Only” (the “Consultation Conclusions”). The Guidance and Consultation Conclusions relate to the listing regime for debt issues to professional investors only (the “Professional Debt Regime”) 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”). For the updates on the Professional Debt Regime, please see our news update on the Consultation Conclusions here.
This update centres upon the guidance provided by the Guidance on debt issues to professional investors only under Chapter 37 of the Listing Rules (“Chapter 37 Debts”), which consists of (1) general guidance on disclosure to be included in listing documents for the Chapter 37 Debts, (2) specific guidance in relation to the disclosure requirement of particular types of debts with special features (the “DSSFs”), as well as (3) general guidance on issuers’ continuing obligations. The Guidance applies to the Professional Debt Regime under both Chapter 37 of the Listing Rules and Chapter 30 of the Rules Governing the Listing of Securities on the Growth Enterprise Market of the Exchange.
1. Disclosure for Chapter 37 Debts and DSSFs
1.1. What are DSSFs?
DSSFs are debts with the special features that render debt securities “complex”[1]. The Guidance provided a non-exhaustive list of special features including:
(a) perpetual or subordinated debt securities;
(b) variable or deferred interest payment terms;
(c) extendable maturity dates;
(d) convertible or exchangeable;
(e) have contingent write down or loss absorption features; and
(f) with multiple credit support providers and structures.
1.2. General Disclosure Guidance
Disclosures in a Chapter 37 Debt listing document should be commensurate with the customary expectation of professional investors, especially when such investors also include high net worth individuals. Customarily expected disclosures for Chapter 37 Debts would usually include:
(a) a summary of key terms and conditions.
(b) financial information on the obligors, considering what level of financial disclosure would be required for investors to make an investment decision, including any credit assessment of the debt security.
(c) risk factors relating to the obligors, their businesses, and the Chapter 37 Debts, which may include:
(i) structural or other risks associated with the Chapter 37 Debts such as subordination, security and credit support;
(ii) for state corporations, prominent disclosure on the relationship with the government and level of financial support from the state; and in case the latter is no longer available, state that the repayment obligations of the Chapter 37 Debts remain solely on the issuer;
(iii) highlighting the risks that where the trustee or a prescribed proportion of holders of the Chapter 37 Debts can modify, waive or make other decision which may adversely affect the interests of individual or its minority holders, and that their recourse may be limited;
(iv) the full terms and conditions of the Chapter 37 Debts;
(v) a description of the use of proceeds of the Chapter 37 Debts;
(vi) business disclosure on the obligors, for example where an individual obligor has a fundamental role in fulfilling payment obligations of the debt securities, information on the business of this obligor, which the investors might not otherwise require or expect in the disclosure;
(vii) a summary of key taxation consequences associated with dealings in the Chapter 37 Debts;
(viii) any restrictions on the subscription and sale of the Chapter 37 Debts; and
(ix) any other material information that may be necessary to facilitate investors in making an informed investment decision.
(d) Issuers should consider the particular features of the Chapter 37 Debts which investors would expect to be drawn to their attention, particularly those of DSSFs that affect the investors’ rights (“Product Features”).
(e) Issuers should avoid misleading terminology when describing Chapter 37 Debts, which should have a title or description of the obligors that reflects the type of credit support being provided.
(f) Issuer should consider prominent disclosure of the key terms and structure of Chapter 37 Debts, highlighting any Product Features and risks. It may be appropriate to include a disclaimer or cautionary statement on the front cover of the listing documents, highlighting the key Product Features of DSSFs which could have an impact on investors’ rights.
(g) Issuers should include in the listing document:
(i) on the front or inside cover of the listing document, a disclaimer statement under Listing Rules 37.27 stating that Hong Kong Exchanges and Clearing Limited and the Exchange take no responsibility for the contents of the document, make no representation as to its accuracy or completeness, and expressly disclaim any liability;
(ii) a responsibility statement under Listing Rules 37.28 stating that the issuer accepts full responsibility for the accuracy of the information contained in the document and that there is no omission of other facts that would make any statement therein misleading; and
(iii) on the front cover of the listing document a caution statement stating that the Exchange has not reviewed the contents of the listing document, other than to ensure that certain prescribed form disclaimer or statements have been reproduced in the listing document, and that the listing is not to be taken as an indication of commercial merits, credit quality of the bonds or the issuer or guarantor, or quality of disclosure in the listing document.
(h) Issuers should clearly indicate the intended investors for the Chapter 37 Debts.
1.3. Specific Disclosure Guidance for DSSFs
The table below sets out the specific guidance on each type of DSSFs. Issuers should consider the type of disclosure that investors would customarily expect in a listing document in order to understand the particular type of DSSF, its Product Features and risks associated with investing in such.
|
Description or Definition adopted in the Guidance |
Guidance on disclosure |
| I. Perpetual debt securities | |
| Debt securities with no fixed maturity date or with variable or deferred payment terms. | (a) The ability of the issuer to defer or cancel distribution payments and the details and means of such, whether such deferral or cancellation can be exercised for an unlimited number of times and whether any deferred or cancelled distributions are cumulative or forfeited;
(b) The impact of any “pushers” or “stoppers” in relation to distributions, and their impact on investors; (c) The perpetual nature of the securities and the nature of any redemption rights by the issuer; (d) If the debt securities are subordinated, the status of such debt securities and how they rank relative to the issuer’s existing and future indebtedness; (e) The circumstances where the rate of distribution can be reset or adjusted and the consequential impact on investors, while where there is no reset or adjustment to the distribution rate, a more robust risk factor emphasising the perpetual nature of the debt securities may be appropriate; (f) The limited remedies for default or non-payment; and (g) Issuers may also consider highlighting any legal and/or commercial drivers behind the issuance of the debt securities, if this would be helpful for investors to evaluate the issuer and the nature of the debt. |
| II. Debt securities with extendable maturity dates (also known as “EMT Securities”) | |
| Debt securities where the maturity dates of the debt securities (“Original Maturity Dates”) can be extended to later dates (the “Extended Maturity Dates”) at the option of the issuers. | (a) The possible delay in receipt of payment of the final redemption amount, including the fact that such delay will not result in any right of holders to accelerate payments or take action against the obligors;
(b) Where the rate of interest or calculation of such is different during the period from the Original Maturity Date to the Extended Maturity Date, a description of the new rate of interest or the new calculation method; and (c) (If applicable) Any restrictions imposed on the issuer under the terms and conditions where it has elected to extend the Original Maturity Date. |
| III. Convertible bonds and exchangeable bonds (also known as “EQL Securities”) | |
| Debt securities:
(1) convertible into or exchangeable for equity securities (“Underlying Shares”) or other property (“Exchange Property”); and (2) with non-detachable rights to subscribe or purchase equity securities or other property attached. |
(a) The nature of the Underlying Shares and dividends payable;
(b) The description of the Exchange Property, stating any risks associated with it; (c) The conversion price or exchange ratio, with a description of the conversion or exchange right and the process for exercising the conversion or exchange right; (d) The nature of any adjustments to (i) the conversion price or (ii) the Exchange Property, and other anti-dilutive investor protection; (e) Any ability on the part of the issuer to elect to pay cash in lieu of delivering shares upon any exercise of the conversion or exchange right; (f) The nature of any redemption rights by the issuer and/or investors; (g) The nature of any lock up imposed on the issuer and/or major shareholders around future dealings in the EQL Security and/or the Underlying Shares; (h) Any key risks relating to the Underlying Shares; (i) The nature of any related party transactions; and (j) Information on substantial shareholders of the issuer. |
| IV. Debt securities with contingent write down or loss absorption features (also known as “CWD Securities”) | |
| Debt securities with a provision requiring a principal amount of the instrument to be written down, or converted into ordinary shares, upon the occurrence of a triggering event. | (a) The ability of the issuer to cancel distributions;
(b) The impact of any “stoppers” in relation to distributions, and their consequential impact on investors; (c) If the CWD Securities have no maturity date, the perpetual nature and the nature of any redemption rights by the issuer; and where investors have no right to require redemption, issuers should consider highlighting such a risk; (d) The ability of the issuer to require a principal amount of the instrument to be written down, or converted into ordinary shares, the consequence of such, and its impact on the investor’s rights; (e) For subordinated CWD Securities, the status of such and how they rank relative to other existing and future indebtedness; (f) The circumstances in which the rate of distribution could be reset or adjusted and the impact on investors; (g) The limited remedies for default or non-payment; and (h) To the extent the CWD Securities qualify for regulatory capital treatment, disclosure of such treatment together with disclosure on the key regulatory capital requirements, current regulatory capital ratios and any applicable resolution regime. |
| V. Debt securities with multiple credit support providers and structures (also known as “MCS Securities”) | |
| Debt securities which have the benefit of security or other types of credit support and/or contains more than one obligor (which may include the issuer, guarantor, keepwell provider, letter of comfort provider, and standby letter of credit provider). | (a) A summary of the key terms of the credit support, which may include the form of document evidencing the terms of the credit support, such as the form of letter of comfort or standby letter of credit, and the ranking and status of the credit support;
(b) Clear identification of each credit support provider, including any subsidiary guarantor (if applicable); (c) The business and risk on each credit support provider, credit support structure, identity and nature of the credit support provider, the relationship between the credit support provider and the issuer, the regulatory regime governing the performance of the credit support and the nature of the credit support, including the level of protection afforded to holders of such; and (d) For a standby letter of credit, where the MCS Security involves complex arrangements regarding pre-funding, notifications and drawings, a description of such arrangements, and the consequences of and risks associated with any failure in the operation of such arrangements. |
| VI. Other types of complex debt securities | |
|
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Other features, structures or terms of Chapter 37 Debts not described above that warrant additional disclosure due to their complexity, unusual nature, level of risk posed to investors or otherwise. |
The Exchange will maintain its current approach in relation to disclosure requirements and vetting for Chapter 37 Debts. It is the issuers’ responsibility to ensure that their listing documents contain information that is customarily expected by the investors in a listing document for making informed investment decisions. Issuers should also consider any Product Features and the associated risks of investing in the debt securities with such features.
2. Post-Listing Continuing Obligations
General Guidance in relation to Continuing Obligations for Chapter 37 Debts
The Guidance also reminds the issuers of Chapter 37 Debts of their continuing obligations, particularly:
(a) Issuers and guarantors should consider at all times whether they would be required to disclose information, pursuant to the continuing disclosure obligations under Listing Rules 37.47(b), 37.47A and 37.47B(a);
(b) Issuers must comply with the Listing Rules in force from time to time under Listing Rules 37.46, failing which the issuers may be subject to disciplinary action including cancellation or suspension of the Chapter 37 Debts and public or private sanctions against the issuers, and/or other appropriate actions under Listing Rules 2A.09; and
(c) Issuers and guarantors may be required to provide the Exchange with their annual accounts or any interim reports when they are issued, or to notify the Exchange when such accounts or reports are published on a website under Listing Rules 37.53.
Implications and Conclusion
This Guidance promotes disclosure consistency and quality of listing documents and reminds issuers of their post-listing continuing obligations. Having been issued along with the Consultation Conclusions, the duo clarifies and strengthens the Professional Debt Regime amid rapid debt capital market development. Particularly, the Guidance has provided specific examples of disclosable contents according to the type of DSSFs, which can better accommodate and regulate the complex debt issues nowadays. The review and guidance regarding the Professional Debt Regime further fortify Hong Kong as an international finance centre and promise greater certainty and predictability for the bond 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] As posted on the SFC’s website “Non-complex and complex products”: https://www.sfc.hk/web/EN/rules-and-standards/suitability-requirement/non-complex-and-complex-products/