Brexit: the implications for debt capital markets
The impact of the UK's decision to leave the EU on offers of debt securities by both UK and non-UK issuers in the UK and offers of debt securities by UK issuers to European investors will largely depend on the terms of the exit and, in particular, the extent to which:
- the UK listing and prospectus regimes remain consistent with EU regulation, and
- EU regulators allow mutual recognition between EU and UK prospectuses and third country equivalence of UK prospectus requirements with EU prospectus rules.
- Differences in prospectus and listing requirements
Different prospectus and listing requirements in the UK from those in the EU would make it difficult and costly for issuers to make public offers of debt securities both in the UK and Europe. Faced with the prospect of having to comply with two different sets of requirements, it is likely that, with the exception of the largest issues, many issuers would choose one or the other of the two markets for public offers in order to avoid the extra cost and effort of preparing multiple prospectuses.
There is reason to believe that, the UK will strive to ensure close consistency with EU requirements in order to maintain the UK’s competitiveness and status as a major financial centre. By keeping the two sets of requirements similar and consistent, the costs of preparing two different prospectuses and complying with two different regimes could be kept to a minimum. However, it may be difficult to maintain such consistency and over time the two sets of requirements would be likely to diverge.
The consequences of Brexit for the UK may therefore be that the London Stock Exchange loses market share and some UK investors are denied valuable investment opportunities if issuers are discouraged from making public offers and/or listing their debt securities within the UK. This could in turn impact on the popularity of the UK as a financial centre.
Unlike the equity markets, the debt markets are characterised by a large proportion of wholesale transactions which are done outside the EU prospectus and listing regimes. These transactions are unlikely to be affected to any great extent by Brexit which, if anything, is likely to result in a shift towards transactions which do not require public offer prospectuses and are not listed on regulated markets in the EU. This would further deprive retail investors of investment opportunities in the bond market - and runs contrary to the aims of the Capital Markets Union, which has otherwise been heavily promoted by the UK.
- Mutual recognition
If, as part of its exit negotiations, the UK is able to retain full or partial mutual recognition between its and EU Member States’ prospectus requirements, UK issuers would be able to continue to make public offers of debt securities with relative ease within the EU. It is doubtful, however, if EU Member States will allow the UK to continue to enjoy mutual recognition rights after leaving the EU.
Without mutual recognition, issuers would have to prepare a new prospectus which would be a significant disincentive to list or offer securities to the public in the UK.
Under Article 20 of the Prospectus Directive, the Commission is entitled to make assessments of third country equivalence in relation to prospectus requirements. To date, no such assessments have been made and the question of the general criteria for such equivalence is the subject of review currently by the EU. It is expected that the question of equivalence will gain prominence as a method by which UK prospectuses could be used to offer securities to the public within the EU. Under this regime, should the UK’s prospectus regime be deemed equivalent, securities offered within the UK using a prospectus approved by the FCA could also be offered within the EU using the same prospectus (albeit with the addition of a “wrapper” containing additional “boilerplate” language) approved by EU authorities under a fast-track procedure. This could potentially provide an alternative method for UK issuers to continue accessing the EU public bond market.
- Capital Markets Union
- In September 2015, the European Commission published its CMU Action Plan to build a Capital Markets Union across the EU. The CMU project is aimed at creating “deeper, stronger and better capital markets” and one of its priority areas is to bring down cross-border barriers and develop capital markets for all Member States. A significant amount of effort has already been put into proposed initiatives to, among other things, modernise the Prospectus Directive and make markets work more effectively and efficiently within the EU. By leaving the EU, the UK is likely to lose the opportunity to take advantage of improvements to EU capital markets under CMU.
For further information, please refer to Brexit: the legal implications.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.