Over the past couple of years, many US issuers have taken advantage of historically low interest rates in Europe by selling Euro-denominated debt. (Johnson & Johnson in May 2016, IBM and Berkshire Hathaway in March 2016, Apple in September 2015, ADM in June 2015, General Electric and Bristol-Myers in May 2015 and Coca-Cola in March 2015). In addition to the attractive rates, borrowing in Europe should allow US companies to diversify their base of debt investors geographically.
On June 20, 2016, Southern Power Company, a wholly-owned subsidiary of The Southern Company, issued €1.1 billion in green bonds. Eligible green projects included financing of, or investments in, solar and wind power generation facilities located in the United States. The offering was the first time a United States utility had taken advantage of the Euro market. We expect that additional energy issuers in the US will follow and thought it would be helpful to highlight a few of the most significant differences between a Euro-denominated offering and a typical US based shelf takedown.
Euro-denominated offerings are typically marketed by the UK affiliate of each investment bank. Similarly, the internal legal team at each bank supporting the offering will generally be from the bank’s UK office. The underwriting agreement for these offerings will include a paragraph whereby the underwriters agree to accept the International Capital Markets Association (ICMA) Agreement Among Managers. Unlike the US practice, underwriters will either all sign the underwriting agreement on their own behalf, or one bank will sign on behalf of itself and all underwriters under power of attorney. Also, the Euro market’s convention is to execute the underwriting agreement two days prior to close (so T+3 on a T+5 close), so issuers that wish to execute the underwriting agreement on the day of pricing will need to make the underwriters aware of that preference.
Unlike the US market where stabilizing efforts are made by the various bookrunners on the deal, the underwriting agreement will likely appoint a single bank to act as the “Stabilizing Manager” for the transaction.1 Given this role, the description in the underwriting section of the prospectus supplement will likely need to be substantially revised. Further, it is common for the underwriters to request both a representation and covenant from the issuer that the issuer will not engage in any stabilization efforts during the course of the offering.
Almost without exception, US issuers that sell Euro-denominated debt apply to have the debt listed on the NYSE. Unlike certain hybrid securities of US utilities that are sold retail and listed on the NYSE, Euro-denominated debt generally will be deemed “debt” by the NYSE. Therefore, the underwriters will not be required to submit any representation letter to the NYSE with respect to post-offering holdings. NYSE Listed Company Manual Section 102.03 simply requires that “the debt issue must have an aggregate market value or principal amount of no less than $5,000,000.”
Issuers should also be aware, and revise the disclosure accordingly, that the payment convention in Europe for fixed-rate debt is referred to as ACTUAL/ACTUAL as defined in the rulebook of the ICMA (as opposed to the 30/360 day count convention for fixed-rate debt in the United States).
The Underwriting Agreement
One very common additional provision present in many Euro-denominated underwriting agreements is a reference to certain “Bail-in Powers” of member states of the European Economic Area which have implemented the Bank Recovery and Resolution Directive (BRRD). The BRRD is Directive 2014/59/EU and gives resolution authorities in Europe wide-ranging powers to manage failing financial institutions. (Under the BRRD, each member state is required to nominate a public administrative body to be the “resolution authority” responsible for exercising resolution powers).
The underwriting agreement will most often identify a “common depositary,” which will (or together with an affiliate) also serve as the paying agent and registrar for the bonds in the UK. At closing, the authenticated global note will be delivered to this common depositary.
Many underwriters will request that the OFAC representation include references not only to the OFAC, but also any sanctions administered by the United Nations Security Council, the European Union and Her Majesty’s Treasury.
Finally, most underwriting agreements for these Euro-denominated transactions include a provision with respect to “Judgment Currency.” This addition is meant to clarify the point in time when an exchange rate will be set with respect to judgments in a currency other than US dollars. It is also meant to hold harmless the underwriters in case the underwriters are unable to purchase US dollars with the currency of the judgment award.
Subject to a laundry list of exceptions, the bonds will be subject to a tax gross-up for non-US persons in the event that any withholding or deduction on payments in respect of the notes on account of any tax, assessment or other governmental charge is required to be deducted or withheld by the United States. However, there is also a corresponding redemption provision. To the extent there is any change in law such that the issuer becomes obligated to pay the additional amounts, the issuer may redeem the notes at par.
In most cases, the underwriting agreement will deem that any transfer taxes payable in connection with the sale of notes will be paid by the issuer. It is also common in the prospectus supplement for these Euro-denominated debt deals to notify purchasers that holders may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country in which the debt is purchased.
Closing will generally take place on the fifth business day after the date of pricing (T+5). The issuer and the billing/delivering bank will need to work with Euroclear and Clearstream in order to determine whether an International Central Securities Depository (ICSD) Agreement between the issuer and Euroclear and Clearstream is required.2 In the case of a Classical Global Note (CGN) that is deposited with a common depositary, an ICSD agreement may not be required.3
Closing through Euroclear or Clearstream does not require a telephone call on the morning of closing, as with a FAST closing at DTC. Instead, on the morning (London time) of closing, a contact at the billing and delivering bank will send a “green light” email to the working group, including the common depositary, stating that all of the conditions to closing have been met and that the parties are cleared to proceed with closing.4
In February 2011, the US Treasury released the final instructions for the reporting requirements of the Treasury International Capital Form SLT, the “Form SLT.” It is a monthly report on cross-border portfolio investment in long- term marketable securities by US and foreign residents and is used by the US government for formulating international financial and monetary policy. The form collects data on (1) the securities of a US person that are held by foreign resident investors (not through a US-resident custodian) and (2) a US person’s investments in foreign securities that are not held by a US-resident custodian, in each case, when the aggregate amount of these securities exceeds $1 billion.
Form SLT treats all securities issued by a US person that are held through Euroclear and Clearstream as being held by foreign resident investors. Therefore, a US issuer of more than $1 billion of foreign bonds will likely be required to file a Form SLT on a monthly basis.
Final Thoughts and Potential Impact of Brexit
Issuers that are selling Euro-denominated debt for the first time are well advised to build additional time into their standard offering schedule. An inaugural offering in Europe will often necessitate an in-person roadshow. Underwriters’ counsel will need to work closely with internal counsel in the UK in order to bring an issuer’s standard underwriting agreement in line with what is expected for a Euro- denominated offering. With respect to closing mechanics, it is helpful to consider a more extensive form of closing memo, complete with timeline and funds flow, in order to ensure that both the pre-closing and closing of the trade proceed smoothly.
The impact of the June 23, 2016 vote in the United Kingdom on Euro-denominated debt transactions is yet to be seen. As has been reported widely in the press, the referendum was advisory rather than mandatory and has no immediate legal consequences. What is clear is that financial markets will likely continue to be volatile, which may affect the timing of any potential transaction.