Describe the disclosure requirements applicable to high-yield debt securities financings. Is there a particular regulatory body that reviews or approves such disclosure requirements?
In most high-yield debt security offerings, the notes are not registered with the US Securities and Exchange Commission (SEC) or equivalent foreign or state regulators and are, therefore, subject to less stringent disclosure requirements. Although the purchasers of high-yield notes are generally sophisticated institutional investors with ability to evaluate risk, offering memoranda for high-yield offerings is generally similar to Form S-1 registration statements, with limited exceptions. The primary differences are the absence of compensation disclosure, beneficial ownership disclosures and certain other disclosures that are generally viewed as immaterial for debt investors. Except for these limited categories, high-yield offering memoranda generally follow the current SEC-registered disclosure rules and exceptions.
The indenture governing the high-yield securities will require the issuer to provide financial and other information to current and prospective investors. Until relatively recently, private offerings of high yield securities included registration rights whereby the issuer would be required to register an exchange offer for the initial private notes for freely tradeable registered bonds. As a result of this registration, the issuer would become an SEC reporting company. It is much more common today for bonds to be issued as ‘private for life’ where the issuer never becomes an SEC reporting company and instead provides comparable information on a secure website. A requirement to hold quarterly conference calls for bondholders and debt analysts has also become common.Use of proceeds
Are there any limitations on the use of proceeds from an issuance of high-yield securities by an issuer?
In general, high-yield covenants will not mandate or specify a use of proceeds, but as part of marketing, the offering memorandum may disclose a specified use, such as an acquisition or refinancing of other debt. Recent ‘sustainable financings’ involve issuers committing to using the proceeds from notes only for eligible green projects, and those issuers will set forth the criteria for such eligible green projects in separate documents associated with the issuer’s environmental, social and corporate governance policies. Green financing frameworks typically limit the use of proceeds from green bonds to finance or refinance new or existing projects that have environmental benefits; the framework set forth by the issuer prior to the offering governs the process for project evaluation and selection. Additionally, the issuer is typically required to provide status updates periodically after the debt issuance with respect to the amount of funds remaining for green projects, and the issuer is also required to produce case studies on highlighted projects and demonstrate the sustainable impact created by the green projects.Restrictions on investment
On what grounds, if any, could an investor be precluded from investing in high-yield securities?
High-yield notes are usually only eligible for resale in the United States to ‘qualified institutional buyers’ as defined in Rule 144A under the Securities Act, and sometimes to institutional accredited investors. To be eligible as a ‘qualified institutional buyer’ under Rule 144A an entity generally must invest at least $100 million of unaflliated securities and fall under one of several enumerated categories of institutions. As a result, non-institutional investors are generally not holders of high-yield notes. Affiliates of the issuer may also have practical difficulties in holding the issuer’s notes as they generally cannot vote them except in limited circumstances and affiliate investment in the same ‘CUSIP number’ as the rest of the bonds can preclude the issuer from removing the restrictive legend on the notes in reliance on Rule 144 under the Securities Act.Closing mechanics
Are there any particular closing mechanics in your jurisdiction that an issuer of high-yield debt securities should be aware of?
Closings for high-yield debt securities sold under the Rule 144A exemption are almost always conducted through The Depository Trust Company. Closing typically occurs two to 10 business days after the date of pricing although the SEC has recently proposed shortening the standard settlement cycle to one business day (source: SEC.gov | Statement on Proposal to Shorten the Standard Settlement Cycle). In acquisition transactions or transactions where there is a contingency to the ultimate use of proceeds, the proceeds from the issuance may be funded into escrow, and the bonds will be subject to mandatory redemption by the issuer if the acquisition or other contingency does not occur by a specified date. If the acquisition does not close within a specified period of time, the issuer is required to redeem the bonds.