It is anticipated that the UK Parliament will hold its "meaningful vote" on the Brexit deal in the week commencing 14 January. If Parliament votes down the deal, a number of scenarios could arise. Whilst not inevitable, one of these scenarios is that the UK will leave the EU on 29 March 2019 without a deal a so-called "hard Brexit". A hard Brexit will mean that the UK will not be a Member State of the EU and that Union law will not be applicable in the UK.
In light of this, we set out below a high-level discussion of ten points for action and issues for consideration to assist issuers and other participants in the mainstream debt capital markets in preparing for a hard Brexit. The UK Government has announced measures which will address some concerns of issuers accessing UK markets following a hard Brexit. We have not seen any similar measures contemplated by the EU to date. Therefore, our points below focus principally on the impact of a hard Brexit on accessing EU27 markets and complying with EU27 regimes post-Brexit. We do not cover the UK domesticated regime post-Brexit, but if you would like general information in relation to the EU (Withdrawal) Act 2018 and the legislative position in the UK post-Brexit, please refer to other Brexit publications on our website. Finally, while many of the points below will apply equally in relation to covered bond and structured finance transactions in general, there will also be additional points to consider in those contexts which we do not cover in this paper (for our Brexit publications relating to these areas, please refer to our website).
1. London listed issuers to reconsider listing venue if ECB eligibility is key
Assets that are to be used as collateral in Eurosystem credit operations must fulfil certain specified criteria. For debt instruments to be eligible, one of the criteria to be met is that they must be admitted to trading on an EU regulated market or on an acceptable non-regulated market. Following a hard Brexit, the main market of the London Stock Exchange will no longer be an EU regulated market. It is also uncertain whether the European Central Bank (ECB) will revise its list of acceptable non-regulated markets to include London's main market.
Therefore, where it is important that an issuer's debt instruments can potentially be used as collateral by counterparties within the Eurosystem, any London listed issuer should consider an alternative listing venue. This could be an EU27 regulated market or one of the ECB listed acceptable non-regulated markets, such as the Global Exchange Market in Ireland, the EuroMTF in Luxembourg, or another from the ECB's list.
Note that where choosing an EU27 regulated market, current indications are that it will not be possible, following a hard Brexit, to achieve that alternative listing using an FCA approved and passported prospectus (including where approved and passported prior to Brexit), as explained below.
2. Issuers with FCA approved prospectuses used in EU27 to consider funding needs and prospectus approval
On a hard Brexit, the ability to passport a prospectus between the UK and EU27 under the EU prospectus regime will end. Whilst the UK Government has confirmed that prospectuses approved by an EU27 competent authority and passported into the UK before Brexit will be grandfathered for use in the UK until their validity expires, there has been no indication to date that a similar confirmation will be given by the EU in respect of an FCA approved prospectus passported into the EU prior to Brexit.
Following a hard Brexit, therefore, issuers wishing to admit to trading on a regulated market in the EU27 or offer to the public in the EU27 on a non-exempt basis will need prospectus approval from an EU27 competent authority. Considering what action to take will be particularly relevant for issuers with FCA approved London listed retail programmes, who will be keen to protect their ability to issue seamlessly post-Brexit. They should consider whether their funding needs still require them to offer on a non-exempt basis across the EU27; if so, they should factor in the need to seek approval of the base prospectus from an EU27 competent authority for that purpose. Many other considerations will also impact an issuer's decision, such as whether a London listing and access to the UK's markets will still be important and whether ECB eligibility will be relevant.
3. Check value of sterling when setting denomination
Where an issuer issues "wholesale securities" that is, debt securities having a denomination of at least EUR100,000 or equivalent in another currency it takes the benefit of key exemptions from certain obligations under both the EU's prospectus and transparency regimes. The "wholesale" regime benefits include lighter prospectus disclosure requirements, a summary exemption, an exemption for offers to the public and an exemption from the EU Transparency Directive's financial reporting requirements.
It is not clear exactly what the impact of a hard Brexit will be on the value of sterling. Therefore, issuers of sterling-denominated debt securities which rely on the "wholesale" regime should check when issuing that the denomination of their securities is equivalent to EUR100,000. This may entail setting denominations at GBP200,000, should sterling fall significantly against the euro, and would also mean that issuers are unable to tap issues with a GBP100,000 denomination (as a different denomination will affect fungibility). A similar point will be relevant for any issuers of sterling-denominated securities who will continue to access EU27 markets following a hard Brexit and wish to have choice over which competent authority will approve their prospectus it will be important to ensure that the debt securities have a denomination equivalent to at least EUR1,000. EUR100,000 (or equivalent in another currency) is also expected to be the relevant threshold for "wholesale" treatment under the UK's domestic prospectus regime post-Brexit, so checking the value of sterling will also be prudent from that perspective.
4. Issuers with the UK as TD home Member State may need to choose again
The EU's Transparency Directive (TD) regime requires filing, publication and dissemination of "regulated information" with an issuer's home Member State. Certain issuers currently have the UK as their TD home Member State. Whilst UK domestic rules will be relevant for issuers with London listed securities following a hard Brexit (from a domestic transparency and continuing obligations perspective), issuers with debt securities listed elsewhere in the EU27 will need to elect another home Member State in place of the UK to satisfy EU27 transparency requirements. It is unclear exactly how issuers should elect a replacement and an indication from the European Securities and Markets Authority on how to do this would be helpful.
5. Selling restrictions and legends will need to be revisited
As mentioned above, a hard Brexit will mean that the UK will not be a Member State of the EU and that Union law will not be applicable in the UK. As a result, the current market standard ICMA EEA public offer selling restriction will no longer cover the UK public offer regime and consideration will need to be given to how to address the UK position and relevant English domestic law. A similar exercise will be required in respect of PRIIPs selling restrictions and legends, MiFID product governance legends and language, stabilisation clauses and announcement language and retail cascade wording. We will be involved in discussions around the ICMA table on the necessary changes to the standard language.
6. UK GAAP issuers listed in EU27 will have more onerous disclosure requirements and may wish to reconsider any EU27 listing of "retail" debt
Following a hard Brexit, issuers who produce UK GAAP accounts will still be able to use them to meet the UK's domestic prospectus disclosure requirements. However, UK issuers using UK GAAP to list on EU27 regulated markets or offer to the public in the EU27 on a non-exempt basis will face more onerous disclosure requirements in their prospectuses. This is because, post-Brexit, they become third country issuers for EU prospectus regime purposes, and such issuers must disclose financial information prepared according to IFRS or national accounting standards equivalent to IFRS. As UK GAAP is not equivalent to IFRS (and it is currently not expected that the European Commission will issue a decision stating it to be equivalent) UK GAAP issuers will therefore need to restate to IFRS (if producing a "retail" prospectus) or produce a narrative statement of differences from IFRS accounting (if producing a "wholesale" prospectus). However, UK GAAP issuers may not want to list further "retail" debt securities, or maintain their listing of such existing securities, on an EU27 regulated market post-Brexit. This is because, as third country issuers of "retail" debt, they will be required by the TD to file annual and semi-annual accounts in accordance with IFRS, unless an equivalence decision regarding UK GAAP is made by the European Commission.
7. Supporting legal opinion will be required if UK issuer debt instruments are to meet ECB eligibility criteria
Debt securities of a UK issuer will continue to be potentially eligible as collateral in Eurosystem credit operations post-Brexit. However, as the UK will be a non-EEA G10 country post-Brexit, debt securities issued by a UK issuer must be supported by a legal opinion in a form and substance acceptable to the ECB.
8. Contractual recognition of bail-in required in English law-governed contracts of EU27 banks
Most EU27 bank issuers have already moved to include contractual recognition of bail-in language (for Article 55 EU Bank Recovery and Resolution Directive purposes) in relevant English law-governed terms and conditions in anticipation of English law becoming a third country law post-Brexit. Following a hard Brexit, it will also become necessary for EU27 bank issuers, dealers/managers and agents to include contractual recognition language in their "other liabilities" governed by English law.
As a result, it will be necessary to include relevant language in, amongst other things, subscription agreements, confirmations for a trade, agency agreements (or agency side letters for a programme) and auditor arrangement letters at the point of issuance, and via programme agreements, agency agreements and auditor arrangement letters at update of a programme.
9. Review listing covenants to ensure flexibility going forward
Whilst issuer listing covenants should be reviewed in light of Brexit, it is unlikely that Brexit and the fact that London's main market will not be an EU regulated market going forward will cause an issuer to breach its listing covenants. This is on the basis that most listing covenants require an issuer to maintain the particular listing that has been sought on issue for its notes.
However, some listing covenants provide that listing can be obtained instead on another EU regulated market as an alternative to maintaining the particular listing sought on issue. This would preclude listing on London as an alternative to an EU regulated market listing. Going forward, it may be desirable to add a specific reference to London's main market as an additional alternative to an EU27 regulated market, to ensure appropriate flexibility.
10. HM Treasury will need to enact specific regulations for the new Prospectus Regulation to apply in the UK
The EU (Withdrawal) Act 2018 will, on a hard Brexit, domesticate the current prospectus regime, which is based on the EU's Prospectus Directive. However, the EU will move to the new Prospectus Regulation (so-called "PDIII") soon after Brexit on 21 July 2019. As the UK will no longer be a Member State at that date, the UK will need to introduce specific legislation to update its prospectus regime in line with the new EU Prospectus Regulation. The UK Government has indicated its intention to do so and has published draft legislation facilitating this, but the timing and details are currently unclear. The hope is that the UK will domesticate the new Prospectus Regulation concurrent with it applying in the EU27 to ease prospectus drafting for issuers accessing UK and EU27 markets. If this does not happen, issuers wishing to access both the UK and any EU27 market will need to bear in mind the potential need to comply with different prospectus content requirements.
If the "meaningful vote" on the Brexit deal is passed, this should give debt capital market participants comfort that a hard Brexit will be avoided (assuming the EU ratification process goes smoothly) and there will be fewer points for consideration in respect of a transitional period. However, if Parliament votes down the deal, uncertainty will continue, meaning consideration of the issues outlined above will be a priority.