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7 February, 2018
Effective from April 2018, the regulations will, to a large measure, affect the way bankers and issuers structure their debt capital market deals. Among other things, the new rules eliminate public offerings of bills while limiting issuers who may issue bills to high net-worth investors, set out new criteria for offering debentures to the public and high net-worth investors, and make it requisite to appoint a debentureholders' representative in short-term debentures offerings to the public and debentures offerings to high-net worth investors. The new rules introduce the concept of medium-term note program uplifting the domestic market practices. The disclosure and post-offering requirements will change to provide investors with more protection and access to information.
Public offerings
Bills
Public offerings of bills (e.g. promissory notes and bills of exchange) are prohibited outright. There is a grandfather provision which allows a company to offer its bills under the old rules until 30 June 2018 if its annual general meeting of its shareholders is held prior to 30 April 2018. A company which will hold its annual general meeting after 30 June 2018 may offer its bills under the old rules until the end of a two-month period after the annual general meeting. Therefore, it is essential that companies use the narrow window to take advantage of this market. Given that the short-term bill offerings to the public will not longer be permitted, the effects are twofold. Firstly, companies which are cash-strapped may not be able to refinance their existing bills through other money market instruments. Failure to repay their existing bills on the due dates will unfortunately result in a payment default. Secondly, investors who have an investment appetite for short-term bills may face the re-investment risk as there will be no similar type instruments available in the market. As a result, their return on investment will be adversely affected.
Debentures
Additional qualifications
A company wishing to issue debentures to public markets must possess additional qualifications. These include the following:
1. There must be no conflicts of interest between the company and its directors, management and major shareholders.
2. The company must not default on its debt instruments or other financial indebtedness that it owes commercial banks, finance companies, credit foncier companies or financial institutions set up under specific laws.
3. The company must be in compliance with terms and conditions of securities that it has issued. Note that in its feedback on comments that it has received during the hearing process, the Office of the Securities and Exchange Commission of Thailand (SEC) responds that if a company does not comply with the terms and conditions, but it has obtained a waiver from the holders of securities, then it should not be considered that the company does not comply with the terms and conditions.
Appointment of debentureholders' representative
This will be requisite regardless of whether it is a long-term or short-term debenture offering.
Certification
After rounds of consultation with market players, the SEC dropped the requirement that an SET-listed company which possesses the prescribed good corporate governance criteria and an investment-grade credit rating must engage an underwriter to help it prepare the SEC application. Less clear from the letter of the new regulations is that the underwriter must still deliver a certificate to the SEC representing that it possesses certain qualifications and has exercised its duties to advise the issuing company regarding regulatory requirements. For a company that does not meet those requirements, it must engage an SEC-approved financial advisor to help it prepare the application.
Offerings to high net-worth investors
Bills
The new rule imposes limitations on the types of company that can offer bills to high net-worth investors. To be eligible for the offering, a company must be either a commercial bank, a securities company, a life-insurance company or a financial institution set up under the specific law. The issuing company must also apply for approval which used to be the deemed approval, and thus, it is subject to a regulatory fee and must engage an underwriter, who in turn has to submit a certificate regarding certain qualifications to the SEC. In addition, if the company voluntarily appoints a financial advisor to help facilitate the sales of bills, the financial advisor must help the company prepare the application as well.
Debentures
Approval and certification
These requirements are similar to those applied to the bills as mentioned above. Note that concurrent placement of debentures to both high-net worth investors and institutional investors will by default fall under the category of debenture placement to high-net worth investors. Hence, an issuer cannot avail itself of the new rules applicable to debenture offerings to institutional investors, which are less stringent when compared with those applicable to debenture placement to high-net worth investors only.
Standard terms and conditions
The terms and conditions of debentures must be consistent with the sample of terms and conditions prescribed by the SEC. In its feedback on the comments, the SEC states that if the terms and conditions are to deviate from the sample ones, the company must make a proper disclosure in its prospectus so that investors are aware of the differences. This requirement is similar to that applied to debentures offered to the public.
Appointment of debentureholders' representative
Any company offering debentures to high net-worth investors must appoint a debentureholders' representative. While this requirement will become effective on 1 July 2018, it is encouraged by the SEC that this requirement is met even for offerings under the old regime. In fact, this practice is also driven by the demand side, and those who want to tap the markets now without appointing debentureholders' representatives may find themselves caught off guard.
Offerings to institutional investors
One significant change is the bills offered to institutional investors must bear a legend: "The bills are intended to be negotiable among institutional investors." This is to eliminate past practices where bills were initially issued to institutional investors but then swiftly transferred to non-institutional investors. Other than that, there appears to be minimal deviation from the old regime for both bills and debentures other than additional disclosure requirements and the medium-term note scheme.
Medium term note program
All market participants have keenly accepted the medium-term note program concept (the "MTN scheme"). Under the MTN scheme, a company can tap the markets within a relatively short period compared with a standalone offering. Note that the company must also comply with filing requirements whereby it must submit a base filing document, file a supplement to keep the program updated, and file the pricing document before it can offer and issue debentures. Both the approval and base filing document have a lifetime of two years. Failure to file the supplement to update the program could delay the offering process as the company must then wait for the supplement, which has a longer cooling period than the pricing documents, to become effective.
Other developments
Additional disclosure
The new form of factsheet is set out by the new regulations which requires more information of the issuer when compared to its previous version. Sample of additional information includes specific risks relating to the issuer and key financial ratios. As a result, the contents will vary between each issuer even though they may be in the same business industry. To avoid any unwanted scenarios, intense due diligence should be performed in order to craft the language that addresses this requirement. Offerings to the public or high net-worth investors are subject to periodic disclosure post-offering on an annual or quarterly basis.
Timeframe
The cooling period for filing documents and timeframe for the SEC to consider applications has changed significantly thanks to the additional approval requirement for offerings to high net-worth investors and the MTN scheme. The timeframe varies depending on the qualifications of the issuer, such as whether the issuer is a listed company with good corporate governance and investment-grade credit rating and whether the terms and conditions are similar to the sample of terms and conditions. Issuers as well as underwriters and financial advisors planning for their customers should carefully study the new timetable to ensure they are compliant with the new regulations.
For further information, please contact:
Viroj Piyawattanametha, Partner, Baker & McKenzie
viroj.piyawattanametha@bakermckenzie.com
