29 June, 2019
Introduction
Welcome to the second edition of Ashurst's Debt Capital Markets Update (Asia Pacific) for 2019. In this edition, we summarise the key developments in debt capital markets in Australia and abroad in the first half of 2019.
Significant developments in the Australian market were APRA's update on the consultation process in relation to the adoption of an Australian TLAC regime for Australian ADIs, APRA's consultation on BEAR obligations for smaller ADIs, review of BBSW, the coming into effect of AASB16 and the RBA's recognition of the economic risks of climate change and the role of green and sustainable finance to address these.
We also bring to you an update on the latest developments in the New Zealand market, courtesy of Bell Gully.
Visit our Finance Hub for analysis and commentary on developments affecting global financial markets, including the new Prospectus Regulation, PRIIPs/KID, EMIR and LIBOR transition.
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Contents Include:
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Australian developments
Update on Proposed Australian TLAC Regime
APRA executive general manager of policy and advice, Pat Brennan, provided an update at the KangaNews DCM Summit in Sydney on March 19, on the regulator's consultation on its initial proposal from November last year to introduce an Australian loss-absorbing capacity (ALAC) regime for Australian ADIs.
Responses to the consultation highlighted the challenges a tier-two only ALAC regime could face. Market participants commented, saying that the required volume of tier-two capital could become a problem at times of market volatility.
Furthermore, due to the fact that most other jurisdictions have opted to use a new instrument to satisfy requirements, the concern domestically is that it will be hard to fill the requirement economically.
While Brennan acknowledged the validity of the concerns, he said APRA is thinking through the options and would "prefer a solution that is on the side of simplicity."
Importantly, Brennan elaborated on APRA's rationale in preferring tier-two capital for ALAC requirements. He said TLAC approaches in other jurisdictions were formulated in response to the "painful, lived experience" of having to bail out banks during the financial crisis. In Australia however, "the objective is to protect the community from the potentially devastating broader impacts of financial crises. This is done first by reducing the probability of failure and secondly by establishing sufficient recapitalisation capacity such that, should a failure or near-failure occur, the overall cost is minimised."
Furthermore, according to Brennan, APRA is open to considering "everything we have seen internationally" as options for ALAC fulfilment – including senior non-preferred instruments or other types of bail-in security that would be new to Australian banks.
Market participants at the summit expressed a view that tier-three instruments would appear to be an easier way of fulfilling APRA's goals as it will inevitably be the rest of the world which funds the majority of the requirement. Still, others noted that supply creates its own demand and that banks will be able to raise it notwithstanding the price they will have to pay.
APRA has not yet made any final decisions on the proposals.
Reserve Bank comments on economic effects from climate change
On 12 March 2019, the Reserve Bank Deputy Governor Dr Guy Debelle delivered a speech on the first-order economic effects likely to arise from climate change and the transition to a less carbon intensive world. In his speech, Dr Debelle stated "the economy is changing all the time in response to a large number of forces. But few of these forces have the scale, persistence and systemic risk of climate change". This is due to climate change being a trend and the resulting impacts being permanent. Dr Debelle also discussed current climate related benefits on the Australian economy evident in increased renewable energy investment, leading to a rapid advancement in renewable energy research and reduced cost of production. Funding the costs associated with the moves businesses will need to make to transition to viable low-carbon models will largely come from the financial sector. Sustainable finance will play a role.
In relation to financial stability, Dr Debelle stated increased climate events would cause "previously valuable assets to become uneconomic". Dr Debelle strongly endorsed the need for businesses to look and implement the Task Force for Climate-related Financial Disclosures. In response to managing the volatility climate change poses to our economy, Dr Debelle stated that "[f]inancial stability will be better served by an orderly transition [to a less carbon-intensive world] rather than an abrupt disorderly one".
Following this, the Bank of England Governor Mark Carney delivered a speech on 21 March 2019 highlighting the need for a global approach to sustainable finance. This was followed by the publication of an open letter on climate-related financial risks. In this open letter, he stated "climate change is a global problem… in which the whole financial sector has a crucial role to play".
APRA begins consultation on BEAR obligations for smaller ADIs
The Banking Executive Accountability Regime (BEAR), set out in Part IIAA of the Banking Act 1959, establishes accountability obligations for authorised deposit-taking institutions (ADIs) and their senior executives and directors. The regime also establishes, among other things, deferred remuneration for ADIs.
On 1 April 2019, APRA issued a consultation letter announcing that it would receive submissions in relation to the determination that APRA has the power to make under s 37EA(4)(b) of the Act, that certain variable remuneration is not variable remuneration for the purposes of the BEAR, where certain conditions are met.
APRA expects that this instrument will not result in any large ADI (i.e. one of the big four banks) initiating any changes to the amount of differed remuneration, as the instrument does not apply to their corporate structure.
APRA released for consultation a draft schedule of the kinds of remuneration that are not variable remuneration. This draft legislative instrument will be subject to a four week public consultation which closes on 30 April 2019.
IFRS 16 and AASB 16 – Taking effect in Australia on 1 July 2019
The International Accounting Standards Board (IASB) issued a new reporting standard in January 2016, which will affect the way in which Australian businesses account for leases on their balance sheets. The International Financial Reporting Standards (IFRS) IFRS Standard 16 (IFRS 16), which is replicated by the Australian Accounting Standards Board (AASB) AASB Standard 16 (AASB 16) (the Standards). The Standards will take effect in Australia on 1 July 2019 however, the changes will be effective for reporting periods commencing 1 January 2019. The new accounting model requires lessees to recognise all leases on balance sheets and removes the distinction between operating and financial (or "capitalised") leases.
This will mean that all lease liabilities must be recorded on balance sheets to comply with the standards unless the lease is of short-term duration (less than 12 months) or the lease relates to a low value asset.
The AASB stated these changes were implemented to counteract the negative impact the division between operating and financial leases had upon creditors and other entities relying on balance sheets. This is because it allowed businesses to, in effect, underreport their liabilities and expenses and as a result, not fully disclose their financial liabilities to creditors and other entities who relied on the balance sheet. However, the changes may also have some negative impacts and Australian businesses must be adequately prepared for the transition.
Leasing provides businesses with a means of gaining access to assets, finance and commercial property without being exposed to the risks and costs associated with ownership. The prevalence of leasing across all industries means that almost all Australian businesses will be impacted by these changes and the inclusion of all lease liabilities in balance sheets will increase their overall net debt and financial indebtedness. Further, income statements, financial covenants and other contractual agreements, as well as cash flow, will also be impacted by the changes.
These changes will require Australian businesses to not only alter their methods for the accounting of leases but will also force them to recognise their increased leasing liabilities and consider whether leasing is the most viable commercial option in light of their existing loans, covenants and other financial agreements. Further, they will also need to consider whether they are compliant with their existing contractual obligations, or alternatively, are required to renegotiate any of their existing agreements or financial accommodation covenants to account for any resulting increased financial indebtedness and ensure they are not breaching their obligations.
Whether a business is required to renegotiate its existing agreements and financial accommodation terms will ultimately depend upon how the pre-existing agreement has been drafted or whether there are terms which permit the business to be exempt from changes to accounting standards, such as "grandfathering" clauses. However, it is important to note that businesses can only rely on these throughout the transition or until the financial accommodation has ended. Further, reliance on a grandfathering clause will require the business to apply two different standards of accounting for contractual arrangements or note terms entered into prior to and after the amendments, and will mean they must use the old standards for all contractual arrangements or note terms entered into prior to the changes, which adds an additional layer of complexity to their financial reporting.
It is unclear how the new changes will impact Australian businesses however, it is important that businesses are receiving accounting and legal advice to prepare them for the transition.
Update to 1 month BBSW methodology
The Reserve Bank of Australia gave a speech recently commenting on the stability of the BBSW after the methodology was put in place last year.
In particular, the 3 month BBSW has shown to be robust and the 1 month BBSW has shown to be more volatile. This is likely attributable to the methodology used across the 1 and 3 month BBSW rates being the same. The lack of liquidity in the market for 1 month bills appears to be reducing the daily transactions to approximately half of those in the 3 month BBSW.
Due to this instability in measing the 1 month BBSW, the ASX announced in March that it was taking steps to vary the methodology used for the 1 month BBSW. The ASX implemented an interim solution which is discussed in the consultation paper, and has stated that it will continue to work with the BBSW Advisory Committee on a longer term solution.
New Zealand developments
Framework for new financial advisers' regime now in place
The Financial Services Legislation Amendment Act 2019, which repeals the Financial Advisers Act 2008 and amends the Financial Service Providers (Registration and Dispute Resolution) Act 2008, has been passed into law in New Zealand.
This legislation will introduce a new model setting out duties for advisers and requiring licensing by New Zealand’s Financial Markets Authority.
Click here to read the Code of Professional Conduct for Financial Advice Services published in May.
The new regime is expected to come into effect by the middle of 2020, with two phases of licensing – allowing advisers to operate under a transitional licence, with two years to obtain a full licence.
Click here to read the Financial Services Legislation Amendment Act and here for Bell Gully's Issue No.58 Corporate Reporter.
New Zealand's Reserve Bank to announce final decision on bank capital rules by November
The Reserve Bank of New Zealand has received 164 submissions on its bank capital proposals, which will be released publicly in June.
Implementation of any new rules is expected to start from April 2020, with a transition period of “a number of years” before full compliance will be required.
Click here for more information.
New Zealand’s Reserve Bank consulting on framework for identifying domestic systemically important banks
The Reserve Bank of New Zealand is consulting on a framework for identifying domestic systemically important banks (D-SIBs), as a complement to its consultation on bank capital adequacy requirements.
The consultation, which closed on 31 May, seeks views on the proposed indicator-based approach for identifying D-SIBs.
The proposal, which aligns with international practice, would make D-SIBs subject to a capital surcharge.
Click here for more information.
Consultation invited on the FMA/NZX “Capital Markets 2029” review
The steering committee heading the Financial Markets Authority and NZX industry-led review of capital markets in New Zealand (known as “Capital Markets 2029”) is inviting feedback to ensure their final recommendations “reflect a breadth of New Zealanders views in promoting the health of New Zealand’s Capital Markets”.
Submissions are due by 7 June 2019. Matters that the steering committee are interested in receiving feedback on include:
- features of offshore markets that could be successfully replicated in New Zealand;
- new products or market structure initiatives that would help the “funding gap” for small and medium sized enterprises;
- the lack of IPOs;
- achieving broader retail participation in capital markets; changes to KiwiSaver that could improve its contribution to New Zealand’s capital markets; and
- regulatory settings.
See Capital Markets 2029: Have your say for further details.
New NZX listing rules effective from 1 January 2019, subject to a six-month transition period
The new NZX Listing Rules are the first holistic rewrite of the Main Board/Debt Market Listing Rules since their introduction in 2003. They also mark the beginning of a new market structure, with the NXT and NZAX markets to be consolidated under a single equity market with NZX’s Main Board issuers.
The rewrite of the rules has been driven largely by NZX’s current five-year strategy, which is aimed at reinvigorating its core market business. As such, the new rules incorporate provisions to help facilitate listings of a broader range of financial products and issuers, including issuers that are already listed overseas. NZX has also focussed on making the rules fit for purpose for smaller issuers (given the removal of the NXT and NZAX markets), listed funds and debt issuers, and has introduced further investor protections with a view to increasing confidence and participation in its markets.
Click here for more information.
International developments
New ESMA Q&As regarding the prospectus directive and Brexit
On 31 January 2019 ESMA issued two new Q&As regarding the Prospectus Directive, Q&A 103 and 104. Both Q&As are only relevant in the event that the UK exits the EU with no withdrawal agreement in place.
Q&A 103 deals with issuers which currently have elected the UK as their home member state for prospectus approval purposes under Article 2(1)(m)(iii) of the Prospectus Directive and wish to offer securities to the public or be admitted to trading in the EEA after exit day. ESMA proposes to allow any such issuer to "reset" its home member state as though its offer securities to the public or admission to trading in the EEA after exit day is its first for these purposes.
Q&A 104 provides that prospectuses approved by the UK FCA and passported to one or several EEA member states before the exit day can no longer be used to offer securities to the public or admit securities to trading on a regulated market within the EEA after exit day. This is in contrast to the UK's proposals to grandfather after exit day any prospectus passported into the UK before exit day. It also provides that after exit day the UK will lose its competence to approve any prospectus or prospectus supplement for Prospectus Directive purposes and to operate the Prospectus Directive's passporting mechanism.
BREXIT and accounting standards applicable to UK-incorporated companies
On 31 January 2019 ESMA issued two new Q&As regarding the Prospectus Directive, Q&A 103 and 104. Both Q&As are only relevant in the event that the UK exits the EU with no withdrawal agreement in place.
Currently the IAS Regulation requires any company which is incorporated in an EEA member state, which is obliged to prepare consolidated accounts and which has any securities admitted to trading on a regulated market to use EU-endorsed International Financial Reporting Standards (EU-IFRS) for the preparation of their consolidated accounts. Member states may also either permit or require other companies to prepare their consolidated and/or nonconsolidated accounts using EU-IFRS.
The UK Government has stated that it is in the UK’s interest to maintain convergence with IFRS after exit day as IFRS are used as the basis for preparing company accounts globally, in over 140 jurisdictions including 15 out of the 20 G20 countries.
Accordingly the UK Government has published The International Accounting Standards and European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2019 which provide for a national framework for endorsement and adoption of IFRS after departure from the EU.
London stock exchange listing and ECB eligible collateral
On 25 February 2019 the London stock exchange published a notice which describes how it proposes, for both outstanding and new issues, to avoid any question of the London stock exchange ceasing as a result of Brexit to be an "accepted market" for the purposes of "eligible collateral" for Eurosystem monetary policy and thereby bonds admitted to trading on the London stock exchange ceasing to meet the ECB's eligibility criteria.
It will do this by utilising its affiliate BondVision. This is a Multilateral Trading Facility (MTF) included in the list of “accepted markets” recognised by the ECB and organised by Monte Titoli. The notice says the process of admission of bonds to BondVision is automatic and without recourse to the issuer.
BREXIT and amendments to the London stock exchange primary market rulebooks
On 7 March 2019 the London stock exchange published Market Notice N04/19 giving details of its proposed changes to its rulebooks that will apply in the event that no transitional or other agreement is reached before the UK withdraws from the EU. These amendments are designed to allow the exchange to continue to operate its markets effectively and meet its regulatory obligations.
ICMA standard language, selling restrictions, legends
On 15 March 2019 ICMA circulated to its Primary Documentation Group drafts of suggested updates to various forms of ICMA standard legends and clauses which are intended for use after the UK exits the EU. These suggested updates are intended as a tool to assist market participants' thinking in considering how to approach post-Brexit activity.
FCA consultation on prospectus regulation and changes to the FCA handbook
On 28 January 2019 the FCA launched a public consultation (CP19/6) concerning changes it is proposing to its Prospectus Rules sourcebook to ensure consistency with the Prospectus Regulation when this Regulation becomes fully applicable (from 21 July 2019) and the existing Prospectus Directive and associated EU measures made under it are repealed.
The proposals put forward in this consultation will only be relevant if the withdrawal agreement between the UK and the EU comes into effect giving rise to an "implementation period" lasting until 31 December 2020 (or later) during which EU law will continue to apply in the UK (and therefore the Prospectus Regulation will apply in full and become directly applicable in the UK from 21 July 2019).
If the UK exits the EU without any withdrawal agreement and the implementation period therefore does not come into effect the consultation says the FCA will not proceed with these proposals but instead will put forward revised proposals if and when the UK government decides to proceed with the implementation of the Prospectus Regulation.
The consultation closed on 28 March 2019. We now wait to see the FCA's final proposals and in particular whether the Prospectus Regulation becomes fully applicable in the UK.
LIBOR transition and contractual fallbacks
Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, gave an important speech at the ISDA Annual Legal Forum on 28 January 2019 concerning LIBOR transition and contractual fallbacks. Among the important points to note from his speech are:
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IBA, the administrator of LIBOR, may announce in advance a date after 31 December 2021 on which it will cease the publication of particular currency-tenor combinations. However it may come under considerable commercial pressure not to do this and at this point, if banks leave the LIBOR panels, the problem of capturing enough transactions to underpin robust calculation of the rate may become severe and the requirements of the European Benchmark Regulation may become relevant. Amongst these requirements, is a clear and unambiguous requirement for not only the administrator, but also for the supervisor of the benchmark administrator to assess the capability of a critical benchmark to be representative of an underlying market and economic reality.
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In these circumstances, the end-game for LIBOR may include an assessment by the FCA that one or more panels have shrunk so significantly in terms of number of banks or the market share of the banks remaining, that it no longer considers the relevant rate capable of being representative.
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It seems essential to consider this scenario when choosing the design of fallback triggers.
Goodbye UKLA
In its Primary Market Bulletin No 20 published in February the FCA announced that, for the sake of clarity, it will begin phasing out the name ‘UK Listing Authority’ or ‘UKLA’. The FCA is gradually removing the name "UKLA" from its website and other external communications and will instead refer to the FCA’s ‘primary market’ functions.
The FCA say that there is no need now to revise documents just to remove references to the UKLA but they ask that when updating templates/documents for other reasons, market participants should phase out the terms UKLA or UK Listing Authority.
EONIA transition and EURIBOR reform – extension of benchmark regulation transition deadline
In a press release on 25 February 2019 the European Commission announced that a political agreement has been reached to extend the transitional period under the Benchmark Regulation for two years, until 31 December 2021, for critical benchmarks. It is expected that the European Parliament and Council will now move to formally adopt appropriate legislative measures to give effect to this extension.
Proposed EU delegated regulation on the format and content of prospectuses and their regulatory scrutiny
On 14 March 2019 the European Commission published a revised draft of its delegated regulation supplementing the new Prospectus Regulation regarding the format, content, scrutiny and approval of prospectuses. This is the final draft, subject to the right of the European Parliament or the Council to express objections.
European Commission draft RTS on key financial information in the summary of a prospectus, advertisements, supplements, etc
On 14 March 2019 the European Commission published the draft text of its delegated regulation supplementing the new Prospectus Regulation with regard to regulatory technical standards on key financial information in the summary of a prospectus, the publication and classification of prospectuses, advertisements for securities, supplements to a prospectus, and the notification portal.
ESMA Q&AS on the new prospectus regulation
On 27 March 2019 ESMA published its first Q&A document in relation to the new Prospectus Regulation. This Q&A document is similar to but separate from the Q&A document which ESMA publishes in relation to prospectuses under the Prospectus Directive regime. Q&A 2.1 provides that the current ESMA Q&As relating to prospectuses (and the ESMA update of the CESR recommendations) should be applied to prospectuses drawn up under the Prospectus Regulation to the extent they are compatible with the Prospectus Regulation. The new Q&A document also contains useful guidance on the grandfathering provisions of the new Prospectus Regulation.
ESMA guidelines on risk factors under the new prospectus regulation
On 29 March 2019 ESMA published its Final Report (ESMA31-62-1217) on its proposed guidelines on risk factors under the new Prospectus Regulation. The final guidelines are set out in Annex II to the Report together with explanatory text and will become effective on a date (expected to be 21 July 2019) which is two months after their publication on ESMA’s website.
These guidelines follow closely the draft guidelines set out in ESMA's Consultation Paper dated 13 July 2018 (see our briefing).
Visit our Finance Hub for analysis and commentary on developments affecting global financial markets, including the new Prospectus Regulation, PRIIPs/KID, EMIR and LIBOR transition.
For further information, please contact:
Caroline Smart, Partner, Ashurst
caroline.smart@ashurst.com
