Contributed By Baker McKenzie
The largest UK stock exchange is the London Stock Exchange (“LSE”).
Debt securities can be admitted to trading on the LSE's Main Market, the Professional Securities Market (“PSM”) or the International Securities Market (“ISM”). The Main Market is an EEA-regulated market which is authorised and functions in accordance with Directives 2014/65/EU (“MiFID II”), 2004/109/EC (“the Transparency Directive”), 2003/71/EC (“the Prospectus Directive”) and, to the extent applicable, Regulation (EU) 2017/1129 (“the Prospectus Regulation”). The PSM and the ISM are exchange-regulated markets which are not authorised under MiFID II and are outside of the scope of the Transparency Directive and the Prospectus Directive. Issuers with securities admitted to the trading on any of these markets are subject to the Market Abuse Regulation (“MAR”).
There are several indices on the LSE, including the FTSE ORB Index, FTSE ORB Financials Index, FTSE ORB Non-Financials Index, FTSE ORB Under 5Y Until Maturity Index and FTSE ORB Over 5Y Until Maturity Index. Corporate fixed-coupon GBP-denominated bonds are included in these indices automatically, while convertible, perpetual and hybrid bonds are excluded.
See 1.5 Remit of Regulatory Bodies.
The competent authority for securities listed on the Main Market is the Financial Conduct Authority (“FCA”) in its capacity as the UK listing authority (“UKLA”).
The FCA makes decisions with respect to the eligibility for admission and regulates compliance with ongoing obligations and enforces MAR.
PSM and ISM
For companies whose debt is listed on the PSM or the ISM, the LSE enforces the relevant provisions of the London Stock Exchange's Admission and Disclosure Standards and relevant provisions of the Prospectus Rules, the Listing Rules and the Disclosure and Transparency Rules and (with respect to debt securities admitted to trading on the ISM) the ISM Rulebook. However, like the Main Market, the FCA enforces the MAR.
The UKLA reviews the prospectus and admits the debt securities of issuers seeking a listing to the Official List, while the LSE admits debt securities to trading on the Main Market.
Admitting securities to the PSM involves a similar two-stage process to that followed for a Main Market listing. The issuer submits “listing particulars” (rather than a “prospectus”) to the UKLA for approval and admission to the Official List whilst simultaneously applying to the LSE for admission of the debt securities to trading on the PSM.
Admitting debt securities to the ISM requires submission of draft “admission particulars” to the LSE. Once the issuer has received confirmation of no comments from the LSE on the draft admission particulars, it can apply for admission to trading by submitting the final versions of the admission particulars and supporting forms and checklists.
Rules applicable to standalone debt offerings also apply to debt issuance programmes. To list debt securities issued under a programme, final terms need to be filed with the UKLA (in the case of the Main Market or the PSM) or the LSE (in case of the ISM) by 2 pm one business day prior to admission to trading/the day listing is to become effective.
The issuing and trading of debt securities are governed by:
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An issuer must be duly incorporated or otherwise validly established according to the relevant laws of its place of incorporation or establishment and operating in conformity with its constitutional documents.
There is no minimum rating requirement for securities to be listed on the LSE.
Issuers must have audited IFRS accounts, published or filed, for a two-year period. The end of this period must be no more than six months before the planned issuance.
Issuers must have audited accounts, published or filed, for a two-year period (or such shorter period the issuer has been in operation). The end of this period must be no more than six months before the planned issuance.
If the issuer does not have IFRS accounts, a narrative description of the differences between IFRS and the local accounting principles adopted by the issuer should be provided. This requirement may, in some circumstances, be waived for issuers admitting to the PSM.
An issuer must have published audited financial statements that cover at least two years and the latest financial statements must be in respect of a period ending not more than 18 months before the date of the admission particulars. The LSE may, in certain circumstances, accept financial statements for a shorter period or waive the requirement for financial statements.
Debt securities traded on the LSE are issued in various currencies. There are no additional requirements applicable to local currency issuances or offerings to local investors.
The eligibility requirements are the same for a standalone issuance and a debt-issuance programme.
Main Market and PSM
Listing debt securities is a two-stage parallel process in which the UKLA and the LSE work together with the issuer and its advisers.
An application for admission to the "Official List" must be made to the UKLA, whilst an application for admission to trading on either the Main Market or the PSM must be made to the LSE.
Before the request for admission to trading is made to the LSE, a prospectus or listing particulars must be produced and approved by the UKLA.
This listing document is submitted in substantially complete form to the UKLA through its Electronic Submission System, with accompanying documents at least ten clear business days prior to intended publication.
The UKLA appoints a review team, who vet the listing document to ensure it complies with the relevant rules. The UKLA returns comments on the first draft of the listing document within four (for plain vanilla bonds, MTN programmes and supplementary prospectuses) or five (for convertible bonds) business days of the initial filing.
If the UKLA requires amendments to the draft listing document, the applicant sends a revised draft incorporating amendments, a redline showing changes made and written responses to the UKLA's comments. The UKLA returns comments on subsequent drafts within two (for plain vanilla bonds, MTN programmes and supplementary prospectuses) or three (for convertible bonds) business days of any subsequent submissions.
Once the reader is satisfied with the listing document, it is approved (stamped off) on a date agreed by all parties.
After the listing document has been stamped off, a listing application can be made. The listing document must also be filed with the National Storage Mechanism (“NSM”) and made available to the public.
Listing hearings take place no less than 48 hours after the stamp-off, with relevant documents, namely the approved prospectus, an admission form and certain other documents, sent to the UKLA by midday two business days before the hearing.
At the same time, the listing document and trading admission form is submitted to the LSE for admission to trading.
Admission to listing becomes effective when the decision to list has been announced by the UKLA. On the same day, the LSE admits the debt securities for trading.
Admitting debt securities to the ISM requires submission of draft admission particulars (prepared in accordance with the ISM Rulebook) and supporting documents and checklists. The review periods are three and two business days for the initial and subsequent filings, respectively.
Once the reader is satisfied with the listing document, the issuer can apply for admission to trading by submitting final versions of the admission particulars and supporting forms and checklists by 9 am one business day prior to the day on which admission is sought.
The decision to admit the securities to the ISM will be announced by the ISM via RNS.
These procedures do not differ for companies incorporated in a foreign jurisdiction.
While there are no additional steps for a debut issuer, the period prior to initial submission of the draft listing document may be longer to allow for full due diligence enquiries and disclosure drafting to be completed in compliance with the relevant rules.
The structure of an offering will depend on the jurisdiction of the issuer and the type of debt security.
Offerings limited to institutional investors are more common than offerings which include a retail element. This is partly due to the perceived additional liability exposure in a retail offering. The PSM and the ISM allow wholesale issuances only, while the Main Market can be used for retail and wholesale debt securities. Offerings are frequently extended into the United States, but only to qualified institutional buyers under Rule 144A of the US Securities Act.
The decision on whether to structure the transaction using a trustee or fiscal agency structure will often hinge on the complexity of the debt securities being offered.
Since a trustee is able to act as representative of the bond-holders and can take action against the issuer on behalf of the bond-holders, has certain discretionary powers and is able to hold trust property on trust for bond-holders, a trustee will usually be appointed over a fiscal agent (whose functions are purely administrative) where:
A company issuing convertible debt securities should normally have at least a three-year trading record, and should be able to present independently audited accounts covering the past three years (as opposed to the two year history required for non-convertible debt securities).
Admission of convertible securities to listing and trading will also generally only be permitted if the securities into which the convertible securities are to be converted are, or will become, either London-listed securities or securities listed on a recognised regulated open market.
Listing green bonds requires the issuer to use an external reviewer which must be independent, receive remuneration in a way that prevents conflicts of interests and have sufficient financial and market-specific expertise to perform a comprehensive assessment.
Setting up a programme requires compliance with the steps listed in 3 Standalone Listings above subject to the following:
See 5.2 Roles of Key Advisers.
Lead manager(s) or arranger(s)
The lead manager (in the case of a standalone issue) or arranger (in the case of a programme) is a bank or financial institution appointed by the issuer to arrange the issue and to deal with the underwriting and distribution arrangements. The key functions of the role include:
The co-managers are a group of banks or other financial institutions that work with the lead manager(s)/arranger(s) to find investors to buy the securities. This is known as “book-building”. In a programme, the co-managers are usually referred to as “dealers”.
The issuer's audited accounts have to be published, or incorporated by reference, in the listing document, so the auditors are required to provide a consent letter giving their permission for the audited accounts to be used. They will also need to sign off on any extract of the accounts reproduced in the listing document to confirm it is consistent with the financial statements.
The issuer's auditors are typically asked to give the lead manager (and any co-managers) a comfort letter confirming, among other things, that there has been no material adverse change in the issuer's financial condition since the date of the last published accounts.
The issuer and the lead manager(s) each appoint their own legal advisers. If the issue involves a trust structure, the trustee will appoint its own legal advisers.
If the issue involves an overseas jurisdiction, for example the issuer's jurisdiction of incorporation, local lawyers will also need to be appointed to advise on local laws, selling restrictions and regulations.
Legal advisers are involved at the due diligence stage and at the documentation and listing stage. They will also facilitate signing and closing and issue a legal opinion in relation to the issue of debt securities.
Fiscal agent or trustee
See above for the rationale for choosing one structure over the other.
The main function of a paying agent is to distribute payments to the holders on behalf of the issuer.
Various other agents may also be involved:
Debut issuance will require more preparatory work by all parties involved.
Foreign issuers occasionally use a loan participation notes structure, which requires setting up a special-purpose vehicle (“SPV”) and appointing a separate legal adviser to the SPV.
The roles will largely be the same for a drawdown under an existing programme.
Listing debt securities on the LSE will require a prospectus (for the Main Market), listing particulars (for the PSM) or admission particulars (for the ISM).
The listing document must contain all of the information necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profits and losses and prospects of the issuer of the securities and of the rights attaching to the securities.
The content of the prospectus is governed by the Prospectus Directive and the FCA's Prospectus Rules and differs depending upon the minimum denomination of the debt securities. Denominations less than EUR100,000 are considered retail securities, whilst those of EUR100,000 and above are considered wholesale securities aimed at professional investors leading to the prospectus being subject to less stringent content requirements.
The disclosure rules applicable to the securities listed on the PSM are based on the wholesale regime of the Prospectus Directive.
A key difference between the content requirements for a listing on the Main Market and a listing on the PSM are that the former requires audited historical financial information for the latest two years prepared in accordance with IFRS, whereas the latter permits such financial information to have been prepared in accordance with local accounting standards.
The admission particulars should contain all information prescribed by the ISM Rulebook. The information contained in the admission particulars should be presented in a form which is comprehensible and easy to analyse by users of the ISM.
The issuer and any person who accepts responsibility in the listing document for any particular parts thereof and who has authorised its contents is responsible and/or liable for the content of the listing document.
Additional liability will apply in the case of debt securities sold into the US where arranger banks may face claims under the anti-fraud provisions of Rule 10b-5 under the US Securities Exchange Act of 1934, which in general terms makes it unlawful in a securities transaction to make any "untrue statement of a material fact" or to "omit to state a material fact" necessary to make other statements "not misleading" in light of the circumstances under which they were made.
The retail regime requires additional disclosure, including a summary, profit forecasts and investment information, information about the underwriting arrangements and commissions. The financial information for retail securities must be prepared in accordance with IFRS or an equivalent standard.
Upon approval, a prospectus must be filed with the FCA by uploading it to the NSM at the earliest of:
The prospectus must also be made available to the public, which can be done by publishing it on the issuer's website, the website of a financial intermediary or the website of the LSE.
The publication, filing and delivery requirements for the listing particulars on the PSM are the same as for the prospectuses on the Main Market.
An issuer must ensure that the admission particulars are published by the time of admission to trading of the securities. The admission particulars can be published on the issuer's website, the website of the financial intermediaries, the LSE website or through the NSM.
Main Market / PSM
The following exemptions from the requirement to produce a prospectus are frequently relied upon:
OECD sovereigns, regional or local authorities, issuers whose securities are guaranteed by OECD sovereigns, regional or local authorities, public international bodies and non-profit-making bodies are exempt from the requirement to produce admission particulars
Financial promotion restriction
The FSMA provides that a person must not communicate an invitation or inducement to engage in investment activity unless that person is an authorised person or the content of the communication is approved by an authorised person. It is a criminal offence for a person to contravene this restriction. However, there are a number of principal exemptions, including communications made:
Misleading statements and practices
Under the Financial Services Act 2012 and common law, any person could be subject to criminal or civil proceedings for:
The civil prohibition on market abuse under MAR works in tandem with the criminal liability for misleading statements under the Financial Services Act 2012.
The giving of advice to potential investors on the merits of the securities may constitute a “regulated activity” for the purposes of the FSMA. If any person who is not authorised under the FSMA gives any such advice, a criminal offence may be committed under the FSMA.
Offers to the public
Under the FSMA, it is unlawful for transferable securities to be offered to the public in the UK unless an approved prospectus has been made available to the public before the offer is made.
Advertisements under the Prospectus Rules
Advertisements must not be issued unless they meet the requirements listed in the Prospectus Rules.
Book-building is the standard method by which debt offerings are priced and allocated in the UK. It is an interactive mechanism by which investors relay indications of demand and price to the book-runners, who then “lead” investors towards the final price.
Underwriting commitments are usually structured on a best-efforts basis.
The key terms of the subscription agreement are representations and warranties and events of default.
Carrying out stabilisation activity may be considered as market abuse MAR, market manipulation under the Financial Services Act 2012, and/or insider dealing under the Criminal Justice Act 1993.
A safe harbour is available if the stabilisation activity is carried out in accordance with MAR and Regulation (EU) No 596/2014 (together, the "Stabilisation Rules").
These Stabilisation Rules require stabilisation to be carried out for a limited period with a view to support the market price of the securities at a level higher than that which might otherwise prevail. In addition, they require relevant information about the stabilisation to be disclosed and notified to the competent authority of the trading venue no later than the end of the seventh daily market session following the date of execution of such transactions.
Although there are no restrictions, English and New York law are the two most common choices.
An express choice of law and/or jurisdiction will typically be upheld by the English courts, who do not lightly override the parties' autonomy to choose the governing law or the forum in which to settle their disputes (particularly where parties have agreed exclusive jurisdiction should apply). However, for contracts concluded after 17 December 2009, under EU Regulation 593/2008, the freedom of the parties to choose a governing law is subject to a number of carve-outs, and the determination of the governing law applicable to any non-contractual obligations (those obligations which arise from outside the scope of a contract) is subject to Regulation 864/2007. In addition, for proceedings instituted after 10 January 2015, EU Regulation 1215/2012 will apply to claims within its domain, even if the parties are not domiciled in an EU Member State, and contains a number of carve-outs from this general principle, including for disputes with respect to the validity of the decisions of a company, which must be heard where the company is registered/incorporated.
Foreign judgments and arbitration awards are generally enforceable in the UK.
Recognition of an application for the enforcement of a foreign judgment is usually granted ex parte. The other party has one month from service to apply to set aside registration (two months if the other party is outside the UK). The limitation period for registering a foreign judgment for enforcement is six years for enforcement by action on the writ, 12 months for judgments from Australia, Canada, Guernsey, Isle of Man, Jersey, India, Pakistan, Surinam and Tonga and six years for most other Commonwealth countries.
Recognition of an application for the enforcement of a foreign arbitration award is usually granted ex parte. The other party has 14 days from service to apply to set aside registration (sometimes longer if the other party is outside the UK). The limitation period for registering a foreign arbitration award is six years.
The way in which security is perfected depends on the type of security taken by the lender, the type of asset secured and the identity of the security-provider. As a general rule, perfection may be created by registration, possession and/or control or notice.
A bond-holder being domiciled in a foreign jurisdiction is not likely to affect its ability to enforce any of the transaction documents related to an issuance of debt securities.
Subject to their compliance with the relevant English securities laws (which may have differing eligibility criteria and/or requirements for foreign entities versus UK entities entering into equity transactions or offering their equity securities in the UK), there are no restrictions on foreign entities entering into debt transactions or offering their debt securities in the UK.
An offering of standalone debt securities is usually completed within seven to eight weeks.
During the pre-launch period (weeks one to six), the managers, counsel and other third parties are appointed. The respective teams conduct due diligence and prepare a first draft of the preliminary listing document and the roadshow and ancillary marketing materials, which are usually circulated to the working group ahead of a management due diligence session. The first filing of the listing document tends to occur shortly thereafter, usually on week four to five when it is sufficiently advanced. Drafting and negotiation of transaction documentation and the closing conditions precedent, such as the auditors' arrangement and comfort letters, counsels' legal opinions and any required consents, will occur during this pre-launch period.
Once the FCA (or the LSE in the case of ISM issuances) have confirmed no further comments to the preliminary listing document, the deal enters the launch/pricing period, usually around weeks six to seven. Applications are made for approval of the listing, bring-down due diligence calls are held and then the transaction is announced to the market. A roadshow will usually follow, with the finalised version of the preliminary listing document and roadshow and marketing materials. Upon the completion of the roadshow, the deal prices and the listing document is finalised and stamped off and the subscription agreement is signed.
The final phase of the transaction, closing and settlement, typically occurs in weeks seven to eight, when the remaining transaction documents are signed, the global certificate is signed and delivered, the debt securities are issued and admitted to trading on one of the markets of the LSE and the net proceeds from the issue are paid to the issuer.
A repeat offering of standalone debt securities can be completed faster than a debut deal, though the timeline depends on how up to date the existing disclosure is.
A drawdown under a programme can be completed within one to two weeks.
Retail offerings tend to take longer to complete as there is more disclosure to produce and additional protections to build into the transaction documents.
Debt securities are usually issued as a single instrument representing the entire issue. This single instrument (either a global note or a global certificate) is held by or on behalf of an international central securities depositary (Euroclear, Clearstream or DTCC) (“the ICSD”). Investors hold the securities either directly in accounts at the ICSDs or indirectly through custodians who have accounts at the clearing systems.
To transfer debt securities, the seller and buyer give instructions to debit the seller's security account and the buyer's cash account and credit the buyer's security account and the seller's cash account simultaneously (ie, on a “delivery versus payment” basis). Transfers can alternatively take place on a “delivery free of payment” basis.
To pay the principal or interest under debt securities, the issuer first pays the ICSD, or an entity holding the debt securities on its behalf, and the nominee then instructs the ICSD to credit the securities' owner's cash account.
Arrangements between the various clearing systems have been put in place to permit transactions between account-holders in different systems.
Settlement of securities issued in currencies other than GBP, EUR or USD may involve additional settlement counterparts, which usually leads to a longer settlement period.
The key UK tax issues that should be considered when issuing and listing debt securities include withholding tax (“WHT”), stamp taxes, the tax treatment of the issuer and those acquiring the debt securities and certain regulatory provisions such as the Foreign Account Tax Compliance Act (“FATCA”). These should be considered in the context of the transaction itself and the transaction documents.
Payments of principal should not be subject to the WHT.
Generally, UK income tax must be withheld from payments of interest with a UK source at the basic rate (currently 20%). The application of this provision is relevant in the circumstances where payments are made by UK incorporated issuers or UK branches of non-UK incorporated issuers.
In the event that issuers are paying "UK source" interest they usually try to ensure that at least one WHT exemption is available in the UK in respect of the securities.
The main UK WHT exemptions, in relation to interest payments on debt securities, apply where:
In relation to the transfer of listed or unlisted securities, the main taxes are stamp duty and stamp duty reserve tax (“SDRT”). Stamp duty and SDRT are transfer taxes and, where applicable, are chargeable at a rate of 0.5% on the instruments transferring, or an agreement to transfer, the securities. However, most plain vanilla debt securities are exempt from stamp duty or SDRT on the basis that the loan capital exemption should apply (which would normally be the case, unless the amount of interest under the debt security depends on the results of the underlying business, the securities carry a right of conversion into shares or other securities, or other exceptions apply). Even where the loan capital exemption does not apply in practice, there is generally no need to pay stamp duty or SDRT on the transfer of such securities in the UK.
There should be no stamp duty or SDRT applicable on the issue of debt securities in the UK.
Capital gains that arise to non-UK resident persons on the disposal of debt securities should not generally be subject to UK corporation tax or UK capital gains tax.
Reporting (financial or otherwise) obligations
An issuer must publish audited annual accounts within four months of its year end and unaudited interim accounts within three months of the end of the interim period. Both annual and interim accounts must be compliant with the requirements of DTRs.
Issuers of retail debt must prepare both annual and half-yearly reports while issuers of wholesale debt are exempted from the obligation to prepare the latter.
Disclosure requirements in respect of information regarding the issuer
An issuer must maintain an insider list and disclose inside information in respect of the issuer, unless there are reasons permitting the issuer not to disclose such information.
An issuer must also make the following details public:
Corporate governance requirements
There are no corporate governance requirements applicable to issuers of debt securities admitted to trading on any of the markets of the LSE.
Specific rules applying to transactions post-listing
Restrictions on securities dealings
MAR requires persons discharging managerial responsibility (“PDMRs”) not to conduct transactions on their own account (or for the account of a third party) relating to debt instruments of the issuer during certain closed periods. PDMRs are: (a) the directors of the company; and (b) senior executives who have regular access to inside information relating directly or indirectly to the issuer and the power to make managerial decisions affecting the future development and business prospects of the issuer.
A PDMR must not conduct any transaction during a closed period, namely, the period of 30 calendar days before the announcement of the annual or interim financial results or any period where there exists any matter which constitutes "inside information" in relation to the issuer.
Disclosure of securities dealings
MAR requires PDMRs and persons closely associated with them to notify the issuer and the FCA of every transaction conducted on their own account relating to the debt instruments of the company, or to derivatives or any other financial instruments linked to those debt instruments. Notification must be in a prescribed format and must be made within three business days of the day on which the transaction occurred.
There is a threshold for notification of EUR5,000 per calendar year, after which all subsequent transactions need to be notified regardless of size. The company is also required to transmit the information notified to it under MAR to a Regulatory Information Service within three business days of the transaction.
There are exemptions from certain continuing obligations for issuers of wholesale debt securities.
An issuer whose registered office is in a non-EEA State is exempted from the rules on annual financial reports, half-yearly financial reports and reports on payments to governments if the law of the non-EEA State in question lays down equivalent requirements or the issuer complies with requirements of the law of a non-EEA State that the FCA considers as equivalent.
The FCA (for the Main Market and PSM) and the LSE (for the ISM) can impose a number of penalties for non-compliance with the continuing obligations, including:
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