Junk Bond Issuers May Snub Europe Exchanges to Sidestep EU Rulesby
New disclosure requirements may spur borrowers to go overseas
Channel Islands, Bermuda may win high-yield debt listings
New European rules are forcing junk-rated issuers to disclose more information to investors and some companies are considering whether to list their high-yield bonds overseas to avoid them.
The lure of fewer regulations may attract issuers away from Ireland and Luxembourg, the dominant bourses in Europe’s about $500 billion corporate high-yield debt market, and undercut European Union efforts meant to help investors spot potential trouble at inherently risky companies. The more lightly regulated Channel Islands Securities Exchange has already won its first corporate junk-bond listing since the Market Abuse Regulation, or MAR, came into effect in the EU about a month ago.
The trade bloc’s rule changes mean all companies with bonds listed in the EU have to report details that were previously only required from businesses with shares on major exchanges. Junk-bond issuers may look overseas to avoid this burden and cost, while investors may have to accept such a move because central-bank asset purchases have crushed yields worldwide, leaving them few alternatives.
“People are definitely talking a lot about listing on non-EU exchanges,” said Michael Dakin, a London-based partner at law firm Clifford Chance. “Bondholders prefer the added disclosure that MAR would give them, but it doesn’t seem like it’s a deal-breaker.”
MAR introduced reporting requirements to previously unregulated exchanges, such as Ireland’s Global Exchange Market and Luxembourg’s Euro MTF. Companies with bonds on these bourses are now legally required to promptly publish material information, to record lists of key insiders and their families, and to require managers follow tougher trading rules, according to a client note from Debevoise & Plimpton. The changes also apply to issuers with bonds that trade on an unlisted basis, such as via the London Stock Exchange’s Admission to Trading Only platform, law firm said.
The Channel Islands exchange is touting non-EU regulation and trading hours in line with European office hours to help win new issuers. Based in Guernsey, an island less than 20 miles from the northern France coast, the bourse is covered by local rules rather than MAR because the Channel Islands are separate from the U.K. and not part of the EU.
“We have appropriate regulation here, but it doesn’t mirror MAR in all of the elements,” Chief Executive Officer Fiona Le Poidevin said in an interview. “There are a number of elements of MAR that are quite onerous.”
The exchange has seen a pickup in interest lately including inquiries from potential high-yield issuers, she said. It has also begun working with London law firms focused on junk bonds, as well as boosting marketing efforts as part of a wider push to expand its 2,000-plus listings of mainly specialized debt securities.
Still, the bourse is dwarfed by the Irish and Luxembourg exchanges, which both boast more than 35,000 securities across their markets. Irish Stock Exchange Plc is “seeing no material change to our pipeline” following the introduction of MAR, said David Clerkin, an external spokesman.
Companies with bonds listed on Luxembourg’s Euro MTF market have previously had to publish inside information as soon as possible because of local exchange regulations, said Julie Becker, the head of international primary markets at operator, Societe de La Bourse de Luxembourg SA. The impact of the new insider lists will be limited to administrative costs, while management-trading restrictions will have a bigger effect on equity markets, she said.
The potential escape from EU rules for junk-debt issuers may undermine attempts by investors to get more information and protections. Working through groups such as the Association for Financial Markets in Europe, bondholders have called for closely held issuers to publicly provide more regular financial data. They’ve also tried to push back against attempts to pare covenants, such as restraints on debt levels and dividends.
“I’d prefer a jurisdiction with more disclosure,” said Sjors Haverkamp, the head of European high yield at The Hague, Netherlands-based NN Investment Partners, which manages about 190 billion euros ($212 billion). “It makes everything more transparent, and you can really assess all the risks and opportunities.”
Still, investors have bought debt with limited disclosures as they seek to escape negative yields on a growing number of bonds in Europe and Japan. Mydentist, Europe’s largest dental-care provider, sold 425 million pounds ($560 million) of notes last month, which it plans to list in the Channel Islands. A spokeswoman for the Manchester, England-based company said she couldn’t comment on why it chose the exchange.
New junk-bond issuers may also look at Singapore or Bermuda to sidestep EU rules, according to Clifford Chance’s Dakin. Like the Channel Islands, the two exchanges already handle debt securities, and they are covered by international arrangements regarding tax and single-market access in Europe, he said.
Bermuda Stock Exchange can’t comment on junk bonds as it doesn’t track credit ratings, said James McKirdy, its listing and compliance manager. The bourse has a total of 673 listings, including fixed-income and insurance-linked securities, according to its website. A representative for Singapore Exchange Ltd., which opened a trading venue dedicated to Asian bonds in December, declined to comment on whether it was seeing more interest from high-yield issuers following the EU rule changes.
“People will be looking at what exchange makes sense after MAR,” said Timothy Peterson, a London-based partner at law firm Milbank, Tweed, Hadley & McCloy. “Many high-yield issuers just don’t have the internal personnel and investor relations people to deal with these rules.”