Relaxation of requirements to issuers of corporate bonds

Date 30 jul. 2012
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Introduction

On 4 July 2012, the Danish Financial Supervisory Authority published a guiding pronouncement regarding the rules on the issuing of corporate bonds. The pronouncement, which has been presented to the Financial Business Council, entails a relaxation of the requirements imposed on issuers of corporate bonds, as issuers in fewer cases will be required to have a banking license according to the Financial Business Act (hereafter the “FBA”).


The background for the pronouncement is that the Danish Financial Supervisory Authority intends to harmonise the Danish practise with the practise of other EU countries and thereby increase companies’ access to use corporate bonds as a financing source.


The pronouncement entails:

  • That issues encompassed by the prospect duty pursuant to the prospect declaration require no further authorisations. In practise, this means that invitations to tender directed against the public, or where bonds are sought registered to a regulated market, authorisation pursuant to the FBA is not required.
  • That issues that are not encompassed by the prospect rules do not, in principle, require authorisation pursuant to the FBA. The prospect declaration’s exceptions include tenders 1) to qualified investors, 2) to fewer than 150 physical or juridical persons, 3) where each investor must invest a minimum of EUR 100,000, or 4) where the face value per bond is a minimum of EUR 100.000. According to the FBA, the issue of bonds will in these cases, in principle, not entail reception of funds from the public that are due to be refunded. 
  • Where issues do not fall outside the FBA due to the prospect rules, the scope of the FBA is also reduced.

 

Legal framework and its new interpretation

Section 7(1) of the FBA determines that companies that do business entailing reception of deposits or other funds from the public that must be refunded, and who on their own account provide loans not based on the issue of mortgage bonds, must be authorised as a bank.


Only banks can receive deposits from the public. However, Section 3(3) of the FBA determines that companies without a banking licence are entitled to receive “other funds” from the public that are due to be refunded, provided that this does not constitute a significant part of the company’s business.


Against this background, the Danish Financial Supervisory Authority has previously set up four conditions to determine when an issue of corporate bonds demands a banking license. The four conditions which in principle are retained in the new pronouncement are:

  1. The company must receive deposits or other funds that are due to be refunded
  2. The funds must be received from the public
  3. The company must provide loans on their own account
  4. The reception of deposits and other funds must constitute a significant part of the company’s business.

If conditions 1), 2), and 4) are met, but the company does not provide loans on their own account, e.g. because the bonds are issued directly from the operating company, the issuer will be required to have a saving bank license pursuant to FBA Section 334, if the issue constitutes a significant part of the company’s business.


The requirement concerning the mentioned licenses has historically complicated issues of corporate bonds.


However, the Danish Financial Supervisory Authority’s new pronouncement entails that the Danish Financial Supervisory Authority does not impose a banking license or a saving bank license in a number of practical cases where the need for protection is safeguarded by the rules regarding prospects.


Issues encompassed by the prospect duty – FBA does not apply


If an issuer of corporate bonds is encompassed by the prospect declaration, the issue will in principle not be encompassed by the rules laid down in the FBA. The prospect rules are in principle applicable, if the issue is tendered to the public or if the tendered bonds are registered to trade on a regulated market.


The prospect rules exempt the following tenders from prospect duty:

  1. Tenders of securities, solely tendered to qualified investors;
  2. Tenders of securities, tendered to fewer than 150 physical or juridical persons per country inside the EU, or per country with which the EU has a financial treaty, who are not qualified investors;
  3. Tenders of securities, tendered to investors purchasing securities for a minimum of EUR 100,000 per investor at each separate tender; or
  4. Tenders of securities, with a facial value per security amounting to a minimum of EUR 100,000.

In principle, the Danish Financial Supervisory Authority rates investors as professional investors in these cases. The Danish Financial Supervisory Authority is of the opinion that in these cases, funds are not received from the public, see below, and the FBA requirements regarding saving banks licenses and banking licenses are not met. The effect is therefore the same as if the tender was encompassed by the prospect rules. However, if the tendering company must be regarded as having knowledge that the bonds are being purchased with the purpose of selling to non-professionals, the funds will be regarded as received from the public.


Issues not encompassed by the prospect duty- assessment according to the FBA


Deposits or other funds that must be refunded (1)

In accordance with the explanatory notes to the FBA, the Danish Financial Supervisory Authority does not consider corporate bonds as deposits, but as “other funds” that must be refunded.


Furthermore the pronouncement establishes that deposits of share capital are not to be regarded as deposits or other funds that must be refunded.


Reception of other funds from the public (2)

The Danish Financial Supervisory Authority makes a concrete assessment of whether or not a company receives funds from the “public” during an issue of corporate bonds.

In the assessment of whether or not the funds have been received from the public, the Danish Financial Supervisory Authority puts emphasis on whether the tender has been directed to a closed group or to a larger and broader group.


Advertising on the internet and in newspapers etc. is a sign that the tender has been directed to the public.


Furthermore, the Danish Financial Supervisory Authority regards the intention to register the corporate bonds as a strong indication of reception of funds from the public. However, it does not affect the assessment that the bonds are registered at a later date and on the bond owners own accord.


Furthermore, it will, in principle, not be regarded as reception of other funds from the public, if the mentioned exceptions from the prospect duty apply.


If the reception cannot be regarded as a reception of funds from the public, the company is not required to have a banking license, even though the received funds form a significant part of the company’s business.


Loans on the companies’ own account (3)

The required banking license is conditioned upon the company “giving loans on their own retention”. An issuing group company’s (on-)lending of the proceeds from the issue of bonds will entail that this condition is met. It is, however, not met if the bonds are issued by a company using the proceeds in the running of the business. In the latter case the issuer will be required to have a saving bank license pursuant to Section 334 of the FBA, unless the reception of funds does not constitute a significant part of the company’s business.


Significant part of the company’s business (4)

In order for the tender to be encompassed by the FBA’s required banking license, the bond issue must constitute a significant part of the company’s business. The same applies if an issuer who is not involved in on-lending is to be regarded as encompassed by the requirement to have a banking license.


In these cases, the Danish Financial Supervisory Authority will also make a concrete assessment.


Each company is assessed individually, not as a group of companies.


The Danish Financial Supervisory Authority among other things put emphasis on whether the bond issue constitutes a significant part of the company’s debt. In one concrete case the Danish Financial Supervisory Authority decided that corporate bonds amounting to 30 % of the company’s debt was a significant part of the company’s business.


Furthermore, it is considered to be of significance whether the company has an actual non-financial part of their business activities. In that regard, the Danish Financial Supervisory Authority assesses whether the received funds are invested in the company’s main business activity


Our opinion

As a consequence of the new pronouncement, the issue of corporate bonds will be easier in the future.


The central amendment is that in the future, issuers issuing corporate bonds covered by the prospect duty will not be required to go through the relatively heavy process of applying for a banking license or a saving bank license, regardless of the size of the issue.


The other significant amendment is that in principle, the issuers of corporate bonds are not required to apply for a banking license or a saving bank license, if the issue is exempted from prospect duty pursuant to the prospect rules.


This relaxation of the interpretation of the rules is likely to increase interest in the possibility of financing the company through the issuing of corporate bonds.



If you have any questions or require additional information on the decision, please contact Partner Christoffer Galbo(cga@mwblaw.dk) or Junior Associate Ted Rosenbaum (tro@mwblaw.dk).


The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis for decisions or considerations.