Brexit and debt capital markets

Piers Summerfield, partner at Simmons and Simmons, looks at how the UK’s vote to leave the EU may impact on debt securities.

What is the immediate impact of the UK's vote in favour of Brexit on the debt capital markets?

The immediate impact is minimal, and relates primarily to levels of activity in the markets—there was a significant slowdown in activity in the markets in the run up to the Brexit referendum, and it awaits to be seen how quickly (and to what extent) activity in the markets picks up after the summer break (when activity is typically more muted anyway). From a purely legal perspective, there is nothing to stop transactions proceeding at the current time.

Regarding the immediate impact of the UK's vote in favour of Brexit on the debt capital markets, is it reassuring that EU law will continue to apply until at least two years after Article 50 TEU is triggered?

It is reassuring, in that it leaves time for changes to be made in a relatively orderly manner. Given how much of the law surrounding debt capital markets issuance is derived from EU Directives and Regulations the key question is to what extent these provisions will apply once the UK is no longer part of the EU. Some of the legislation is now on the UK statute books anyway, but it would potentially generate a lot of uncertainty if EU laws had to be replaced in a very short timeframe.

What is the likely long-term effect of Brexit on the debt capital markets?

The debt capital markets are, by nature, international and outside the UK the effect is likely to be relatively minor. It remains to be seen how things will develop in the UK, and whether, for example, the UK will become less attractive for issuers both in terms of offering securities to UK investors and as a listing venue. The Capital Markets Union initiative is expected to proceed irrespective of Brexit—though the UK’s influence over this will be significantly reduced.

In terms of the long term impact of Brexit, is the market relatively confident that London can maintain its position as an international financial centre?

Yes. London has the advantanges of massive infrastructure to support international finance and a long history as a major international hub, and it is hard to see that disappearing in a hurry—not least as it would not be in the UK’s own best interests to allow that to happen. However, there will undoubtedly be a period of uncertainty while things settle down and financial institutions and other market participants organise themselves and their European operations.

Could it become less attractive to issue bonds out of London?

It depends what is meant by issuing bonds ‘out of London’. If you mean London-listed bonds, it would only be less attractive for issuers seeking to tap the retail market and needing to take advantage of EU-wide passporting—and if the UK is granted equivalence for these purposes then it will have little or no impact.

If you mean arranging bond issues out of London, London’s status as a centre for the arranging of international bond issues will only be affected if international banks move their operations out of London.

Could the UK become a more tax friendly haven for issuers?

The UK has already taken steps to make itself a tax-friendly jurisdiction for issuers, with measures such as the UK securitisation company regime. The UK’s tax treaty network, which reduces or eliminates withholding tax on interest payments in particular circumstances, is already very widespread and has nothing to do with EU membership—these treaties are bilateral agreements. To the extent that the government goes ahead with its proposed plans to reduce corporation tax further (which were announced prior to Brexit), this would make the UK even friendlier. However, the UK will also need to cope with the demands placed on its tax system as a result of the changes required by the Base Erosion and Profit Shifting (BEPS) initiative. This has nothing to do with EU membership, and the UK has set out its stall to be an ‘early adopter’, so there will be challenges ahead in this respect.

How would the UK gain third country equivalence under the Prospectus Directive (should it choose to do so)?

Under article 20 of the Prospectus Directive 2003/71/EC, the European Commission is entitled to make assessments of third country equivalence in relation to prospectus requirements. However, while this mechanism exists, to date no such assessments have been made and the question of the general criteria for such equivalence is the subject of review currently by the EU.

Will the UK Listing Authority be able to authorise Prospectus Directive-compliant prospectuses?

If granted equivalence, yes—otherwise it will not.

Regarding third country equivalence, do you have any information on the timescales of the current review by the EU?

The Prospectus Regulation is currently under review, and various draft proposals have been circulated in recent months. It is expected that further developments in this regard will occur in autumn 2016, though there is no definitive timetable at this stage.

What about credit ratings and rating agencies?

Rating agencies are currently subject to regulation by the European Securities and Markets Authority in relation to EU activities, pursuant to EU Regulations. While the UK may have the ability to deviate from these EU requirements if it is no longer part of the EU, it is questionable whether it would do so.

Are there any provisions that we can expect to see in prospectuses going forward? Will Brexit-related risk factors become standard?

Brexit-related risk factors are something that all issuers should consider, and many issuers may derive comfort from including them—though it is preferable if they are specific and tailored to the position of a particular business. Over time further developments may arise e.g. in relation to the Bank Recovery and Resolution Directive 2014/59/EU, which may prompt the inclusion of contractual provisions which anticipate English law becoming third country law, though this is unlikely until there is more visibility around the terms of the Brexit.

Are there any potential upsides of Brexit for issuers of debt securities?

Depending on the terms of the Brexit, the UK may seek to position itself as a competitor to the EU, taking advantage of the fact that it would not be constrained by EU laws and regulations to provide, for example, an alternative listing regime for issuers of wholesale debt—though as with much to do with Brexit, whether this is even feasible let alone something that becomes a reality remains to be seen.

In terms of any beneficial tax effects or it becoming easier to get the deal rated, it is difficult to see any such effects at this stage.

Interviewed by Anne Bruce.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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