The impact of coronavirus (COVID-19) on the debt capital markets

The impact of coronavirus (COVID-19) on the debt capital markets

Becky Bradley, senior counsel at Wells Fargo Legal Department, discusses the impact of coronavirus (COVID-19) on the debt capital markets and sets out what debt capital markets practitioners should be doing now to prepare for potential issues in the future. 

How has the bond market reacted to COVID-19? What do you think the impact will be on the capital markets world?

In Europe the markets initially stopped for around two weeks as the crisis took hold. However, issuance volumes have since returned albeit at a cost for the issuers.

In the US, bond issuance slowed initially with a period where there were more frequent than usual 'no-go days' but has since continued without disruption although seemingly issuers are willing to issue at any cost.

Long term it is hard to predict but for now they seem largely unaffected, at least in terms of volume of issuance.

Asian bond issues often include risk factors dealing with pandemics after SARS. Are we seeing any additional risk factors being used in prospectuses in Europe yet?

We are seeing two approaches to addressing COVID-19 in risk factor disclosure.  Initially issuers were just updating their general macro-economic risk factors to include a reference to the 'corona virus pandemic' but increasingly we are seeing issuers include stand-alone risk factors addressing the impact of COVID-19 on their business.  The risk factors we are seeing are general in nature due to the inability of issuers to know what the full impact of the pandemic will be on their business. However, we anticipate as time goes on the risk factors will become more specific.

Is it likely that force majeure provisions will be triggered?

In European capital markets transactions it is the ICMA force majeure clause that is typically used. This clause requires two limbs to be met:

  • first, there must be an event which constitutes, in the opinion of the lead manager, "a change in national or international financial, political or economic conditions or currency exchange rates or exchange controls", and
  • second, that event must be of such consequence that it would, in the opinion of the lead manager, be likely to prejudice materially the success of the offering and distribution of the bond or dealings in the bond in the secondary market

The effect of the clause is that if a situation is known at the time a subscription agreement is entered into, but subsequently escalates, this could potentially cause a force majeure event enabling the managers to terminate the subscription agreement under the force majeure clause, provided that the escalation fulfils the two limbs noted above.

Practically speaking though most capital markets sign on a T+3 basis with settlement on T+5. This means there would only be two business days in which to invoke the force majeure clause between the subscription agreement being signed and the transaction completing. The likelihood of there being an event in those two business days, which would fulfil the two required limbs, is low. 

How is the market dealing with issues in compiling due diligence?

The approach to diligence has been to include additional questions on due diligence calls addressing COVID-19 and its impact on the issuer's business.  In addition, discussions are taking place with issuers around the inclusion of disclosure in the offer document typically by way of updating the risk factors or including a standalone risk factor. 

How is the market dealing with signing issues?

The usual approach of banks providing a power of attorney to the lead bank to sign on their behalf has been replaced with banks generally signing for themselves.  This is due to the practical difficulties with powers of attorney being signed as a deed under English law and the practical difficulties with witnessing such a document when remote working.

Wet ink signing has been largely replaced with electronic signing, either within the document itself or by using a service such as 'DocuSign'.  Where documents are still being printed at home and physically signed, copies of those signatures are typically being provided by way of photograph rather than the usual scanned approach.  Under English law there are no constraints to eSigning which are problematic for the types of documents banks are typically required to sign in capital markets transactions. However, documents such as global notes and ICSD agreements are usually required to be signed as 'wet ink' and so consideration should be given as to how best to approach documents such as those. 

What should debt capital markets practitioners be doing now to prepare for potential issues in the future?

Being aware of the potential issues and looking to address them in advance of a live transaction is the most practical thing debt capital markets practitioners can do:

  • Know who your authorised signatories are and plan for how they can sign remotely
  • Check if there are any internal constraints on digital signing at your institution, make sure the proper approvals are in place to permit digital signing
  • Discuss with external counsel at the outset of the transaction any COVID-19 related issues e.g. disclosure, signing constraints, the need for original copies
  • Discuss timing with issuers, given the potential for a significant reduction in the workforce and the increased workload for debt capital markets practitioners, tight turnaround times on transactions may not be feasible
  • Discuss with auditors whether they will be limited in the scope of their investigations by remote working and if so how that might impact the comfort that can be delivered

Interviewed by Emma Millington.

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About the author:

Emma is head of the Banking and Finance team and the Finance Group at LexisNexis®UK.

Emma has wide-ranging experience in derivatives and capital markets with a particular emphasis on credit derivatives and structured products. Emma qualified as a solicitor with Allen & Overy LLP, working in the derivatives and structured finance teams in both their London and Paris offices before gaining experience with Deutsche Bank AG (advising the foreign exchange prime brokerage desk) and Crédit Agricole CIB (advising the fixed income and derivatives desk) before joining LexisNexis®.