Our task as Operational Agent when working with Asset Managers, Fund Managers & Corporations when preparing the structuring of the Information Memorandum or Admission Document for a Linked Bond issue is that the disclosure requirements of the Information Memorandum or Admission Document are always full, true and plain in order to receive admission for listing from the Stock Exchange.
When the prospectus supplement or the base prospectus is offering a linked bond, issuers should consider what information investors and their advisers would need to assess the nature of that security. Issuers may find that describing the linked bond in plain language, without being overly technical or relying on the use of complex jargon, will help a person trying to understand the nature of the security.
Given the unique characteristics of a Linked Bond, Issuers should consider whether investors and advisers would benefit from additional disclosure about the linked bonds on the cover page of the prospectus supplement. Some examples of disclosure an issuer could consider are:
If a feature of a particular linked bond is a limit on the return the issuer will pay to investors, we will generally conclude that the prospectus does not meet the full, true and plain disclosure requirement unless the shelf prospectus or prospectus supplement clearly explains that investors’ returns will be capped at a certain amount and that they will not be able to participate in any returns on the underlying interest that exceed that maximum.
In most linked bond offerings some or all of the principal amount invested is at risk. If principal protection only applies where the linked bonds are held to maturity, this fact should also be disclosed in the prospectus supplement.
Where the prospectus supplement contains past performance information for the underlying interest, the prospectus supplement should clearly state that past performance is not an indicator of future performance. Information provided should not include only the best periods for past performance while ignoring negative periods. This disclosure would be necessary to meet the full, true and plain disclosure requirement.
Where an issuer uses hypothetical examples to illustrate how payouts for a linked bond are calculated, the issuer should use reasonable and balanced assumptions and should disclose those assumptions. In particular, it may be misleading to emphasize potential gains while minimizing the risk of loss. It should also be clear that the hypothetical examples are not indicators of future results. This disclosure would generally be necessary to meet the full, true and plain disclosure requirement.
If total return figures are used in the presentation of past performance data or assumptions for hypothetical calculation examples, the issuer should also refer to the equivalent annual returns in an equally prominent way in the prospectus supplement to meet the full, true and plain disclosure requirement.
For the purposes of the full, true and plain disclosure requirement, the issuer should clearly identify any benefits that will accrue to it or to any other parties that are involved in structuring or administering the linked bond offering.
The full, true and plain disclosure requirement requires a clear and full explanation of fees that an investor will be paying. An issuer should clearly disclose any direct or indirect fees, expenses, costs or other charges that may be imposed on investors in linked bonds. This would include any charges embedded in the formula used to determine payment at maturity, or in the offering price of the linked bonds. For example, disclosure should be made of any fees or costs associated with enhanced participation rates, principal protection and any hedging activities undertaken by the issuer or any other party involved in product structuring on behalf of the issuer.
Issuers should consider what format the disclosure could take that would make the information easy to understand. For example, including all applicable fees, charges and expenses an investor would pay in a single table might be a useful format for this disclosure. This would allow investors to more easily determine the total cost of investing in a linked bond without having to refer to various sections of the prospectus supplement.
It is important for investors to understand where issuer and investor interests in a linked bond might conflict. To meet the full, true and plain disclosure requirement, the prospectus supplement should disclose any actual or potential conflicts of interest that might arise from the different roles an issuer and its affiliates could have in connection with a linked bond offering. Risk factor disclosure should also address these conflicts. Without this disclosure, investors may find it difficult to make an informed investment decision.
Investors may also find it helpful to understand how issuers will address situations where the issuer finds that its interests conflict with those of an investor. One way an issuer could do this is to disclose any policies or processes it has in place to deal with conflicts of interest or perceived conflicts identified by the issuer.
Some examples of conflicts we have seen, and how some issuers have resolved them, are:
Because linked bonds often constitute unsecured debt obligations of the issuer, an investor purchasing these notes would usually want to understand the investment of the proceeds of the linked bond. As part of their investment decision, investors would also want to understand how they will be able to monitor changes in the underlying performance from which the linked bond derives its value.
When considering the full, true and plain disclosure requirement, issuers should think about informing investors on how they can obtain on-going information about the issuer, the underlying performance and the value of the linked bonds.
An issuer will generally find it difficult to meet the full, true and plain disclosure requirement without adequately disclosing the risks relating to the issuer and the particular linked bond it is offering. The issuer should highlight any features of linked bonds that differ from conventional debt securities, as well as the additional risks that may result from those differences.
Risks for the investor will also usually be different than if the investor held the underlying interest directly. As a result, where an investor in a linked bond does not have the same rights as it would if it held the underlying interest directly, we will generally consider that disclosing this information is necessary to meet the full, true and plain disclosure requirement.
Given the complexity of linked bonds, it is important that issuers consider including a brief description of the suitability of a linked bond for particular investors. This description may include the characteristics of investors for whom the linked bond may or may not be a suitable investment.
If the linked bond is redeemable, the full, true and plain disclosure requirement requires a description of how the redemption price is determined. In addition, where the issuer or a related entity intends to maintain a secondary market for its linked bonds, the full, true and plain disclosure requirement would be satisfied by describing how bid-ask pricing is determined, as well as the limitations or conditions affecting the issuer’s commitment to maintain a secondary market.
In order to satisfy the full, true and plain disclosure requirement issuers must provide sufficient information regarding the underlying interest in order to allow investors to make an informed investment decision. As a result, issuers should consider whether the disclosure in the base prospectus or prospectus supplement would provide investors with sufficient information about the underlying interest so that an investor can fully understand the nature of its exposure under the linked bond.
We have seen many linked bond offerings use a market index or a basket of market indices as theunderlying interest. Where this is the case, issuers may want to consider whether the indices on which they are basing the offering are “publicly available”. We would generally consider a market index to be publicly available if there is market transparency of the index methodology, the constituents that make up the index, and the calculation of the index through information that is published and circulated to the public on a regular basis.
In some cases we believe that it would be difficult for an investor to readily access information about an underlying interest. In order to meet the full, true and plain disclosure requirement, issuers of linked bonds tied to these underlying interests should pay special attention to whether adequate information about the underlying interest will be made available to investors. Areas where we think this could be particularly difficult are:
Some linked bonds provide a return based on the performance of an underlying security of a single underlying issuer or a static basket of underlying securities of one or more underlying issuer(s), where the issuer of the note and the underlying issuers (i.e. the issuers the note is linked to) are not the same. For the purposes of this Notice, equity linked bonds do not include notes where the underlying issuer is an investment fund or the basket of underlying securities is a managed portfolio.
Investors in equity linked bonds generally need specific information about the underlying issuer(s) to make informed investment decisions. This part of the Notice provides an issuer of equity linked bonds with guidance on the disclosure it should consider including in its prospectus supplement to satisfy the full, true and plain disclosure requirement.
An issuer of equity linked bonds can meet the full, true and plain disclosure requirement in a number of different ways:
To meet the full, true and plain disclosure requirement, the prospectus supplement should disclose whether each underlying issuer will receive a direct or indirect financing benefit from the distribution of the equity linked bonds.
Whether an underlying issuer receives a direct or indirect financing benefit will depend on the facts and circumstances of a particular distribution. We may consider that an underlying issuer receives a financing benefit if the issuer of the linked bonds has purchased securities of the same type as the underlying security directly from the underlying issuer within a proximate period of time to the distribution of the linked bonds.
Certain equity notes may provide for the physical delivery of underlying securities at maturity. In this case, the prospectus supplement should disclose whether the underlying securities to be delivered will be subject to any resale restrictions. We understand that in most circumstances the underlying securities to be delivered will be freely tradable.