Sponsored briefing: 2019: diversity and new rules for Portuguese corporate issuers in debt capital markets

Diversity. This is a fair word to describe Portuguese debt capital markets in 2019. We have seen a bit of everything this year: new issuers, including Transportes Aéreos Portugueses, Sociedade Independente de Comunicação and Casais, SGPS, and from the public sector, the Autonomous Region of the Azores, frequent issuers, including Sport Lisboa e Benfica – Futebol SAD, Mota-Engil, José de Mello Saúde and Galp, and from new structures, including the combination of subscription and exchange offers to retail and institutional investors, and the segregation of books by types of investors (retail vs eligible counterparties and professional clients in retail offerings), and even a new prospectus regulation. Lastly, at the top of the list, new investors and alternative funding sources for Portuguese issuers. This is good news in a year that, on the regulatory front, turned a page with the enactment of the new EU Prospectus Regulation and related delegated regulations.

As from 21 July 2019, new rules were required to be followed in the preparation of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market. New rules were also adopted in respect of related advertisements.

Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 (New Prospectus Regulation), although maintaining the essential structure inherited from its predecessor, introduced new requirements aimed at simplifying an issuer’s access to capital markets, notably frequent issuers or issues by small and medium-sized companies, and ensuring that the information contained in a prospectus is as useful as possible for its readers (potential investors).

Critical chapters of the prospectus, such as the summary and the section on risk factors, have also been affected. The summary was reduced and reshaped to be modelled as much as possible on the key information document, with the goal of making it shorter, simpler and easier for investors to understand. To achieve this goal, the language used in the summary should be plain and non-technical, presenting the relevant information in an easily accessible way. Following this route, summaries will become a more useful source of information for investors (notably retail investors), focused on providing key information that helps investors take more accurate investment decisions.

Rules regarding risk factors have also been amended and detailed. The main purpose of disclosing risk factors in a prospectus is to ensure that investors are aware of the major potential risks relating to the issuer and the securities, and that they make investment decisions based on their knowledge of these risks. In order to avoid long generic descriptions of risks that often serve only as disclaimers, the New Prospectus Regulation and related ESMA Guidelines require that the risk factors be limited to those which are material and specific to the issuer and the securities being offered or admitted to trading. The relevant risks are now required to be described adequately, organised by categories, and those considered most critical by the issuer should be presented first. The main reason for organising the description of risk factors according to these new rules is to present the information contained in a prospectus in an easily analysable, concise and comprehensible form. Whereas the above does not appear to constitute a great challenge for issuers, the need to assess (and eventually quantify) the impact of each risk on the issuer seems to be harder to address, notably because the information available may not be sufficiently reliable to be included in a formal document such as a prospectus. The New Prospectus Regulation and related ESMA Guidelines admit the use of a qualitative scale of low, medium or high, and precedents so far have shown that issuers tend to prefer this alternative.

Also of importance are the new rules in respect of advertisements, particularly the relevant required content. The word ‘advertisement’ is now required to be prominently included in any advertisements disseminated to potential retail investors, and legal disclaimers are required to include statements and recommendations to investors highlighting the need to read and consider the prospectus carefully before investing, rather than simply relying on the approval of a prospectus as a sign of endorsement of the securities being offered or admitted to trading. So far, these new rules have proven to be susceptible to being followed, although in some cases, notably television and radio advertisements or advertisements of more limited dimensions, the new rules have had an impact on the advertisement and its purpose.

The available experience shows that the changes introduced by the New Prospectus Regulation have been successfully handled by issuers and that complying with these new rules has neither discouraged the use of capital markets, nor affected timelines for the approval of a prospectus, notably in Portugal, where this responsibility falls on the Portuguese Securities Market Commission (Comissão do Mercado de Valores Mobiliários), as was the case in the first new prospectus-compliant public offering targeting the retail market – the combination of subscription and exchange notes issue launched by Mota-Engil in October. Therefore, with the benefits of a renewed legal and regulatory framework and of an environment where low interest rates facilitate access to funding, 2020 is likely to follow in line with the current year, promising continued intense activity and diversity.