SEC rule change allows banks, issuers go public on private deals
NEW YORK, July 26 (IFR) - Corporates issuing hundreds of billions of dollars in private placement bonds need no longer cower under the threat of a reprimand from the Securities and Exchange Commission at the mere mention of their securities offering.
Thanks to the US government's JOBS Act, the SEC has been obliged to take the 'private' out of Rule 144A bond private placements, by lifting an implicit ban on even speaking about the deals after pricing.
The final rules proposed last year and just adopted by the Commission also give issuers in the even more private Regulation D market the choice to tell all and sundry if they wish.
"Basically there is nothing private anymore, if you don't want it to be," said Anna Pinedo, partner at Morrison Foerster.
"Companies and their initial purchasers can talk to the press about the 144A bond, you can issue a press release if you wish, or post a roadshow presentation on a website - as long as you comply with the 144A rule that the bonds are only sold to Qualified Institutional Buyers."
The prohibition on advertising was brought in by the SEC when it introduced rule 144A in 1990, because of its concern that mom and pop investors would end up buying bonds issued by companies that had not undergone the public disclosure rigors of a full SEC registration.
But that fear has always been unfounded, given that Qualified Institutional Buyers - bond funds - are the only investors who can buy them in the first place.
Despite the contradictory terms of Rule 144A, the rule change was not the result of a more benevolent SEC, but instead arose from the Obama Administration's efforts to boost small businesses and their hiring.
"The idea was that Congress wanted to make it easier for people to invest in small businesses and private companies, so they directed the SEC to reduce restrictions on investors' ability to buy debt and equity in these firms," said one debt capital markets banker. "The unintended consequence was that an obscure rule like 144A was tacked onto the JOBS (Jumpstart Our Business Startups) Act."
The removal of the advertising ban is a huge relief to borrowers and their lawyers, who have spent the last 22 years fretting over each instance a 144A deal is inadvertently referred to before the bonds 'settle' and are in the right hands of the buyers.
"It's been difficult for bankers to communicate the most basic of information about 144A transactions," said a corporate communications executive at a major bank.
"Under a strict interpretation of the rule, we can't even share simple pricing information with the financial press for fear that it will be considered a general solicitation, which is ridiculous when you consider that the information is essentially public once it's sent out to a large group of investors."
But the changes will do more than just remove a headache for the industry. They will also open up the possibility for 144A bonds to be included in major bond indices against which investors benchmark their performance.
Now that the privacy restrictions have been removed, FINRA has filed a proposal to have trading of these bonds included in its TRACE system.
"That (FINRA's proposal) is an important move, because institutional investors will have much more transparency on bond trading of 144A bonds and the lack of transparency up until now is one of the reasons many index managers cite as a reason why 144A bonds are not included in their indices," said Pinedo.
The 144A rule was introduced to encourage non-US companies and private firms to tap the US bond markets without having to undergo the disclosure requirements of a full public SEC registration.
The chance to skip expensive and exhaustive accounting and financial disclosures has been a huge boon to the US bond markets. There are at least US$1.61trn worth of 144A deals in separate bond indices for private placements run by Barclays, compared with about US$4.78trn in Barclays' high-yield and investment-grade public bond benchmarks.
The proliferation of 144A bonds has made them as 'public' in the minds of institutional investors as the SEC registered issues, but because they can't be included in the most popular public benchmark indices, there are many funds that don't or can't buy them.
"SEC registration essentially enables a bond to become index eligible, which broadens the investor base and that ideally lowers the pricing for the issuer," said Ben Colice, managing director and head of RBC Capital Markets' covered bond business.
According to some strategists, RBC saved anywhere from 5-10bps in pricing by registering its issues in the past year with the SEC.
The new laws will go into effect on Monday September 23, 60 days after publication of the final rule to the Federal Register.
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