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
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
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
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