In the first issue of Dechert’s International Capital Markets Team’s “In Conversation With...” series, associates Amy Rees and Nick Quarrie sit down with Shrey Kohli, Director of Fixed Income and Funds at the London Stock Exchange Group (LSEG), to discuss key trends in the debt capital markets in 2021 and 2020, as well as expected drivers for growth and change going forward.

In this issue, they discuss:

• Recent market trends;

• The expansion of the sovereign prospectus exemption;

• Sukuk trends;

• Trends seen in the International Securities Market;

• The success of the Sustainable Bond Market;

• The development of the LSE’s dedicated Issuer Services initiative; and;

• The launch of Spark Live

RECENT MARKET TRENDS

Dechert: The past couple of years have seen a number of momentous shifts at both a national and an international level, some anticipated, others unforeseen. Brexit, COVID-19, climate change – these and other factors all have an impact on global markets in several different ways. What trends has the LSE noticed in particular over the past year or two?

Shrey Kohli: The London Stock Exchange (LSE) saw a large and immediate response to the COVID-19 pandemic in debt capital markets in 2020. London-listed debt issuances raised almost US$ 1 trillion, a significant amount of which was raised by governments directing proceeds to both mitigate the impact of the pandemic and to raise funds for medical research and the infrastructure required for sustainable economic development. Social bonds, such as those issued by the International Finance Corporation and the African Development Bank, opened up the market again in March 2020 following a difficult pricing environment. This was the first time the market understood that use of proceeds for social bonds could be used not just for access to water, healthcare or sanitation, but also for the medical infrastructure eventually needed for COVID-19 vaccines and the rollout of the vaccine over the last two years.

Over the last two years we’ve witnessed the power of capital markets to channel capital to areas that need it. In 2021, the LSE continued to see strong issuance levels with more than US$700 billion raised, with generally a good level of risk appetite. Green and social bonds are no longer niche products and are increasingly considered business as usual for issuers across the globe.

Dechert: And what about the impact of Brexit?

Shrey Kohli: With Brexit, we’ve seen the wholesale markets continue to work well. Additionally, bonds listed on the LSE maintain European Central Bank collateral eligibility, subject to the bonds meeting other eligibility criteria. There is also a large amount of work ongoing in relation to the UK listings review, launched by the Treasury to strengthen the UK’s position as a leading global financial centre.

Wholesale debt capital markets are largely global, and we’ve seen instances where more than 60 global issuers have switched their bond listings to the LSE. Such switches are due to our investments and innovations in our markets, which have made them simple to access, customer centric and both time and cost efficient, as well as offering a joined-up approach for our issuers. The London Stock Exchange Group now operates as a broad financial market infrastructure group. We offer services to issuers at multiple levels, from offering vast amounts of data to our clients, whether market information or ESG data, and to offering a platform for issuers to live-streamed investor events. This changes the proposition of what ongoing value a listing venue offers to an issuer.

THE EXPANSION OF THE SOVEREIGN PROSPECTUS EXEMPTION

Dechert: In respect of post-Brexit rule changes, a key change that a number of our sovereign clients have benefitted from is that, since 1 January 2021, sovereigns, local and regional authorities and central banks of any country are now exempt from the requirement to produce an FCA-approved prospectus to offer debt securities to the public or to admit such securities to trading on the UK’s regulated markets, such as the LSE’s main market. We understand that this change was designed to offer such issuers a faster and less burdensome route to the international capital markets. Have you found use of the exemption to be as popular as expected?

Shrey Kohli: Dechert was one of the first to advise issuers that used the UK sovereign exemption in the UK Prospectus Regulation. That was a change we worked on with the FCA to deliver at the point of Brexit. If it weren’t for the co-operative relationship between the FCA, the LSE and the advisory community, it wouldn’t have been as seamless when the first few transactions came to the market. Beyond that, those transactions were able to use the profile that the LSE offers to raise the visibility of such milestone transactions.

As with any new rule, there is a period of time during which the market adapts to new processes involved. The exemption is framed broadly, which allows many issuers, whether sovereign, municipal, agency, a public international body with at least one country as a member, or an issuer guaranteed by any of these, to be able to seek eligibility as an exempt issuer. Once the market understood how eligibility would work, we saw a large number of issuers across these categories access the markets. The drafting of the rule has ensured that the widest range of issuers have come to market and the process has worked smoothly as well.

Dechert: Have many such issuers been tempted across to the LSE from other stock exchanges, as a result of the expanded exemption?

Shrey Kohli: We have seen a number of sovereign listings move to the LSE this year from regions like West Africa, the Middle East, both North and South America, and an increasing number of issuers in East Asia. I think this is due to a combination of two factors: (i) the exemption rules and the way they operate; and (ii) the LSE’s customer-centric offering. An example of this would be that listing agents are optional, which is not the case for other exchanges. Teams are able to pick up the phone to the LSE’s admissions team or the FCA’s early engagement team to clarify the process and to ensure there is a relatively smooth path to execution.

SUKUK TRENDS

Dechert: The Sukuk market has risen in prominence over the last decade as demand for Islamic financial products and services has increased globally, with global outstanding sukuk reaching US$754.1 billion in the second quarter of 2021 (a 5% increase from the first quarter of 2021). More than US$50 billion of that has been raised from Sukuk listed on the LSE. What has the LSE been doing in recent years to establish itself as a key venue for Sukuk listings?

Shrey Kohli: The UK has always been the leading western centre for Islamic finance, both in terms of the number of financial institutions that enable corporate or individual investors to access products in line with shari’a principles, and the asset management community looking to invest in assets in a shari’a-compliant manner. The LSE has become the largest international venue for capital raising for debt and Sukuk issuers from the Islamic world, especially the Middle East.

Dechert: And the LSE was selected as the listing venue of choice by the UK government for its £500 million trust certificates due 2026 by HM Treasury UK Sovereign Sukuk Plc in March 2021.

Shrey Kohli: Yes, the UK government cemented the LSE’s leading position by listing its second sovereign Sukuk on the LSE. Large corporates such as Saudi Aramco have also diversified their debt issuance programmes by issuing in conventional form and Sukuk on the LSE.

Sovereigns from across the world, such as Saudi Arabia, have conventional bond programmes and Sukuk programmes listed on the LSE. Other sovereigns are exploring adding Sukuk financing as it is a good way to align the way capital is raised with the faith and values of the country.

Dechert: What trends do you see for the Sukuk market?

Shrey Kohli: At COP26, the LSE launched a high-level working group on green Sukuks with the UK government, the Republic of Indonesia and the Islamic Development Bank in a bid to bring together teams to develop the Sukuk market and the green bond market. Green Sukuk this year have accounted for US$8 billion of a US$180 billion market, which is a small proportion compared to its potential.

Dechert: How does the LSE differentiate itself from other listing venues for Sukuk?

Shrey Kohli: Within the LSE’s exchange-regulated International Securities Market (ISM) rulebook, there are hard-wired debt derogations relating to issuers of asset-backed and asset-based securities, which generally apply to Sukuk issuances. There is also an ongoing discussion around whether the prospectus exemption we just discussed will be extended to apply to sovereign Sukuk issuers, which would make it more efficient for Sukuk issuers to come to the market. We are also able to help issuers in other ways, such as raising the visibility of new transactions, as well as providing tools like “Spark Live” to transmit the issuer’s message to a wider set of investors across the world.

Issuers get exposure to the widest peer group when listed on the LSE. The LSE continues to be one of the most international exchanges globally, and when you look at the diversification of bond issuers listed on the LSE, you generally get a book that is balanced across the world. FTSE Russell and Refinitiv, both LSEG businesses, also provide a significant amount of thought leadership and market intelligence on Sukuks and the development of the Sukuk market. FTSE Russell enabled the development of shari’a-compliant indices, which are used by investors across the world.

TRENDS SEEN IN THE INTERNATIONAL SECURITIES MARKET

Dechert: Since its launch in 2017, the International Securities Market (which operates alongside the LSE’s other markets as a direct competitor to the European exchange-regulated markets) has seen bond issuers from across different continents and industry sectors, as well as a number of market firsts in terms of currencies and ESG-related bond issuances. What trends have you seen (and what trends do you expect to see in the short term) in relation to issuers that choose to list their securities on the ISM?

Shrey Kohli: 2021 has been the ISM’s most successful year in terms of the number of listings. We have seen more issuers use the simplified disclosure route, which allows for shorter admission documentation where there is a listing on another suitable exchange, including the LSE’s own markets for equity such as the Main Market and AIM.

More structured products issuers use the ISM because the submission process is a lot more straightforward than other exchanges. We have hard-wired derogations in the ISM rulebook, incorporation by reference for future financial information and MAR-related¹ announcements and promote early consultations with the regulatory team. All of that makes the ISM a market that is easily accessible.

We expect the listing process to be further simplified in 2022 following the UK Listing Review and once we consult on future changes to the ISM rulebook.

THE SUCCESS OF THE SUSTAINABLE BOND MARKET

Dechert: Since the LSE became the first exchange to provide dedicated “green bond” recognition in 2015, the demand for sustainable financing and investing has grown and so has the number of instruments listed on the LSE’s Sustainable Bond Market, or SBM. Many of the bonds listed on the SBM are “world firsts” in terms of currency, geography or structure. In 2020, the Arab Republic of Egypt, a Dechert client, chose to list its debut green bond on the SBM, as well as the Main Market. How successful has the SBM been in helping to promote visibility of sustainable debt finance instruments?

Shrey Kohli: In 2015, the LSE became the first exchange to set up dedicated segments for green bonds in response to the development of the green bond principles under the stewardship of the International Capital Markets Association. That developed into the Sustainable Bond Market, which launched in October 2019 and brought together segments for social bonds and sustainability bonds linked to newer, or newly, established principles. The SBM enables issuers across the world to raise capital for green, social, sustainability and sustainability-linked purposes. In 2021, LSE also launched a world-first transition bond segment on its SBM, There are over 340 active bonds raising a total of US$142 billion on the SBM – with over 100 of these bonds issued in 2021. Investors with assets worth US$100 trillion have signed up to the UN principles for responsible investments, which needs to be channelled into sustainable activity.

The LSE has done a lot of work in this space, centering around four key themes:

1. developing the LSE’s “green economy mark” for London-listed equity issuers with more than 50% of their revenues being generated from green sectors, within a green taxonomy;

2. supporting better data and disclosure within sustainable finance through the launch of our model guidance in line with the work of the TCFD-Task Force on Climate-Related Financial Disclosures. Investors make better investment decisions when based on better data, which is created with better disclosure;

3. supporting the transition to a low carbon economy with tools available to issuers, including the transition bonds segment, climate transition guidance and governance courses available for issuers; and

4. convening the market by bringing together issuers who need the capital and investors who can allocate it at events such as our annual Debt Capital Markets Forum, which has had a sustainability theme for a number of years.

Dechert: It seems ESG considerations are becoming increasingly important; how does the LSE think this will affect markets in the longer term?

Shrey Kohli: We see ESG investing increasingly becoming “business as usual” across jurisdictions. This has been the case in Europe for a number of years, but we are now seeing a steady increase across the United States and Latin America. A significant amount of capital is being allocated to sustainability-linked loans in the banking market and, with over US$7 trillion required per annum to meet the goals of the Paris agreement, sustainable finance will continue to account for greater proportion of global debt capital markets and will be a theme that continues into the future.

THE DEVELOPMENT OF THE LSE’S DEDICATED ISSUER SERVICES INITIATIVE

Dechert: The LSE has sought to offer additional value to issuers on its markets with its dedicated Issuer Services initiative. What level of engagement have you seen from issuers?

Shrey Kohli: A few years ago, we made significant investments in our digital infrastructure so that we could offer more to the LSE’s listed clients. By way of example, as of 2021, every LSE-listed client has access to ESG data and scores provided by Refinitiv, one of the most comprehensive databases covering over 10,000 companies across 76 countries. The client can log on to the issuer services portal and access the tool to compare itself to its peers using the ESG data. Issuers are using this valuable data in a few different ways.

We have also enabled issuers to upload their own bond documentation on the LSE website free of charge and in a manner that allows issuers to meet relevant regulatory requirements, whether that be under the UK prospectus regulation or the ISM rulebook.

Dechert: How might the LSE and issuers’ professional advisers assist issuers better when coming to market and subsequently as a listed company?

Shrey Kohli: We partner with over 40 different service providers in the Issuer Services marketplace, who offer services from investor relations and corporate advisory to ESG information to our listed clients. The LSE also has tools like “SparkLive”, which can be used by any company to engage with the market. For example, a company may be advising on a syndicated loan offering and the client may be setting up a meeting with its advisors and lenders that requires a private live-stream; or a company may wish to set-up a pre-recorded presentation and a live global investor call with the ability for participates to ask live written or verbal questions – this can be done on SparkLive.

The Issuer Services portal is also our genesis for digital innovation and, in partnership with Nivaura, a fintech firm, we are developing tools such as LSEG Flow. This tool is designed to help issuers negotiate term sheets and pricing supplements in a more automated manner, with agreed economics of a transaction populated through all documents and without the need to be manually copied, thereby reducing the risk of human error. This is a first of its kind product to be offered by an exchange. The idea is that a more streamlined process would allow companies such as law firms to focus on providing advice and reduce time spend on drafting documentation. The LSE’s aim with this and other product development is to work in partnership with the market by using technology to make things more efficient and streamlined rather than to change the nature of the roles in the market.

THE LAUNCH OF SPARK LIVE

Dechert: Coming back to Spark Live, the LSE launched this online platform in 2020 with the aim of assisting issuers in presenting their story to the investor community. What services does Spark Live provide? What has demand for Spark Live been like since it launched, and how has this product been welcomed by Issuers and market participants?

Shrey Kohli: SparkLive sits within Issuer Services, and any client issuing on the LSE can use the service for at least one event without any additional fee. SparkLive has supported over 200 events from issuers across the world, whether they be bond roadshows, investor days or capital markets days, and this has allowed issuers to communicate with investors at a time when travel has been significantly limited.

Refinitiv’s services also allow us to provide clients with easily consumable data alongside an event on SparkLive in a GDPR-compliant manner. We want the LSE to be at the forefront of innovation within capital markets.

Dechert’s International Capital Markets Team would like to thank Shrey Kohli and the team at the London Stock Exchange for their contributions to this piece.

Footnotes

1) Regulation (EU) No 596/2014 on Market Abuse, as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018