International Capital Markets Newsletter - March 2021 - Issue 3: Post-Brexit UK FCA Rule Change Accelerates Access to International Capital Markets for Sovereigns and Local Authorities

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With effect from 1 January 2021, and following the end of the Brexit transition period, sovereigns, local and regional authorities and central banks of any country can benefit from newly-expanded exemptions to the UK prospectus rules that exempt such issuers from being required to produce an Financial Conduct Authority ("FCA")-approved prospectus to offer debt securities to the public or to list such securities on the main market of the London Stock Exchange. This change is designed to offer such issuers a faster and less burdensome route to the international capital markets.

Previous UK position and current EU position

Prior to 1 January 2021 in the UK (and still currently the case in the  European Economic Area ("EEA")), non-equity securities issued by non-EEA member states or local or regional authorities or central banks of non-EEA member states were required to produce an EU Prospectus Regulation-compliant prospectus to be approved by the relevant competent authority (in the case of the UK, the FCA) in connection with offers to the public in the EEA or for securities that would be listed on a regulated market in the EEA (such as, the London Stock Exchange’s Main Market (the “Main Market”)). Following Brexit, the EU Prospectus Regulation forms part of domestic law in the UK by virtue of the European Union (Withdrawal) Act 2018 (as amended, the “UK Prospectus Regulation”).

New UK Position

With effect from 1 January 2021, the FCA has updated its Prospectus Regulation Rules sourcebook (notably PRR 1.2.2) to expand the categories of issuers and issuances to which the UK Prospectus Regulation does not apply to include (among others):

  • Non-equity securities issued by: (i) the government of any country or territory; (ii) a local or regional authority of any country or territory; (iii) a public international body of which any state is a member; and (iv) the European Central Bank or the central bank of any state.
  • Securities unconditionally and irrevocably guaranteed by the government or a local or regional authority of any country or territory.

Accordingly, issuers no longer need to be sovereigns or organs of an EEA Member State to benefit from prospectus-exempt status in the UK. Any sovereign, local or regional authority or central bank issuer (as well as any issuer of securities guaranteed by any government or local or regional authority) is an exempt issuer pursuant to Article 1(2) of the UK Prospectus Regulation.

The process of producing an approved prospectus can be time consuming and create timetable pressures for issuers seeking to take advantage of market opportunities. The extension of “prospectus-exempt” status is designed to offer sovereigns, local and regional authorities and sovereign-guaranteed issuers a faster and less burdensome route to the international capital markets, reducing drafting time and removing the FCA vetting process.

It will likely still be desirable to prepare an offering document for marketing purposes in most cases, but the timetable to produce and finalise such a document may be reduced under the new rules, as this will not be reviewed by the FCA or London Stock Exchange. Practically, the effect of this change is that the time to market for these issuers should be reduced by a minimum of two weeks and, in some cases, by as much as a month.

Sovereign issuers are already taking advantage of this new exemption. In January 2021, Dechert advised the Kingdom of Bahrain and the Sultanate of Oman, the first two non-EEA sovereign issuers to benefit from the exemption, on their respective sovereign bond issuances.

Market participants should note that, at present, this exempt-status is not extended to the issuance of sovereign- or local authority- backed Islamic instruments (i.e., Sukuk), unless there is a full and irrevocable guarantee provided by the relevant government or authority. This could, however, be an area where regulations continue to develop and should be monitored.

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