On 21 December 2010, the Banking, Finance and Insurance Commission (“CBFA”) published two notices regarding public offerings of corporate bonds in Belgium aiming to (i) establish an accelerated procedure for approving prospectuses for "plain vanilla" bond issues and (ii) increase the chances of retail investors to subscribe to such bonds by issuing a set of “good practices”.
While Belgian companies proved to be keenly interested in bond issues since the credit crash, either they often turned to the Luxembourg's supervisory authority to obtain the green light for their prospectus and 'passported' it afterwards into Belgium, or gave priority to offerings addressed solely to institutional investors which do not require a prospectus.
Furthermore, on the occasion of certain retail bond issues by (Belgian) companies, the CBFA was informed of problems relating to the offering process, which include, amongst others, the receipt of orders prior to the official opening of the public offering and, as a result thereof, the impossibility for retail investors to subscribe.
The CBFA therefore decided to:
• establish a fast track prospectus approval for "plain vanilla" bond issues, and
• issue a number of "good practices" in relation to the placement and allocation of retail bond issues.
Accelerated procedure for approving prospectuses
Normal procedure
According to the Act of 16 June 2006 on the public offering of investment instruments and the admission to trading of investment instruments to a regulated market ("Prospectus Act"), any public offering of bonds made on the Belgian territory requires the publication of a prospectus prior to the commencement of any such offering.
In practice , the procedure for approving a prospectus lasts often 3 to 4 weeks depending on the quality of the initial draft prospectus submitted by the issuer to the CBFA and the number of questions/comments that the CBFA will have as part of the review process.
Accelerated procedure
In order to limit the number of Belgian companies turning to foreign supervisory authorities to have their prospectus approved within a shorter period of time, the CBFA decided to establish an accelerated procedure for approving a prospectus for "plain vanilla" bonds[1] offered by issuers with a positive track record. In practice, this procedure - enabling the CBFA to decide within five working days upon receipt of the draft prospectus, either to approve the prospectus, or to proceed with a more detailed review - concerns prospectuses for which the CBFA does not expect, in light of the issuer's history and the nature of the operation, to have any questions or at least any substantial questions on the prospectus.
Eligibility criteria for the accelerated procedure
The accelerated procedure will be open to issuers:
• whose shares or bonds have been listed for at least three years and where the periodic information is subject to a posteriori supervision by the CBFA;
• who have responded satisfactorily to any comments made by the CBFA over the past three years in the course of exercising its competence to supervise financial information;
• whose auditor has not, over the past three years, issued an abstention's declaration and has not refused to certify the accounts or expressed any reservations/remarks as to the going concern. This applies equally to the (limited) review of the interim financial statements;
• that have confirmed in writing to the CBFA that they currently meet all their obligations to their creditors, and
• whose net assets have not fallen below 50 % of the company's capital as a result of sustained losses (see article 633 of the Belgian Company Code).
Description of the accelerated procedure
Any issuer wishing to be considered for the accelerated procedure must, when submitting its draft prospectus, request to be considered as such and demonstrate that it fulfils the eligibility criteria set out above.
With respect to the contents of the prospectus, eligible issuers are invited to use the existing periodic and occasional information as much as possible, either by incorporating it by reference into their prospectus, or by using a registration document already approved by the CBFA.
Within five working days following receipt of the draft prospectus, the CBFA shall inform the issuer of its decision either to approve the prospectus or to proceed with the normal procedure as set out in the Prospectus Act. If the CBFA has any concern, the accelerated procedure will not apply.
"Good practices" regarding the placement of retail bond issues in Belgium
On the occasion of certain recent public offerings of bonds issued by (Belgian) companies, the CBFA was informed of problems relating to the offering process, which include:
• the receipt of orders prior to the official opening of the public offering;
• the impossibility for individual investors to subscribe at the premises of the syndicate members , although the prospectus stated that the offering was open to the public without any restriction;
• the prohibition of subscriptions for own account by syndicate members;
• non-compliance with the legal deadline for making the prospectus available, and
• the use of the notice referred to in the EC Prospectus Regulation 809/2004 for promotional purposes.
Further to a consultation with the main financial intermediaries involved in retail bond issues in Belgium, the CBFA decided to issue a number of "good practices" in order to resolve the problems that have been identified.
Receipt of orders prior to the official opening of the offering and before the prospectus has been made available, resulting in an early closing of the offering after a very short time.
Most intermediaries currently allow the receipt of pre-subscriptions prior to the official opening of the offering and allocate on a "first come, first served" basis. This has resulted in practice in retail bond issues being oversubscribed within a few hours following the opening of the official offering period, giving little chance to investors to subscribe bonds if they have not been offered the opportunity to place a pre-subscription.
The CBFA recommends therefore that intermediaries deal with oversubscriptions by way of pro rata reduction of the orders received instead of allocating on a “fist come first served” basis. The pro rata reduction of oversubscriptions as proposed by the CBFA can, where appropriate, be adjusted in order to improve its efficacy (for instance, by providing for a minimum allotment in order to take into account the size of the denominations offered or by providing for an allotment of sufficient size to each investor in order to avoid excessively small holdings).
As this will have the side-effect of inducing investors to place oversized orders in order to make sure that they will be served, the CBFA recommends that intermediaries draw the attention of their clients to the risk of receiving a position that is disproportionate to the size of their portfolio or their financial means. Intermediaries could also envisage asking their clients to pay at the time of subscription, in order to limit this risk.
If the allotment is nevertheless made on a "first come, first served" basis, for instance in the case of an international offering , the CBFA asks not to accept subscriptions or expressions of interest that are the equivalent of a subscription before the offering has been opened and the prospectus made available.
Irrespective of the allocation mechanism ultimately chosen for an offering, the CBFA stresses that investors should also be informed of the manner in which the allocation will be made, in order to ensure a degree of predictability. Therefore, the prospectus should be very clear as to the allocation method and the way in which it will be applied in practice, without necessarily having to disclose all the details.
Finally, the CBFA also recommends that the results of the offering and the allocation method be made public in order to enable investors to understand the allocation process.
Subscriptions at the premises of syndicate members
The CBFA recommends that intermediaries ensure that an offering described as "public", i.e. for which no portion is reserved to a specific category of investors, should be open to all investors on the same conditions without discrimination and that the securities should be allotted fairly.
The CBFA therefore recommends that, in addition to the allocation by way of pro rata reduction of orders in the event of oversubscription, issuers opt for a longer subscription period. This should allow all retail clients, including those who are not private banking clients of the syndicate members, sufficient time to be informed of the terms of the offering in order to place orders within a reasonable timeframe.
If, however, a portion of the offering is reserved to certain categories of investors, or if some investors have priority in allotment, the CBFA asks that this feature be stated explicitly in the prospectus.
Non-compliance with the legal deadline for making the prospectus available
Under Belgian law, the prospectus must be made available at the latest three working days prior to the end of the offering.
In fact, however, it has been observed that the prospectus was rarely available within this period of time when, for instance, the prospectus is only made available to the public at the opening of the offering and the offer is entirely subscribed on the first day pursuant to the "first come, first served" allocation method.
The CBFA stresses that, whenever the prospectus is not available before the opening of the offering, the offering must remain open for three working days and it should be possible for subscriptions to be entered validly during this period of time.
If bonds are allocated on a "first come, first served" basis, the CBFA recommends that intermediaries make the prospectus available to the public at least two working days before the opening of the offering. In that case, early closing on the first day of the offering is possible if the offer is already entirely subscribed. As pricing often takes place just prior to the start of the offering period, the issue price will in such case be published in a supplement of the prospectus, whilst the prospectus itself must indicate the maximum price or the criteria/conditions on the basis of which the price will be determined.
Prohibition of subscriptions for own account by syndicate members
The CBFA stresses that subscriptions by syndicate members in order to be re-sold within a short period of time qualify as subscriptions for own account. Such subscriptions by financial intermediaries for their own account are prohibited in public offerings governed by the Royal Decree of 17 May 2007 on primary market practices, unless it takes place as part of a (hard or soft) underwriting commitment.
Notice versus advertisement
The CBFA notes that certain intermediaries have in the past published an insert in the press - without prior approval of the CBFA - claiming that it is a "notice" within the meaning of the EC Prospectus Regulation 809/2004 while it contains in fact more information than provided for by such Regulation 809/2004 (e.g. it generally contains the coupon and sometimes the price of the offer).
The CBFA recommends that intermediaries should comply strictly with the requirements of article 31 of Regulation 809/2004. It therefore deems that inserts in the press may be considered to be "notices" within the meaning of the Prospectus Directive only provided they meet the following conditions:
• their publication is required under the law of the home Member State;
• they are strictly limited to the information referred to in article 31 of Regulation 809/2004 (i.e. stating how a prospectus will be made available and where it can be obtained);
• they are identified as a notice in their title;
• they are plain and cannot be confused with advertisements on the basis of their appearance.
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[1] Ordinary fixed-rate, including zero-coupon bonds, or variable-rate bonds.
