The Financial Markets Authority (FMA) has issued a new class exemption for offers in New Zealand of green, social, sustainability and sustainability-linked (GSSS) bonds that will provide issuers with a simpler way to offer GSSS bonds to investors in New Zealand.
Background
An issuer that makes an offer of bonds to investors in New Zealand must generally comply with the Part 3 disclosure requirements in the Financial Markets Conduct Act 2013 (FMC Act), which require the issuer to prepare and lodge a product disclosure statement (PDS) and complete an entry on the disclose register.
An exclusion is available for offers of bonds that are of the same class as existing quoted bonds of the issuer (QFP Exclusion).
A bond is of the "same class" as another bond if it has identical rights, privileges, limitations and conditions, except that it may have a different redemption date or interest rate (or both).
An offer of bonds made in reliance on the QFP Exclusion does not require the preparation and lodgement of a PDS or the completion of a register entry. Instead, it requires the issuer to release a cleansing notice to the NZX that:
- confirms that the issuer is in compliance with its continuous disclosure and financial reporting obligations; and
- sets out any material information that would be required to be disclosed under its continuous disclosure obligations if the existing quoted bonds had the same redemption date and interest rate as the bonds being offered or an exception to the continuous disclosure obligations did not apply.
Issuers that have quoted "vanilla" bonds are not able to rely on the QFP Exclusion to make an offer of GSSS bonds because GSSS bonds are not the same class as vanilla bonds. This is because GSSS bonds have different rights, privileges, limitations or conditions to vanilla bonds (e.g. the terms of sustainability-linked bonds may provide for the interest rate of the bonds to 'step up' if a sustainability performance target is not achieved).
Class exemption
The class exemption provides relief to issuers from the Part 3 disclosure requirements for offers of GSSS bonds on a similar basis to the QFP exclusion.
The class exemption will permit an issuer to make an offer of bonds that have identical rights, privileges, limitations and conditions to existing quoted bonds of the issuer, except that they may have a different redemption date or different interest rate provisions (or both) and a different GSSS status.
The ability of an issuer to rely on the class exemption will be subject to conditions, including:
- Cleansing notice: The issuer will need to include in the cleansing notice material information that would be required to be disclosed under its continuous disclosure obligations if the existing quoted bonds had the same GSSS status as the bonds being offered or an exception to the continuous disclosure obligations did not apply.
- Offer document: A document containing key terms of the offer (eg a terms sheet) will need to set out additional information about the GSSS features and characteristics of the bonds being offered, including:
- a description of the eligible projects or sustainability performance targets;
- a description of the circumstances in which GSSS bonds may lose their GSSS status and whether the loss of the bonds' GSSS status would result in an event of default or breach of the bonds’ terms; and
- a description of whether the issuer has obtained any independent assurance that the issuer's sustainable finance framework, criteria, KPIs or targets align with widely recognised standards and principles (eg the International Capital Market Association's Green Bond Principles).
- Framework: The issuer will be required to publish its sustainable finance framework, which must contain prescribed information (unless it is included in the document containing the key terms of the offer), including:
- how the issuer intends to allocate the proceeds of the offer or link the financial characteristics of the bonds to sustainability performance targets; and
- how the issuer will monitor the allocation of proceeds and performance against sustainability performance targets and report on progress to investors.
Our observations
Some particular features of the class exemption that are worth noting are:
- Offers of vanilla bonds: An issuer will be able to rely on the class exemption to issue vanilla bonds where the issuer's only quoted bonds are GSSS bonds. An issuer will also be able to rely on the class exemption to issue GSSS bonds where the issuer's only quoted bonds are other types of GSSS bonds (eg to offer sustainability-linked bonds where the issuer's only quoted bond are green bonds).
- Different interest rate mechanics: The class exemption provides that an issuer can rely on the exemption where the bonds being offered have different interest rate provisions (not just a different interest rate) to its existing quoted bonds.
"Interest rate provisions" is defined broadly as:
-
- the interest rate(s) that may be earned by holding the bonds;
- changes to the interest rate(s);
- the basis on which or the method by which the interest rate(s) will be ascertained; and
- the dates on which, or frequency with which, the interest from the bonds will be due and paid.
This broad definition will permit an issuer to rely on the class exemption to, for example, issue GSSS bonds with a floating interest rate in circumstances where its only quoted bonds are fixed rate vanilla bonds. This is more permissive than the QFP Exclusion, which in practice typically does not allow an issue to offer floating rate vanilla bonds in circumstances where its only quoted bonds are fixed rate vanilla bonds.
- Different liability regime from QFP Exclusion: Under the FMC Act, a breach of a term or condition of an exemption is a breach of the obligation to which the exemption relates. The class exemption exempts issuers from the Part 3 disclosure provisions in the FMC Act – not the QFP Exclusion. Directors of an issuer have automatic liability for a contravention of the Part 3 disclosure requirements. This means directors will have automatic liability for a breach of a term or condition of a class exemption. This is different to the QFP Exclusion, where directors are not automatically liable for a breach of a term or condition of the exclusion.
- Materiality: Some of the information that is required to be disclosed under the class exemption would not be required for a regulated offer of bonds and is not obviously material information for investors.
If you have any questions on the class exemption, please contact one of our sustainable finance experts.