Does my debt offering circular need to mention COVID-19? (Part 1)

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In light of the significant impact of the COVID-19 pandemic on economies, markets, companies and customers, many Asia (ex-Japan) issuers of offshore debt have been asking to what extent they need to discuss COVID-19 in their offering documents. The United States Securities and Exchange Commission (the "SEC") recently published guidance on this subject which provides useful considerations for Asia (ex-Japan) issuers to consider. This article examines the SEC guidance within the larger context of the reasons for disclosing the impact on an issuer's business of the COVID-19 pandemic. It identifies the specific sections in an offering document where such disclosure may be appropriate and points out that an offering document for a high yield bond under New York law may have more discussion of the impact of COVID-19 than an investment grade bond under English law because of the inclusion of a financial information ("Management's Discussion and Analysis", or "MD&A") section in the high yield bond offering document. The guidance is available at

Disclosure documents exist so investors can make an informed investment decision

For U.S. law purposes, offshore debt offerings of Asia (ex-Japan) issuers are typically made pursuant to the provisions of either Regulation S or Rule 144A under the United States Securities Act of 1933, as amended (the "Securities Act"), so as to be exempt from the requirement to register the securities with the SEC. The offering document typically includes the terms of the securities, risk factors, capitalisation and indebtedness, business, board of directors, underwriting arrangements and audit reports. Offerings that are conducted under New York law (such as high yield and Rule 144A offerings) will also usually have a financial information or MD&A chapter. Complete and accurate disclosure minimises the possibility that an investor or a regulator might accuse the issuer and the banks assisting with the offering of fraud for not having provided all the information necessary for an investor to make an informed investment decision.  

Because the impact of the COVID-19 pandemic on issuers is evolving rapidly and its future effects are uncertain, issuers may not be sure what they need to disclose regarding the effects and risks of COVID-19 on their business, financial condition and results of operations. The SEC's Division of Corporation Finance on 25 March 2020 published guidance for public companies in the United States that have ongoing disclosure obligations. As practitioners in Rule 144A and, to some extent, Regulation S transactions have historically sought to follow U.S. disclosure standards, the SEC's guidance is also useful for offering documents, and in that context certain of its suggestions will be included in the discussion below.

Risk Factors

Since the SARS epidemic in 2003 and the Sichuan earthquake in 2008 it has become standard in Asia for nearly all offering circulars to include a risk factor addressing "acts of God" such as natural disasters, terrorism and epidemics. COVID-19 can certainly be added into such a risk factor (which often lists SARS, MERS and H1N1), but given that we currently are in the middle of the pandemic and do not know its ultimate impact on economies, markets, companies and customers, COVID-19 most likely deserves its own risk factor or possibly multiple risk factors. The specificity of such a risk factor will vary based on the issuer's assessment of the related risks to its business. If the risk is still relatively unknown, the risk factor might be more general such as "The Group's revenue and profit are likely to suffer a material decrease in 2020 due to the impact of the COVID-19 pandemic on economic activity in the markets where the Group operates". If more details are known, then the risk factor should be more specific. An example might be "The Group's sales in Hubei province, one of its three major markets, declined significantly in the first quarter and are not expected to return to 2019 levels until the third quarter of 2020".  The SEC's guidance includes the following considerations, the answers to which may warrant specific targeted risk factors:

  • Is your cost of or access to capital and funding sources, such as revolving credit facilities or other sources, likely to change?
  • Is there a material uncertainty about your ongoing ability to meet the covenants of your credit agreements?
  • Do you expect to incur any material COVID-19-related contingencies?
  • Do you anticipate any material impairments (e.g., with respect to goodwill, intangible assets, long-lived assets, right of use assets, investment securities), increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that are reasonably likely to have a material impact on your financial statements?
  • Have you experienced challenges in implementing your business continuity plans or do you foresee requiring material expenditures to do so? Do you face any material resource constraints in implementing these plans?
  • Do you expect COVID-19 to materially affect the demand for your products or services?

Description of the Business

The business section typically begins with a discussion of overviews, strengths, and strategies. If COVID-19 has impacted any of these subsections, then the issuer should consider providing specific details. For instance, a common strength states that the issuer is well-positioned to succeed in its given market for various reasons such as economic growth trends, market share, differentiated products or services or reputation. For completeness it may be necessary to qualify some of these generally positive statements to reflect the impact of COVID-19. For instance, an issuer may have a strength that is titled as follows: "The Group is well-positioned to resume its historically strong growth in retail sales in the second half of 2020". The text of the strength may elaborate: "As consumer spending resumes in the second half of 2020 following the lifting of travel restrictions related to the COVID-19 pandemic, the Group is well-positioned through its inventory and distribution channels to satisfy increased demand for its products".

When disclosing the performance of the issuer's business lines, any significant or material delays or declines attributable to the COVID-19 pandemic may need to be described in order to give an investor a complete picture of the issuer's business. For example, any material decreases in revenue or profit that are attributable to COVID-19, especially occurring after the latest audited financial statements, should be disclosed and explained. Specific questions that the SEC recommends be considered include the following:

  • Do you anticipate a material adverse impact of COVID-19 on your supply chain or the methods used to distribute your products or services? Do you expect the anticipated impact of COVID-19 to materially change the relationship between costs and revenues?
  • Will your operations be materially impacted by any constraints or other impacts on your human capital resources and productivity?
  • Are travel restrictions and border closures expected to have a material impact on your ability to operate and achieve your business goals?

Depending on each issuer's unique circumstances, the answers to the above questions may need to be disclosed within the business section of an offering document, although in some cases disclosure in risk factors may be more appropriate.

Management's Discussion and Analysis

An MD&A section is frequently included in the offering documents for high yield notes sold outside the United States and investment grade bonds sold in the U.S. in a Rule 144A offering. Such offerings are usually governed by New York law and include a submission to the jurisdiction of New York courts, and the issuer and the underwriters strive for their offering documents to include the same type and level of disclosure as a registered offering in the United States. Issuers and advisers who work on these transactions may consider consulting the SEC disclosure guidance relating to the COVID-19 pandemic when drafting the MD&A. The guidance provides an extensive list of disclosure considerations regarding the impact of COVID-19 on an issuer's financial information:    

  • How has COVID-19 impacted your financial condition and results of operations? In light of changing trends and the overall economic outlook, how do you expect COVID-19 to impact your future operating results and near- and long-term financial condition?  Do you expect that COVID-19 will impact future operations differently than how it affected the current period?
  • How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook? Has your cost of or access to capital and funding sources, such as revolving credit facilities or other sources changed?  Have your sources or uses of cash otherwise been materially impacted?  If a material liquidity deficiency has been identified, what course of action have you taken or proposed to take to remedy the deficiency?  Consider the requirement to disclose known trends and uncertainties as it relates to your ability to service your debt or other financial obligations, access the debt markets, including commercial paper or other short-term financing arrangements, maturity mismatches between borrowing sources and the assets funded by those sources, changes in terms requested by counterparties, changes in the valuation of collateral, and counterparty or customer risk. 
  • How do you expect COVID-19 to affect assets on your balance sheet and your ability to timely account for those assets? For example, will there be significant changes in judgments in determining the fair-value of assets?
  • Have COVID-19-related circumstances such as remote work arrangements adversely affected your ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures? If so, what changes in your controls have occurred during the current period that materially affect or are reasonably likely to materially affect your internal control over financial reporting?  What challenges do you anticipate in your ability to maintain these systems and controls?

The above list is illustrative but not exhaustive and each issuer will need to carefully assess COVID-19's impact and related material disclosure obligations.

Factual statements versus forward looking statements

The actual impact of COVID-19 may not be fully known or may only be partially reflected in the operating data, financial information and financial statements that are disclosed (such as first quarter or first half figures for 2020). Much of the disclosure that would address the types of considerations noted above would involve forward looking information that may be based on assumptions and expectations regarding future events. Offering documents typically contain a disclaimer reminding investors that forward-looking information can change and should not be unduly relied on.

Please refer to the link here for the Part 2 of this article.

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