On 21 August 2020, The Stock Exchange of Hong Kong (the "HKEx") published amendments to the rules governing the listing of debt securities to professional investors to closer align the rules with current market practice and to enhance the debt listing regime. The changes are to Chapter 37 of the Main Board Listing Rules (the "Listing Rules"), which was last updated in 2011, and are the result of a public consultation process culminating in the 21 August 2020 document titled Consultation Conclusions and Guidance[1]. The document summarises the upcoming rule changes and simultaneously promulgates a guidance letter[2] (the "Guidance Letter") on disclosure which primarily addresses disclosure considerations for debt instruments with special features.[3] Market participants and legal practitioners, including King & Wood Mallesons, provided commentary during the consultation process.
The most significant changes in our view are (1) the tightening of the rules applicable to listing eligibility for regional and local state-owned enterprises; (2) the amendment of the definition of "Professional Investor", obviating the need for a professional investor waiver; (3) the requirement to publish the listing documents on the website of the HKEx; and (4) the addition of new continuous reporting requirements relating to defaults and insolvency.
The amendments, which become effective on 1 November 2020, include the following key changes:
- Eliminate the need to apply for a professional investor waiver by amending the definition of "Professional Investor" to include high net worth and other professional investors.
- Increase the minimum net assets requirement for issuers (other than State corporations) from HK$100 million to HK$1 billion.
- Narrow the definition of "State corporation" so as to exclude regional and local State-owned enterprises.
- Establish a minimum issuance size of HK$100 million (with an exception for tap issuances).
- Require issuers to publish listing documents (e.g., offering circular, pricing supplement, among others) on the HKEx website on the listing date.
- Require disclosure of the intended investor market in Hong Kong* (e.g., Professional Investors only) on the cover of the listing document.
- Establish new continuing obligation rules to require issuers and guarantors to disclose events of default, insolvency proceedings and winding-up applications and to make quarterly announcements following any suspension of trading.
Further details are set forth below.
Applicants' and securities' qualifications for listing
The new rules include higher standards for listing. These higher standards are intended to ensure that only issuers with financial capacity and proven track records of supporting debt issuances of significant amounts will be eligible and to bring the quality of listings in line with other popular debt listing venues including the Singapore, Luxembourg and Ireland exchanges.
- Under the amended Rule 37.04, applicants no longer need to provide documents evidencing valid incorporation or establishment. Instead, applicants may provide written confirmation of valid incorporation and establishment, thus simplifying the application process.
- Under the amended Rule 37.05, issuers are now required to have minimum net assets of HK$1 billion, an increase from the previous HK$100 million.
- Under the amended Rule 37.09A, the minimum issuance size is set at HK$100 million, with the exception of tap issuances.
- Perhaps most notably, the definition of "State corporation" is amended so as to carve out regional and local authorities. The effect of this change will be to force unlisted companies controlled by regional or local authorities to fulfil the listing eligibility requirements of net assets of at least HK$1 billion and issue size of at least HK$100 million rather than qualifying for the State corporation exemption from those minimums. Issuers who do not meet those standards will need to rely on a guarantor that does meet those criteria, thus potentially forcing many local SOEs who might otherwise have used keepwell structures to select a guarantee structure, or, failing that, seeking listings in other exchanges.
Application procedures
Application procedures have been simplified and, in some cases, more closely aligned with the practice in other exchanges.
- The repeal of Rules 37.35(e) – (i) and introduction of Rules 37.35 (k) – (m) modifies the application procedures in relation to the change from the provision of evidentiary documents to written confirmations set forth in the amended Rule 37.04.
- New Rule 37.39A requires issuers to publish listing documents on the HKEx website on the listing date, which is similar to requirements of other stock exchanges, such as the Singapore Stock Exchange.
- The definition of "Professional Investor" is revised to include high net worth and other professional investors prescribed by rules made under Section 397 of the Securities and Futures Ordinance (Cap. 571), thus eliminating the need to apply for a professional investor waiver.
Listing document
Although under the new rules the listing document must now be published, the overall "light-touch" approach to disclosure standards in Chapter 37 has not changed. Similar to other leading debt-listing exchanges, the HKEx only requires that a listing document contain certain disclaimers and "the information that the investors an issuer is offering the securities to would customarily expect it to contain". It need not comply with the detailed requirements contained in Appendix 1, part C[4] (which applies to retail securities).
However, for instruments that fall within the HKEx's definition of products with special features (which follows the SFC's definition of complex products), the Guidance Letter provides detailed considerations specific to certain products, which include:
- perpetual or subordinated debt securities,
- those with variable or deferred interest payment terms, extendable maturity dates,
- those which are convertible or exchangeable,
- those with contingent write down or loss absorption features, or
- those with multiple credit support providers and structures.
This guidance is likely to lead to additional language being added to the listing document, perhaps in a new paragraph in the Notice to Investors section or within a risk factor.
Specific amendments to the rules governing the listing document include the following.
- Under new Rule 37.39A, an issuer must publish on the HKEx's website the listing document (e.g., offering circular, offering memorandum, pricing supplement), in English or Chinese, on the listing date. This change brings the HKEx in line with its main competitor exchanges in Singapore, Luxembourg and Ireland which have historically required the disclosure of the listing document, although the allowance to publish the document only in Chinese is unique and differentiates the HKEx from its competitors.
- Under new Rule 37.31A, the front cover of listing documents must explicitly disclose that the intended investor market in Hong Kong is professional investors only. This disclosure alerts retail investors in Hong Kong that they are not the intended class of investors. The HKEx has in practice been requiring such a statement when reviewing disclosure documents, but it is now expressly stated in the rules.
Continuing obligations
Another major change to the rules is the addition of new requirements to assert increased oversight over, and expand the continuing disclosure obligations of, issuers and guarantors.
- New Rule 37.46A expands on the existing Rule 37.47(b) that requires the issuer, after consultation with the HKEx, to announce information necessary to avoid a false market in its listed debt securities. The new rule establishes an enquiry regime whereby the Issuer must make an announcement if requested by the HKEx. The Issuer may make an announcement that it does not believe a false market exists only if (i) the directors have completed an enquiry; (ii) all inside information has been disclosed; and (iii) the HKEx requests such an announcement.
- New Rule 37.47D imposes an obligation on issuers to publish quarterly announcements in the event that trading in their listed debt securities has been suspended.
- New Rule 37.47E requires issuers to announce as soon as reasonably possible information in relation to (i) a default on its listed debt securities; (ii) any appointment of a receiver in respect of the business or any part of the business of the issuer or the property of the issuer; (iii) the presentation of any winding-up petition or order or the equivalent against or in respect of the issuer; or (iv) the passing of any resolution by the issuer that it be wound up by way of members' or creditors' voluntary winding-up, or equivalent action. Although previously issuers may have been obligated to provide such disclosure under Rule 37.47A, which requires an announcement of "any information" which may have a material effect on an issuer's ability to meet the obligations of its listed securities, the new rules make it an explicit requirement to disclose these default, insolvency and winding-up events. Of note, because the HKEx defines "listed debt securities" as securities listed on the HKEx, the first prong requiring announcement of any default on "its listed debt securities" may be interpreted to mean that an issuer must announce defaults across multiple stock codes if it has multiple listed debt securities, but it would not automatically be required to announce defaults of securities listed on other exchanges (although such default may still be a material event that should be announced pursuant to Rule 37.47A).
Conclusion
The amendments to the rules governing the listing of debt securities to professional investors will accomplish four overlapping objectives:
- closer align the rules with current market practice;
- streamline the listing application process;
- enhance eligibility requirements; and
- enhance the reporting obligations of issuers and guarantors.
The authors would like to thank Paul Marks, Anlei Zuo and Edward Ku for their contributions to this article.
[1] Available at https://en-rules.hkex.com.hk/sites/default/files/net_file_store/new_rulebooks/u/p/Update_129_Attachment.pdf
[2] Guidance on Disclosures in Listing Documents and Continuing Obligations under Chapter 37 – Debt Issues to Professional Investors Only. See https://www.hkex.com.hk/-/media/HKEX-Market/Listing/Rules-and-Guidance/Other-Resources/Debt-Securities/20200821.pdf.
[3] Special features refer to the non-exhaustive list of special features of certain debt securities that render such debt securities complex. Such securities include perpetual or subordinated debt securities, or those with variable or deferred interest payment terms, extendable maturity dates, or those which are convertible or exchangeable or have contingent write down or loss absorption features, or those with multiple credit support providers and structures. See https://www.sfc.hk/web/EN/rules-and-standards/suitability-requirement/non-complex-and-complex-products/
[4] Appendix 1, part C, available at https://www.hkex.com.hk/-/media/HKEX-Market/Listing/Rules-and-Guidance/Listing-Rules-Contingency/Main-Board-Listing-Rules/Appendices/appendix_1C.pdf?la=en
*Any reference to "Hong Kong" or "Hong Kong SAR" shall be construed as a reference to the Hong Kong Special Administrative Region of the People's Republic of China.
