Picture this: it’s 1793. In England, George III is on the throne and the Bank of England issues the first ever ‘fiver’. In the U.S.A, George Washington hosts the first US cabinet meeting as President and the capital moves from Philadelphia to Washington, D.C. In France, the French Revolution is in full swing with King Louis XVI guillotined, and France becomes the first country to adopt the metric system.
And in Ireland, the Irish Stock Exchange is founded. Though of course, that is not to say that there weren’t other important things happening in Ireland at the time as well….
The Irish Stock Exchange – like its London counterpart – for many years has been a popular choice for listing debt securities issued by Irish and English issuers (including securitisation issuances and the issuance of other structured finance products). These exchanges are used to list securities for a whole host of reasons. One of the main reasons is often, tax efficiency.
Broadly speaking, where there are payments of interest to be made by an English or Irish issuer, that issuer is subject to withholding tax at the basic rate (20%) unless of course an exemption from the duty to deduct applies. Typically, English and Irish issuers take advantage of one of the most important exemptions to withhold tax in debt capital markets transactions: the “Quoted Eurobond Exemption”.
The exemption applies to debt securities provided they carry a right to interest, and, crucially for this blog, are listed on a recognised stock exchange. Recognised stock exchanges include the London Stock Exchange, the Irish Stock Exchange and others. In many cases, without this exemption (i.e. without the listed status of the securities), English and Irish issuers would be required to withhold 20% tax on interest payments made in respect of the securities.
All issuers must abide by the rules of the relevant exchange in order to have their securities listed and admitted to trading and these rules do inevitably change from time to time. Last month, the Irish Stock Exchange updated its listing rules.
The update reflects changes to the market abuse regime as a result of the implementation of the Market Abuse Regulation which replaced the previous Market Abuse Directive. However, one lesser known change – with potentially significant implications for debt capital markets – is Irish Stock Exchange Rule 15.5.10. This provides:
“The ISE will cancel the listing and trading of securities on the maturity date of the notes. If the scheduled maturity date has been extended, this must be notified to the ISE prior to the scheduled maturity date”
Clearly, where transactions run smoothly and are repaid in full on or before the scheduled maturity date of the securities, there is no issue. However, what happens when (as is the case for many transactions, particularly securitisations) the securities are not repaid at maturity and default?
It is understandable that a stock exchange would need certainty on the proposed de-listing date and that securities should not be listed indefinitely, not least because of pricing considerations, but this new rule indicates that the Irish Stock Exchange will automatically cancel the listing and trading of the securities upon scheduled maturity, whether or not all required interest and principal payments have been made. The effect of this is potentially significant: from the date of maturity, English, Irish and potentially other issuers and their paying agents are liable to deduct 20% tax from all interest payments that are made thereafter. The effect may also be exacerbated in certain situations where, post-default, additional default interest is also payable.
Another and more challenging situation is where paying agents, issuers and other transaction parties unwittingly make interest payments post-default without deducting the required withholding tax with no knowledge of the automatic de-listing. Though these situations are likely to be rarer, they do create a new liability concern.
If tax is withheld, all is not lost for securities holders as certain of them may be able to reclaim it from the tax authorities, but this won’t be the case in every situation as it depends on the securities holders own personal circumstances, their own jurisdiction of tax residence and availability of other tax relief.
The new rule seems to imply that in order to maintain the listing, the securities’ maturity date must be extended. In most situations, the securities holders will not find that an attractive proposition, not only because it would obviate the default that would otherwise be triggered allowing usual enforcement actions as well as the potential imposition of default interest but also because in many cases, triggers built into the documents change the economics post-maturity. Securities holders may also not wish to incur the time and money associated with holding meetings and passing resolutions in order to effect a formal amendment to the documentation.
As a result, issuers, paying agents, trustees and securities holders may be left in an unenviable situation. A new prospectus is generally required to re-admit securities to the exchange, which is costly and is certainly, in most cases, disproportionate to the interest deductions.
We have advised on a wide variety of issues that arise in the circumstances of automatic de-listing by the stock exchange and usually, a satisfactory arrangement can be achieved for all parties, with a little work. However, in order to mitigate the risk of these issues arising in the first place and to make the resolution easier and less costly, a pro-active approach should be adopted as early as possible by issuers, paying agents and securities holders in anticipation of these issues arising.