Debt prospectuses are being misused
22 April 2008
Rachel Evans
Some European debt documents are not valid. Issuers are using final terms provisions to issue securities that are entirely different from those described in the base prospectus.
At IFLR's Capital Markets Forum on Monday, a panel discussion on accessing retail investors in the wake of the Prospectus Directive highlighted worrying gaps in offering documents.
"There is a lack of clarity in the Directive about what can be included in the final terms. Issuers can create a prospectus to issue structured notes and then use that base prospectus and final terms to issue a totally different type of security," said a panelist.
The provisions in the Prospectus Directive for final terms are unclear. Different regulators have different opinions on their breadth and have been more or less lenient accordingly. This has discouraged some banks from taking on particular clients and deals.
One in-house lawyer said: "Sometimes it is not proper to do a transaction on the basis of the offering documents the client wants to use. The downside risk is pretty horrific if you get it wrong, so I take a conservative view of final terms."
Cesr (the Committee of European Securities Regulators) issued guidance in December 2007 to try and clarify the situation. It stipulated that final terms can include information that relates to the product rather than just to the issuer, and that this must be accurate at the time of issue. Final terms should not be used instead of a supplement.
"This has provided some comfort," said one panelist. "We incorporate lots of types of issue into the base prospectus so our final terms are relatively easy. The problem is that we also structure debt programmes for other issuers. And a bank from Timbuktu doesn't necessarily have the same provisions as us."
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