Publications - Corporate
August 2007
The Benefits of Listing Debt on the CISX
By David White
(Published The CISX Bulletin)
Listing debt on the CISX – and more specifically, the benefits to issuers of private equity debt – was the subject of a recent breakfast seminar co-hosted by KPMG and McGrigors.
The number of debt listings on the CISX has doubled, year on year, for the last four years. Focusing on issuers domiciled in England and Wales, over £30 billion has been listed in that period. These listings include approximately 30 of £10 million or less and 10 of over £1 billion. Over the last year, KPMG, McGrigors and Ogier Corporate Finance have together advised on approximately 10% of these CISX debt listings by value and number. The legal and tax advice was given in relation to both new and existing debt.
The CISX has become the exchange of choice for listing private equity and intra-group debt as the listing process is quick and inexpensive, with minimal ongoing disclosure requirements. Listing debt on a recognised stock exchange, such as the CISX, allows UK-based issuers to eliminate UK withholding tax on payments of interest to parties not resident in the UK. The exemption in the withholding tax rules which allows this is called the 'quoted Eurobond exemption'.
Most private equity acquisition structures include a significant amount of shareholder debt. Where tax deductions are allowable in respect of interest payments, the interest must be paid before those deductions become available. While it is important to get the deductions as soon as possible, it is generally preferable to minimise cash payments during the life of the loan. For this reason, 'payment in kind' (or 'PIK') notes are often issued in payment of interest. This counts as the payment of interest for tax purposes and allows the deductions to become available. The problem with this solution is that, on the payment of the interest (i.e. on the issue of the PIK notes), withholding tax becomes payable. Without mitigating this tax, the benefit of issuing the PIK notes is significantly reduced.
It is best to list debt at the time it is being put in place, or shortly afterwards (for one, it means that you focus on getting the initial form and terms of the loan right for listing). However, the quoted Eurobond exemption applies to interest "paid", as opposed to "accrued", during the period in which the debt security is listed. In other words, unpaid interest which accrued prior to the listing of the debt securities can be paid after the listing without withholding tax arising. It is only possible to list existing debt on a limited number of recognised stock exchanges, including the CISX.
Debt needs to be in a securitised form (for example, loan notes) for it to be listed. However, even if it is not, it is sometimes possible to put the debt in the necessary form by constructing a 'security wrapper' around it. In doing so, one must be careful not to rescind the original loan and put a new one in place. This would result in any accrued interest being 'paid' before the listing, i.e. before the quoted Eurobond exemption applies. The terms of the debt may also be amended to allow the issue of PIK notes in payment of interest on the debt.
Debt may be listed on the more traditional exchanges within the EU. However, listings on these exchanges are subject to EU Directives, in particular, the Prospectus Directive and Transparency Directive. These Directives have made listings more complicated and costly due to certain IFRS requirements, and increased disclosure and continuing obligations.
The CISX is a useful alternative to the EU exchanges for the following reasons:
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listings on the CISX are not subject to EU Directives and there is no obligation under the CISX listing rules to prepare accounts on an IFRS basis;
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the CISX rules are simpler and more flexible than those of most other exchanges, with the CISX having more discretion to derogate from them where investors will not be prejudiced. In addition, the disclosure and continuing obligations of the CISX are less onerous and easier to comply with than most other exchanges, in particular those subject to the EU Directives;
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the Market Authority at the CISX is particularly responsive, allowing loan notes to be listed in as little as two days from start to finish for existing issuers, although, two to three weeks would be a more usual timeframe for new but simple listings and one week would be more usual for the more urgent new listings; and
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as mentioned above, the CISX allows existing debt to be listed.
In the past two years, nearly half of all listed securities on the CISX have been capital market products including Eurobonds and Special Purpose Vehicles, with high quality issuers such as Barclays Bank, JP Morgan, USB, Sage, BSkyB, Persimmon and Millennium & Copthorne.
The listings on which KPMG, McGrigors and Ogier Corporate Finance have worked have included the establishment of a Eurobond programme and the issue of several series of loan notes under the programme, a number of 'one off' listings and the listings of PIK notes. In a recent transaction, the listing of a private equity debt security resulted in the immediate elimination of over £2 million withholding tax and significant future withholding tax savings.
David White is an associate at McGrigors LLP.
For further information please contact : corporate@mcgrigors.com
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