Adequate disclosures required for 'death spiral' convertibles: SGX
Shareholders must be informed of the risks and directors
must give opinion on proposed deal
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Shareholders must be informed of the risks and directors must give opinion on proposed deal
Kenneth Lim
26 August 2016
Companies that plan to issue "death spiral" convertible bonds must adequately inform shareholders about the risks, and directors must give a fiduciary opinion on a proposed deal, Singapore Exchange (SGX) chief regulatory officer Tan Boon Gin said on Thursday.
Writing in the market operator's Regulator's Column, Mr Tan noted that such convertibles, which carry floating conversion prices pegged to a fixed discount formula and therefore have the potential to create runaway dilutive scenarios, "can have significant negative effect on the company and its existing shareholders".
The convertibles, which must receive specific approval from shareholders, therefore require that companies fully and explicitly explain the risks, structural features, seniority and fees of the convertibles, and in a way that is easily understood.
"The company must send shareholders a circular written in plain English and without overly legalistic jargon, before the shareholder vote," Mr Tan wrote. "In it, the company must make clear to shareholders how such a bond could cause a downward spiral of the share price and result in massive dilutions detrimental to investors. The company must state the 'floor', or minimum conversion price and the maximum number of shares which could be issued on exercise."
Directors must also give an opinion that the issuance is in the best interest of the company and shareholders, and "explain to shareholders the alternative sources of financing considered before arriving at the decision to issue the convertibles".
SGX may reject applications to issue such instruments if disclosures do not meet those minimum standards.
Beyond ensuring adequate disclosures, however, SGX is not in the business of assessing the merits of such convertibles, Mr Tan stressed. The instruments are ultimately a source of capital, the appropriateness of which is a commercial decision best left to companies and shareholders, Mr Tan stressed.
"Investors should read the circular carefully to understand the significant risks associated with it, and pose questions to the company and its directors on the matter," he wrote. "Shareholders will have to balance the rationale for the issuance of the convertible and the use of proceeds against the risks described in the circular when deciding whether to vote in favour of the issuance."