Disclosure rules are forcing issuers to consider listing outside the EU, reports Michael Evans. Switzerland's SWX sees an opportunity to win business from its European rivalsThe Swiss Exchange (SWX) has launched its first offensive in what promises to be a long battle to snatch Eurobond business away from London and Luxembourg. Last month, representatives of the exchange visited capital markets law firms in London in a bid to convince lawyers of the benefits to non-EU issuers of switching to SWX.
The SWX sales pitch is based on new rules unveiled on November 15. These make a Swiss listing relatively easy at a time when Europe's transparency and prospectus directives will impose costly reporting requirements on companies listed in the EU.
Executives in Zurich have noted the success of the Singapore Stock Exchange in attracting Asian issuers that would traditionally have listed in Europe. Issuers of convertibles, in particular, will be unable to avoid increased obligations under the EU directives. Singapore has listed 20 convertibles already this year compared with just four in 2003.
Lobbying the lawyers
“We started looking at this project about a year ago when we realized the problems the prospectus and transparency directives would cause for some issuers,” says Jacqueline Morard, deputy head of admission at SWX.
Already, the exchange has made some critical advances. In a shrewd tactical move, SWX chose Linklaters to work on developing the new Swiss rules alongside local firm Homburger. The UK firm, which enjoys a near monopoly in advising on Euro-convertibles, held a joint seminar with SWX in November to explain the rules to its clients, and its lawyers are firmly backing the initiative.
“We will advise our clients to look at all alternatives to the EU's new regime,” says head of capital markets Nick Eastwell. “My personal view is that SWX looks like the most attractive option.”
While in London, SWX representatives also visited lawyers from Allen & Overy, which dominates advice on Euro-medium-term-note programmes and together with Linklaters shares the majority of roles on Eurobond issues. “Lawyers can be very influential in this kind of debate about where to list,” says Cliff Dammers, secretary general of the International Primary Markets Association (Ipma).
The rules themselves emulate as closely as possible the existing London and Luxembourg regimes, meaning issuers will from February 2005 be able to list bonds governed by laws other than Swiss law and register programmes such as MTNs where both were previously impossible. Issuers will also be able to use accounting standards other than Swiss or EU standards.
By contrast, the prospectus and transparency directives will force issuers of convertibles, exchangeables and bonds in denominations of less than e50,000 to file yearly and
half-yearly financial statements under International Accounting Standards (IAS), inflating transaction costs as foreign issuers try to convert their accounts from Japanese, Korean or other accounting standards to match the new European norms.
The move among issuers to include delisting clauses in their deals is a clear indication of the threat to London and Luxembourg. A survey by Ipma of 34 recent convertibles from Japanese issuers this year showed that all 34 were dual listed and contained delisting clauses. Those would allow issuers to delist if implementation of the transparency directive required them to publish financial statements prepared under, or reconciled to, international financial reporting standards (IFRS).
The response from The London Stock Exchange has been to propose its own listing alternative, which would enable non-EU issuers to sidestep the obligations under the transparency directive.
The European directives apply only to what are described as regulated markets in the EU, a list of which is held in Brussels. A year ago, London's Alternative Investment Market (Aim) opted out of that list. Now the LSE wants to create a new market segment for debt, convertible and exchangeable bonds, and global depositary receipts, which would also remain off the Brussels list.
Choosing to be unregulated
The listing rules would be based on the regime for wholesale securities under the prospectus directive while exempting issuers from International Accounting Standards. UK regulator the Financial Services Authority is consulting on the reforms to the listing rules through the UK Listing Authority.
The Luxembourg Stock Exchange is working on a similar strategy although it is yet to publish proposals. Its plan, due to be unveiled this month, is to take the country's existing legal framework for listings and replicate it in a set of stock exchange regulations. These would replicate the existing rules but would create a voluntary rather than formal legal regime for issuers. This would make part or all of the exchange an unregulated market for the purposes of the directives.
The danger for London and Luxembourg is that many investors are bound by their investment rules to trade mainly in securities listed on a regulated market. Ucits, for example, which are European mutual funds that can be marketed to retail investors in all EU countries, must invest 90% of their portfolios in securities traded on a regulated market.
Many countries also restrict the amount of unlisted or unregulated securities their insurance companies and pension funds can invest in, says Alistair Milne, senior lecturer in banking and finance at City University Business School. Even Switzerland could also find itself suffering as a result of national rules on portfolio investment, says Milne. “It depends whether Zurich is perceived to be a regulated market. The [SWX] pitch makes sense, but there are still regulatory questions over how easy it will be for investors to freely buy the securities.”