iThe Polish Parliament has recently adopted a new law implementing certain changes to the Polish financial system (“the Act”).[1] The aim is to strengthen supervision over capital markets and improve protection of investors, but it will significantly impact the timing and cost of raising capital through debt securities offered outside the public market.
The new law amends the Banking Law to implement the provisions of the Bank Recovery and Resolution Directive.[2] Currently, this is a very controversial issue, given the recent resignation of the Chair of the Polish Financial Supervision Authority and the fact that the new law allows the takeover of a bank with equity below certain thresholds or with a risk of such equity falling below certain thresholds. However, this post, in fact, deals with other issues raised by the new law.
The other provisions of the Act affect the financing of a business through private issue of debt securities (i.e. securities issued to private investors, not offered or traded on the public market).
Until now, debt capital could be acquired in several ways – either through bank debt, loans from non-banking institutions (e.g. private investors) or through issue of debt securities. Issuers seeking debt capital could choose to issue bonds or promissory notes, with the latter being the preferred type. The advantage of bonds over loans was the exemption from the transfer tax (podatek od czynności cywilnoprawnych)which, as far as loans are concerned, amounted to 2% of the loan value.[3]
The private issue and placement of bonds was relatively easy. As long as the bonds were offered to a closed and defined group of no more than 150 potential investors, there was no requirement to hold a public offering, prepare a prospectus and discuss the issue with market supervisors, brokers or depository agents. It was sufficient to prepare a simple offering memorandum, print out the bond documents and offer them to selected investors. All these formalities could be completed within one day and did not require any approval from the market regulator. Such bonds were not registered anywhere and, unless the company was listed on the public market, the issuer was under no obligation to report any details about the issue of the bonds (the real size of the privately issued corporate bonds market is not known). Bonds issued this way were fully tradable securities.
The ease of issuing securities connected with a certain lack of transparency had led, in the government’s view, to serious abuses. High-risk corporate bonds were offered to individual customers through a network of banks and ubiquitous financial advisors.[4] The investors were assured that an investment in corporate bonds is “as safe as a bank deposit”. The notorious Polish debt-collection company Getback, now insolvent, offered – through a network of banks, financial advisor and brokers – risky corporate bonds to more than 9,200 bondholders (including 9,064 individuals), with the total issue price exceeding PLN 2.6 billion (approx. €600 million). The company is now in administration, but it is almost certain that the bondholders will not get their all their money back.
This triggered a two-pronged government response.
Poland implemented the MIFID II Directive, thus forcing the investment firms offering securities to disclose whom they represent while offering securities and limiting their possibility to charge commission and receive remuneration from the securities issuers.
The new Act also changed the concept and procedure for issuing “private” securities.
For the sake of transparency, since the new act came into effect, all bonds offered by the Polish issuers [or in Poland] will need to be dematerialized, meaning that bonds cannot be in the form of a printed document, but need to be registered with the National Securities Depository (Krajowy Depozyt Papierów Wartościowych or KDPW). They will exist only as an entry in the KDPW computer system, as is the case of securities traded on the Warsaw Stock Exchange.
This change raises two points.
First, if KDPW is going to take over the dematerialization of all such bonds and other securities[5], it will mean a significant increase KDPW workload. Will KDPW be able to cope, quickly and efficiently, with the registration of so many new documents? Certainly, it will take longer to enter into the required agreement with KDPW and register new bonds, so the amendment will impact the timing of new bond issues.
Second, as KDPW is not a charity, it will charge fees and commissions for bonds registration. Thus, there will be a pricing impact, making acquisition of capital through bonds more expensive. Such cost will be transferred onto the bondholders, who will receive a lower return on their bonds, or on issuers, as raising capital will become more expensive.
Finally, for the purpose of increasing the transparency of the market, KDPW will make certain information publicly available, allowing the public to learn about the existing situation of the issuer, as far as their indebtedness is concerned.
The amendment further provides that the issuer will have to enter into a contract with an issuing agent, being a licensed investment firm having the right to keep the register and deposit of securities. The issuing agent will need to assure they act independently from the issuer and that there is no conflict of interest. The issuing agent will have the duty to verify whether the issuer meets the criteria for issuing and offering the bonds and keep the register of bondholders. Without positive verification by the issuing agent, no bond offering will be closed. Finally, the issuing agent will be liable for damages caused by non-performance of its duties. Certainly, obligatory appointment of an issuing agent will provide additional protection to investors, but it will also impact the timing and costs of the offering.
The act provides for a certain temporary period – all bonds issued and not redeemed before 1 July 2019 in the form of documents are to remain in force and there is no duty to retain an issuing agent until this date. However, the issuer of such bonds needs to inform KDPW, by 31 March 2020, of certain details of such bonds, including the number of bonds, their yield and their face value.
[1] The Act on amendment of certain acts in connection with strengthening the supervision over the financial market and protection of investors. The new law was passed on November 9 and is yet to be signed into law by the President
[2] Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council
[3] There are tax exemptions for loans extended by the shareholders to companies.
[4] Such financial advisors were representing themselves as advisors to the investor while their remuneration was paid by the issuer of securities they offered.
[5] The Act provides that also other securities – such as mortgage bonds and certificates in private closed-end investment funds – need to be dematerialized and registered with KDPW.
