After years of negotiation between the investment industry (represented by Asisa, the Association for Savings & Investment SA), the JSE and other stakeholders, the exchange published version four of the amendments to the bond market’s regulatory framework — the debt listings requirements — in January.
This version fell well short of the improved regulatory mechanisms that were agreed on at a lengthy meeting of stakeholders in October 2019 and we believe it does not provide an acceptable standard of investor protections. Broadly, the JSE proposals do not materially change the status quo, which has allowed various misbehaviours in the corporate bond market for decades.
The draft amendments have improved requirements for disclosure, reporting and noteholder meeting protocols. Given the history of corporate and state-owned enterprise (SOE) malfeasance in SA, there was unanimous agreement among investors and the JSE that significant improvements were needed to the timing, nature and frequency of company and SOE disclosures and reporting.
Such changes include requirements for public disclosure of issuers’ current policies on conflicts of interest, the process of appointing directors (including details of any fit-and-proper and conflicts checks to evaluate the suitability of candidates) and, for SOE issuers, a requirement to disclose all transactions with “domestic prominent influential people”.
As we know all too well in SA, transactions of this nature pose an unacceptable conflict of interest and raise the risk of decisions that are not in the best interests of the company.
Our experience of the history of investor engagements (such as at Umgeni, PPC and other issuers) has taught us that the ability of investors to engage with one another and with the issuer needed significant improvement.
The new version introduces better protocols for investor meetings. Investors will now be able to call a meeting of noteholders to discuss matters of mutual concern, vote on decisions and collaborate when the issuer is not meeting its obligations. Voting is now to be based on the percentage value of investments held, as opposed to the previous outdated and iniquitous voting by a show of hands.
We commend the JSE for improving the minimum disclosures by debt issuers and for promoting better protocols for investor meetings. Sadly, however, this is not nearly enough change. Early on in the debt listings requirements review process, investors had required the appointment of a debt officer who could act for bondholders by, for example, calling meetings, appointing legal advisers and collating votes of bondholders. This necessary role has been repeatedly watered down through the discussions over the past year.
Debt officer
While the concept of a debt officer is included in version four of the draft review, that officer can be an employee of the issuer, and this lack of independence is problematic. Furthermore, critical responsibilities that would facilitate a proper negotiation between issuer and investors, and ensure the issuer meets its obligations to investors, are absent from the debt officer’s role.
In version four, the JSE has backtracked on two key issues that were agreed to at a lengthy and detailed meeting of all stakeholders (including the JSE, Asisa members, Banking Association SA members and other stakeholders) in October 2019.
These are the ability for investors to properly negotiate terms and conditions of loan documents (including transparency in the negotiation process), and provisions requiring issuers to be responsible for legal costs incurred by investors when they (issuers) are not meeting their obligations.
In other global bond markets, investors can appoint either a legal adviser to act for them as a collective, or a bond trustee to ensure that the investors’ rights are protected. In SA we have neither of these.
In an attempt to reach a mutually agreeable alternative solution, investors compromised on this protection by instead requiring transparency when individual investors are providing comments on terms and conditions contained in the legal agreement between the issuer and investors (this document is known as the DMTN).
Notwithstanding agreement by all parties on this provision at the October 2019 meeting, the JSE deleted this requirement in version four and has not offered a substitute mechanism, leaving investors in an invidious position.
In any lending arrangement (home loans, for example) it is entirely normal for the legal fees incurred by the lender to be borne by the borrower in the event of a default, renegotiation of the debt, or amendments to the contract. This principle was accepted by participants at the October 2019 meeting. However, the JSE also removed this mechanism. Consequently, investors will be required to fund legal costs incurred when the issuer (the borrower) is not meeting their obligations. This is iniquitous.
Further emphasising the importance of this requirement as a key investor protection is the prohibition in the Collective Investment Schemes Control Act of funding legal costs from a portfolio of the collective investment scheme. The current position in version four is untenable as it leaves investors significantly hamstrung in the case of corporate breaches, restructurings or defaults.
In removing these items, the JSE cited “internal and external legal opinions” that indicate it does not have the power to regulate processes that are subject to commercial negotiations, and would not be able to comply with its statutory obligation to enforce these requirements.
JSE’s job
Asisa members have taken advice and do not accept the rationale given by the JSE. Though they asked to see the legal opinions, the JSE has not provided them. We do not accept the rationale because:
- The JSE’s job is to create and manage a fair and level playing field where borrowers and lenders can meet, negotiate and transact. Presently, the corporate bond market is a skewed playing field.
- Where commercial negotiations do not achieve an appropriate outcome (as we have experienced over the years of malfeasance in the corporate bond market), there is a need for a regulatory solution.
- Many of the provisions of the debt listing requirements (such as Stock Exchange News Service requirements) arguably fall within “processes which are subject to commercial negotiations” and yet are already part of the existing regulations. It appears that this is inconsistent.
- Investors’ view is that the JSE’s oversight of the corporate bond market does not support or enable a proper commercial negotiation to take place. The removal of these provisions perpetuates this problem.
- The JSE is required to enact debt listings requirements that protect investors. It is the regulator, with all the powers of enforcement that come with this role. As such, before instruments are listed, the JSE must satisfy itself that the regulations have been met by the potential issuer.
We do not understand or accept the rationale provided by the JSE for backtracking on either of these terms. While many of the proposed changes in version four are welcome, the JSE’s reversal of protections governing legal costs and the appropriate negotiation of lending terms leaves investors with a set of unacceptable listed-market standards.
The current proposals perpetuate the weak standards that severely hamper investors’ ability to fulfil their fiduciary responsibilities on behalf of SA’s unit trust and pension fund investors.
Asisa members have argued for provisions that are standard market practice in other jurisdictions but are wholly absent from the JSE’s bond market. As they stand, we believe the protections do not meet the standards required by the Financial Markets Act. The JSE needs to do better — SA pensioners deserve nothing less.
• Constantatos is head of credit at Futuregrowth Asset Management.
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