Revolutionary changes in the bond market as of July 2019 – Issuers and issue agents subject to new duties

On 30 November 2018, the Polish president signed into law the legislative Act regarding amendment of certain acts in connection with increasing financial market supervision and investor protection in this market (“the Act”). The statutes thus amended include those regulating bonds, trade in financial instruments, and financial market oversight. Put in more practical terms, the changes concern the terms of issuing corporate bonds, investment certificates and letters of lien.

Mandatory dematerialisation of bonds, duty to register bonds with the securities depository

As of 1 July 2019, no bonds issued in Poland may assume document form, and all of them must be registered with the securities depository in accordance with the legislative Act on trading in financial instruments. In consequence, as of 1 July 2019 investment houses will no longer be able to maintain bond registers, and any and all bonds – whether issued on the private or the public markets – will need to be registered with the National Securities Depository (KDPW) or, alternatively, with an entity to which KDPW has farmed out these responsibilities. The same duty shall apply to bonds issued within a single equity group – even ones addressed to a single bondholder.

Duty to retain issue agent for a non-public bond issue

1 July 2019 will also mark the coming into force of the duty to execute a contract with an issue agent incumbent on any entity planning a private issue of bonds which will not be listed in the regulated market or within an alternative trading system. Only an investment firm licensed to maintain securities accounts or a trustee bank may serve as issue agent. This duty will not apply to entities which are planning a bond issue by way of a public offering, with the bonds thus issued to subsequently be admitted to trading in the regulated market or introduced to an alternative trading system. An issue agent may not be an affiliate of the issuer which is not able to put in place appropriate ring-fencing measures so as to prevent conflicts of interest and to duly address any conflicts if they do arise.

Duties of the issue agent, scope of liability

Duties of the issue agent will basically include all the actions referred to above, i.e. (i) verification that the issuer has duly fulfilled the legal requirements concerning the bond issue, (ii) verification of issuer’s compliance with the legal requirements concerning bond offers, (iii) verification of fulfilment of the prerequisites for registration of the bonds in the depository and for servicing of the issuer in accordance with the depository rules, (iv) drawing up a list of persons holding rights in connection with the bonds and (v) intermediation in execution by the issuer of a contract for registration of the bonds, assistance in drawing up the requisite documentation. The issue agent may intermediate in registration of the bonds with the depository (leading to effectuation of the actual issue, valid constitution of the bonds and their entry on the account of the bondholder) only if the issuer has complied with all the requirements laid down in applicable laws and in the depository rules, and if trading security and investor safety are duly safeguarded. In an important point, the issue agent shall be liable for harm caused by failure to perform, or improper performance of, the above duties.

Repository of information about bonds and issuers (and their liabilities)

As of 1 July 2019, the National Securities Depository (KDPW) will gather information about outstanding bonds of issuers based in Poland in a repository, tracking (i) liabilities of the issuers with respect to these securities as well as (ii) whether the bond issuers discharge their liabilities on a timely basis. This data will be accessible to the public.

Criminal penalties

Submission of untrue information to the KDPW as well as withholding true information concerning bonds or their issuer in the course of KDPW registration proceedings (where such information would be material to assessing admissibility of the bonds’ registration) may incur a fine of up to PLN 2 mln. Liability attaches to any entity acting on behalf, or to the account of, the issuer or the issue agent.

Duties of issuers registering bonds in a system other than the securities depository

A bond issuer availing itself of the right to register bonds in a registration system other than the securities depository (Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014) will, as of 1 July 2019, be obligated to  forward information about the bonds issued to KDPW, specifying, among other details, (i) the number of bonds within the issue, (ii) the annual interest rate for the bonds and (iii) the deadlines for disbursement of benefits under the bonds. The issuer must submit this information to the KDPW within 15 days following the issue and update it as circumstances warrant. In like spirit, within 15 days following the end of each consecutive month, such an issuer must notify the KDPW of benefits under the bonds maturing within that past month and indicate whether, and to what extent, they have been disbursed.

Bonds issued prior to 1 July 2019

Bonds which have the form of a physical document and ones which have been registered by an investment firm in accordance with the old rules (issued before 1 July 2019 and not redeemed until this date) shall remain valid after 1 July 2019 and will be subject to the same legal regime as before, although the issuer of such securities or the entity registering them must, by 31 March 2020, submit to the KDPW details of all such bonds as at 31 December 2019. These details include, in particular: (i) the number of bonds within each issue, (ii) interest per annum, (iii) timeframes within which the issuer should disburse benefits under the bonds and (iv) whether benefits which already fell due have been disbursed (and, if yes, then to what extent). The issuer and/or the entity maintaining the register will then be obligated to provide the KDWP with updates on the status of such bonds until such a time as liabilities under those bonds expire.

With a view to discharging the above duties, issuers and/or entities maintaining the bond register must have an LEI code.

Entities which fail to provide the above information to the KDPW or to subsequently update it, which perform information duties in an improper way and which provide untrue information and/or withhold true information face penalties of up to PLN 2 mln. The penalty may be imposed on an entity authorised to represent the issuer or on the entity maintaining the register for the issuer’s bonds.

The new law envisages, on a facultative basis, the possibility of registering older bonds with the KDWP. Issuers which take advantage of this possibility shall no longer be bound by the information duties just described.

Coming into force

The new bond market regulations outlined above shall come into force as of 1 July 2019.

Summary

The Act, as declared in the reasoning submitted along with its draft, has the purpose of increasing transparency of bond issues and improving investor safety. Given the character of the statutory changes, however, they are bound to entail higher issue costs and more formalities with respect to the issue documentation (irrespectively of the issue value), and also longer duration of the issue process. The sundry duties incumbent on all bond issuers will increase.