Co-published section: Capital raising
Opportunities for growth
Romania has suffered currency decline and decreased corporate lending, but alignment with the EU means it’s brimming with capital raising potential
Romanian public offerings Romanian public offerings are similar in terms of preliminary procedure with those taking place elsewhere in the EU. Thus, any offering to the public (retail offering) can only have been mostly by banks. The market was going through a period of high activity in the second half of 2007 and even 2008, with a significant number of equity and high-yield transactions planned or attempted, but unfavorable market conditions have heavily impacted the success of such planned offerings.
Like most emerging economies, Romania combines above average opportunities for growth with the need to fuel its development by employing large amounts of capital, often external. Historically, direct investments and bank lending have sustained the major part of the capital need. The advent of the global financial crisis has changed that. Whereas before the crisis bank lending had been increasing rapidly, in 2009 lending to corporates has decreased when compared to 2008.
As the majority of assets in the Romanian banking system are held by foreign-owned banks (mostly from the CEE region), the global and regional liquidity crisis has significantly affected the inflows of capital into the Romanian banking system. Similarly, direct investments have decreased as companies have postponed or cancelled plans for expansion in Romania in the context of much tighter cash management by companies investing or planning to invest in Romania.
Romanian companies have been further hit by the crisis because the leu has depreciated heavily, causing transactional losses and increasing the burden of existing indebtedness, which is often denominated in foreign currency and without the benefit of foreign exchange hedges.
2010 and 2011 will likely bring the reprise of growth in the Romanian economy and the ability to access capital will be a key differentiating factor for those companies that still have potential for strong growth. With less capital being available from traditional sources, raising capital by accessing the capital markets may well increase in importance.
While local investors might be able to offer slightly better valuations up to certain deal sizes (primarily because they are less concerned about country risk and because there are relatively few offerings that they are able to access in Romania), liquidity on the local market may sometimes be insufficient for the larger offerings. So instead, companies will have to turn to capital raising via offerings with an international element.
The Romanian market is at a relatively early stage of development. While most of the regulatory framework is of EU inspiration (Romania has a very good level of integration of EU securities legislation in the national legislation), the implementation laws and regulations have sometimes taken a relatively formalistic and retail-orientated approach when compared to other jurisdictions such as the UK.
The main capital markets regulator for products, markets and participants, is the National Securities Commission (the NSC), while the National Bank of Romania retains some competencies with regards to the monetary market and the regulation of those banks that are also financial intermediaries.
To date, there have been only a few local initial public offerings (IPOs) of a size and standard that would allow investment by sophisticated investors, no dual IPOs and only two notable international global depository receipt offerings (both without a local component).
In debt markets too there have been relatively few local or international corporate bond issues, and those that have happened be undertaken:
-on the basis of a prospectus drafted in accordance with the Prospectus Directive and applicable EU Regulations and which has been approved by the NSC or another EU regulator, and passported into Romania as per the Prospectus Directive; and
-through an authorised financial services intermediary (including a foreign intermediary which has employed the passporting procedure in order to provide services into Romania).
For passporting of equity offerings the summary of the prospectus will have to be translated into Romanian. Any form of marketing or publicity regarding public offerings, including the preliminary prospectus, also requires NSC approval.
Certain offers benefit in Romania from a simplified regime. However, the simplified offer (private placement) regime technically still requires NSC approval for a simplified prospectus. Unless the possibility of passporting an offer approved elsewhere in the EU exists, the simplified prospectus requirement can only be avoided with NSC consent.
The NSC is generally open regarding reviewing intermediary drafts of the prospectus. However, its turnaround time is slower than that of regulators in more advanced markets and even if the draft prospectus has been extensively reviewed, the final approval may take several days. The issuer, underwriter, auditor as well as any other person contributing to the drafting of the prospectus have to declare, under signature, that the information presented therein as a result of their activity in the context of the offering (and for which they are liable) is true, complete and accurate and they are not aware of any other fact that has that still have potential for strong growth” been omitted from the prospectus and which could affect its content in a significant manner.
“The ability to access capital will be a key differentiating factor for those companies
The prospectus is also preceded by a public offer announcement, which is in practice approved at the same time as the prospectus and must be published. Romanian law prescribes a mandatory waiting period of at least six business days after the date when the announcement is published, before the offer can be open for subscription. The offer must be kept open for at least five business days.
Co-published section: Capital raising
These mandatory time periods depart from regular market practice in other EU markets and have to be taken into account for timing purposes. Following the end of the offer, the NSC has to be notified upon the results of the offer and the securities have to be registered with the NSC Register. This is likely to delay trading of the securities for a few days.
The cumulative effect of these timing issues is a delay of approximately one month from filing of a final prospectus with the NSC to the availability for trading of newly issued securities on a market such as the Bucharest Stock Exchange (BSE).
The only regulated market for securities (both equity and debt) in Romania is the (BSE). Given that a corporate bonds market is almost nonexistent, the BSE is only interesting from the point of view of a local equity offering. In principle, there are two conditions that any issuer must meet for its shares to be admitted to trading on a Romanian regulated market, both of which can be waived by the NSC:
- more than 25% of the class of shares being listed must be distributed to the public; the BSE has adopted, in its own regulations, the view that shares “distributed to the public” include shares that are held by a major shareholder to the extent there are no legal or contractual restrictions on their transfer; and
- the issuer must have more than three years of previous operating
In addition, the BSE attaches certain other conditions to being allowed admission in one of its higher tiers, including a condition of at least 2,000 shareholders for admission to Tier
- Given the rarity of public offerings in Romania, a large issuer is not likely to be affected by the tier it is initially placed in.
The listing procedure cannot be finalised until the NSC registration and share capital increase procedures mentioned above have been completed. A Romanian version of the prospectus will be required and the issuer will have to enter into an agreement with the BSE regarding the admission to trading. The BSE can be approached before or during the offer with regards to preparing and completing the listing dossier and will provide some comments, but the approval process can still take one or more weeks after the whole file is completed (legally, the BSE can take over a month to approve the listing, but in practice the process can be somewhat accelerated).
This timing contrasts unfavourably with the immediate listing available for certain international stock exchanges and can create serious issues with regards to the existence of two equivalent (or at least convertible) security tranches of the same class out of which only the international component can be immediately and actively traded.
Issuance of corporate bonds is a relatively straightforward process in Romania. However, to date, there have been very few instances where Romanian companies have chosen a bond issuance as a form of raising capital, even fewer examples of bonds marketed abroad (almost exclusively by banks) and only one instance when a bond carried an equity element (a relatively old convertible bond issue).
Provisions of Romanian law with regards to bonds not only lack authoritative interpretation, but are also relatively few, broadly worded and therefore confusing and incomplete, which means that analogy is often used, resulting in a lack of unitary practice and interpretation.
From a process point of view, an authorisation from the extraordinary general meeting of shareholders of the issuer is required. The authorisation should be as specific as possible considering the details known at the time it is issued. As holding a general shareholders meeting typically requires 30 days notice, it is not practical that a second meeting be held at pricing and signing. Therefore, the initial resolution of the shareholders should empower the board to implement the bond offering and agree its final parameters. There are no particular difficulties with settlement and closing. Post- closing, if the bond is listed on a foreign market and has a maturity of over one year, it will have to be notified to the National Bank of Romania for statistical purposes.
One particularity appears in relation to noteholders meetings and the role of the trustee. Applicable conflicts of laws rules render Romanian corporate law provisions on noteholder meetings directly applicable and submit noteholders meetings decisions to the jurisdiction of Romanian courts. The applicability of Romanian law will have an effect on some of the customary rules on calling the noteholders meeting (including the fact that the Trustee does not have standing to call the meeting simply on the basis of its role as Trustee), as well as on quorum and majority rules on certain matters.
Furthermore, Romanian law allows a majority of noteholders to appoint a noteholders’ representative with powers and obligations that are sometimes superimposing on those of the trustee under English law and with the ability to call noteholders meetings (as opposed to the trustee). A simple solution to this potentially conflicting or confusing situation is to convince the trustee to accept the appointment as noteholders’ representative. An even easier solution would be to employ a fiscal agency structure. But this is problematic at this time, because Romania does not have an investment grade rating and, as a consequence, all standalone Romanian bond issues will de deemed to be high-yield bonds, where a trustee structure is much more customary.
A less problematic quirk of Romanian law is that selection of bonds for redemption is only allowed by drawing lots.
From a fiscal perspective, bond issues by a Romanian entity are relatively unproblematic. Romanian law grants exceptions for non-residents (both individuals and corporate entities) on withholding tax on interest and capital gains for bonds that are traded on regulated foreign capital markets. With regards to the exception for withholding tax on interest, a certain degree of uncertainty persists on whether the term ‘traded’ should be read to mean that simply that the bonds are listed or whether some trading or even an active trading market is required.
Co-published section: Capital raising
Romanian law only regulates convertible bonds. In principle there are no restrictions on issuing exchangeable bonds, bonds with warrants or other equity-linked debt instruments, though such other types of securities have not, to our knowledge, been publicly issued to date.
For all bonds implying an increase in the share capital of the issuer (for example convertible bonds and bonds with warrants) existing shareholders will enjoy a preference right upon issuance. This is impractical and can be disapplied for a period of up to five years by a change in the constitutive act of the issuer, which authorises the board of directors to increase the share capital of the issuer by up to 50% when compared to the share capital outstanding on the date of the authorisation. This ceiling is cumulative for all authorised share capital and therefore, when combined, no equity-linked instruments can contemplate the issuance of more than 50% of share capital (although structures based on cash settlement would not be ruled out by this restriction). However, the main issue is the disapplication of the preference right of existing shareholders, as this requires a general meeting of shareholders of the issuer.
In the case of private companies, the applicable quorum is of shareholders representing three quarters of outstanding share capital of the issuer and the vote of shareholders representing the majority share capital present or represented at the meeting. For publicly traded companies, the test verges on the impossible, as the disapplication of preference rights requires the approval of shareholders holding three quarters of voting rights and also the approval of three quarters of the total number of shareholders. Moreover, the price per share in a share capital increase in a public company with the disapplication of the preference right of existing shareholders is regulated. Consequently, equity-linked bonds are, for all practical purposes, relevant during a pre-IPO or after going through a procedure of allowing the exercise of preference rights of existing shareholders (which creates a significant uncertainty of the number of shares that may be available for attachment to the debt instrument).
Another drawback is that, upon conversion, the full registration of the issued shares with the Commercial Registry and, assuming the shares are listed, the stock exchange, can take several weeks, therefore leaving the convertible noteholders at risk for price variations during the period. One way to deal with this is to try to list (locally) instruments representing the right to receive the share once issuance is complete for the duration of the respective formalities.
Finally, another quirk of Romanian law is that the denomination of convertible bonds must be equal to the nominal value of the shares. As shares of a Romanian issuer must be denominated in leu, it would appear that convertible bonds must also be denominated in leu, which creates unnecessary currency risks.
Issuance of ordinary shares is very straightforward, requiring only a decision of the general meeting of the issuer (or the board of directors, if this power has been delegated to it in advance, including in the case of authorised capital). However, as already discussed, the disapplication of the preference right of existing shareholders on a share capital increase can be problematic, especially for listed companies. Alternatively, existing shareholders can be allowed to exercise their preference right, and remaining shares available for subscription can be thereafter offered to investors. However, for publicly listed companies, the price in the offering needs to be higher than that applicable for the beneficiaries of preference rights.
The need to register share capital increases with the Commercial Registry for the purposes of completing the share issuance process means that shareholders may be forced to wait for a certain period for the finalisation of the issuance of shares they buy as part of the offering and, in case of local listings, for the listing of such shares. The solution of locally trading instruments representing the right to receive the shares can also be applied in this case or, in the case of international offerings, escrow structures can be used to alleviate any potential concerns of investors.
Preferred shares are subject to the same issuance formalities as ordinary shares, but are very uncommon in Romania. One of the reasons for this is that they are very vaguely regulated. They are non-voting and only grant a right of priority on the distribution of dividends. As Romanian law only allows dividends to be issued out of distributable profits, preferred shares issued by a Romanian company may not always ensure the stable revenue stream usually associated with this type of instrument elsewhere. Moreover, priority in the distribution of dividends does not necessarily mean that preferred
shareholders will get more dividends than ordinary shareholders holding a similar percentage of share capital. All in all, offerings of preferred shares are likely to require somewhat more disclosure on the rights and obligations attaching to such shares, as well as more tailored solutions incorporated in the constitutive act of the issuer or contractual commitments of the issuer in the context of the offering than elsewhere in Europe.
Rights issues are sometimes used in Romania and are relatively simple to implement. They require a decision of the general meeting of shareholders of the issuer (or the board of directors if this attribution was delegated to it, including in case of authorized share capital) and a basic presentation document to be drafted by the issuer.
The Romanian capital markets were not extremely active in terms of securities issuance even before the financial crisis and the rules were comparatively somewhat more conservative than those of other jurisdictions. The regulatory response to the crisis was minimal in terms of enforcing new rules driven by the crisis other than as part of European initiatives, which is not necessarily surprising as there were no significant collapses of financial intermediaries or banks on the market.
The economic downturn brought about sporadic attempts of listed companies to raise capital through rights issues or, on one occasion, an attempt to issue convertible bonds. New issues of bonds or IPOs were almost completely absent during this period, although one corporate bond issue (London listed) was launched in February 2010 but failed to price in the context of debt market uncertainty caused by Greek sovereign debt.
The global financial crisis has somewhat shaken confidence in emerging markets, including Romania. However, as some of the effects of the crisis alleviate and economic growth reprises at rates that are likely to be higher than those of more economically developed countries, the stronger companies in these markets may be seen as viable and interesting issuers, both locally and internationally. At the same time, the comparatively lower availability of bank finance may encourage some of these companies to look to alternative ways of raising capital. Also, over time, legal peculiarities tend to be alleviated as legislation is more and more brought in line with EU rules or laws from more sophisticated markets and as alternative structures are developed and validated by the market.