If, on 23 June, the British public decide to make “Brexit” (British exit from the European Union) a reality, there may be consequences for Australian issuers in the eurobonds market and UK or European issuers accessing Australian domestic capital markets (“Kangaroo” issuers).
What are the potential legal and commercial impacts of a Brexit on these issuers and the broader Australian debt capital markets? The answer at this stage is, at best, a “guesstimate”. Following a vote to leave, the UK will enter into a two-year period of negotiations that will determine what form Brexit will, in fact, take.
During that two-year period, it is unlikely that Brexit would have a marked legal impact on existing or new Australian-issuer medium term note (MTN), commercial paper (CP) or Kangaroo bond programmes. During that period, EU law will continue to apply unaffected in the UK.
Potential scenarios under which the UK leaves the EU range from the UK relying solely on existing World Trade Organization rules without any new agreements with the EU, to the UK re-joining the European Economic Area (EEA) and European Free Trade Area (EFTA). In the former scenario, the UK would gain autonomy over its trade policy but have limited or no access to the single market. In the latter scenario, UK capital markets would largely remain integrated with EU’s, but the UK would continue to follow EU rules without having a say in how they are drafted and implemented (see the London knowledge team’s Brexit technical resource).
Brexit may, however, affect some aspects of MTN and CP disclosure documents, and the regulation of EU and UK issuers in sectors such as banking and financial services. For example, under the current rules if an Australian issuer selects the UK as its home member state for disclosure purposes and offers debt securities to the public and/or lists them on a regulated market in the UK, then the approved prospectus can be passported into the other 27 EU Member States. This significantly increases the size of the investor pool as the issuer can issue to investors across the EU.
While scenarios that involve re-applying for EEA and EFTA membership or agreeing bilateral agreements with EU member states would mean that a degree of access to EU capital markets would be maintained, they would differ in one aspect. So long as the UK is a member of the EEA, the application of existing EU legislation could provide a comprehensive market architecture and regulatory framework. Issuers in the UK would continue to enjoy the ability to passport a prospectus into the EU.
A bilateral scenario would require the UK to voluntarily apply capital market rules to UK firms (including UK affiliates of Australian companies) and to Australian firms listing on British regulated markets. This would likely need to be complemented by ‘indigenous’ UK-specific market architecture and regulation for those firms not operating in Europe. As a result, a bilateral scenario (and to some extent where UK-listed firms fall outside the EU framework) would likely result in such firms needing to comply with overlapping UK and EU requirements. Such requirements might not always be consistent.
If UK and UK-listed firms were excluded from the EU capital markets framework, they would likely seek to participate as third country participants (similar to the access by US firms). This would require compliance with both EU and UK rules. From an Australian perspective, the result could be a trend towards listing in EU Member States such as Ireland or Luxembourg that have a developed market ecosystem and access to the entire EU investor base.