Bond buybacks in the Norwegian market
Current market turbulence may be an opportunity for issuers to buy back their own bonds. Issuers of Norwegian bonds are usually free to carry out buybacks through bilateral acquisitions or public tender offers. Key issues to consider for issuers with bonds listed on a regulated market are:
- Compliance with insider trading regulations;
- Compliance with market manipulation regulations;
- Equal treatment of investors; and
- Compliance with requirements to disclose trades and issuer’s holdings of own bonds.
Norwegian law does not prescribe any specific course of action that bond issuers must take if they wish to buy back their own bonds. Issuers may therefore in principle carry out buybacks through bilateral acquisitions or public tender offers, either with or without the assistance of a broker. The terms of individual bonds may contain specific requirements concerning buybacks that must be considered on a case-by-case basis. Such terms may also strip bonds held by the issuer and its affiliates of voting rights. Furthermore, bond issuers will have to consider certain regulatory issues before repurchasing bonds listed on Oslo Børs or Nordic ABM. The relevant regulatory obligations are considered in the following.
Prohibition on insider trading
Bond issuers must ensure that they do not repurchase bonds if they have access to inside information. Inside information is defined as any information of a precise nature relating to financial instruments, the issuers thereof or other circumstances which has not been made public and is not commonly known in the market and which is likely to have a significant effect on the price of those financial instruments or of related financial instruments.
Prohibition on market manipulation
Bond buybacks could constitute prohibited market manipulation if they may give a false, incorrect or misleading indication of the demand for the bonds or creates an artificial price level. The price and volumes at which repurchases are made are key factors when considering whether the transaction is compliant with the market manipulation regulations. Most repurchases will steer clear of the prohibition if done at market and no actions have been taken to affect the pricing of the bond either prior to or in connection with the repurchase.
Equal treatment of bondholders
Issuers of bonds listed on Oslo Børs or Nordic ABM are prohibited from subjecting the bondholders to differential treatment that is not objectively based on the issuer’s and the holders’ mutual interests. This requirement does not involve that all buybacks must be done following public tender offers. The issuer is normally entitled to make bilateral acquisitions, as long as prices are in line with or lower than what bondholders could trade at. However, the equal treatment obligation means that buybacks must be done as a public tender offer if the buyback would have a significant adverse effect on the liquidity of the remaining bonds. Our view is that it is not possible to quantify a threshold at which a buyback must take the form of a public tender offer, and that this question must be assessed on a case-by-case basis.
The above considerations would, in principle, also apply if the seller of the bonds is an affiliated party. However, an issuer repurchasing bonds from affiliates on a bilateral basis should be able to clearly substantiate that it had reasonable grounds for believing that this would not give the seller more favourable terms than what other bondholders can obtain.
Disclosure of trades and the issuer’s holdings of own bonds
Certain disclosure obligations apply in connection with a buyback.
- The issuer must notify the market of any substantial changes in its holding of own bonds. As a rule of thumb, a change exceeding approximately 10% of outstanding bonds is considered substantial. However, the assessment of whether a change is substantial must be made on a case-by-case basis.
- The issuer must notify the market if the buyback results in a substantial change in the outstanding amount of a bond loan. Such a change may alter the threshold for the mandatory disclosure of changes in the issuer’s holding of own bonds, and issuers should take this into account when considering whether subsequent transactions trigger a disclosure obligation.
- Insofar as a buyback offer is launched, the issuer must notify the market of both the offer and the results.
- The issuer must consider whether its decision to buy back bonds or the trades themselves constitute inside information and, if this is the case, immediately disclose the decision or the trades (as applicable). Our view is that a buyback does not generally constitute inside information where the issuer is merely seeking to take advantage of the market turbulence in order to reduce its debt load. However, if the bonds are trading at prices that imply that the issuer is insolvent, the issuer’s decision to repurchase bonds may give the market new information regarding the issuer’s liquidity. This could, in turn, qualify as inside information (see the definition above).
- Announcements of buybacks should, as a minimum, include the following information:
- ISIN and name of the bond issue in question;
- The time at which the transaction was agreed;
- Price (in cases where the price must be assumed to be price sensitive information), or the spread over a specified reference yield; and
- The borrower’s total holding of its own bonds in the loan (if any) after the trade.
Buybacks by affiliates
It may be in the interest of parent companies and sponsors to purchase bonds issued by their subsidiaries. Such purchases will be subject to the prohibitions on insider trading and market manipulation discussed above, but will not trigger any requirement on the part of the parent company or sponsor to treat bondholders equally or disclose the transaction.
Additional requirements for buybacks of convertible bonds
Issuers or affiliates considering to buy back convertible bonds should note that additional requirements may apply to such buybacks.