On July 24, the SEC proposed to simplify the disclosure requirements for registered debt offerings that contain guarantee or collateral features. The requirements for these arrangements are contained in Regulation S-X Rules 3-10 (guarantees) and 3-16 (collateralizations).
Currently, most companies that have registered debt with guarantee features provide extensive consolidating financial information about the parent, the issuer of the security, guarantors and non guarantors in the notes to their annual and interim financial statements. This condensed consolidating financial information includes balance sheets and statements of income and of cash flows and is required for the same periods as the financial statements of the registrant.
Additionally, under current rules, separate financial statements of an affiliate whose shares are pledged as collateral for a registered debt security are required to be filed as if the affiliate were a registrant, subject to certain materiality thresholds.
The proposed amendments include:
Additional provisions specific to guaranteed securities include:
Similar to the proposed changes for guarantors, summarized financial information about affiliates whose securities are pledged as collateral for registered debt will also be permitted to be provided on a combined basis.
The proposed rule amendments are intended to provide investors with material information and to make the disclosures easier to understand. They would also reduce the compliance burden for issuers and may encourage more issuers to offer guaranteed or collateralized registered securities. These features typically reduce interest rates and, therefore, may reduce issuers’ cost of capital.
Comments on the proposal will be due 60 days after publication in the Federal Register.
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