SEC proposes to simplify disclosures of guarantors and collateralizations

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In brief , PwC US Jul 26, 2018

Guarantor disclosures are complicated. Find out how the SEC is trying to make them simpler.

What happened?

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:

  • Replacing consolidating financial information and/or financial statements with summarized financial information under Regulation S-X Rule 1-02(bb) and non-financial narrative disclosures;
  • Requiring financial information for only the most recently ended fiscal year and year-to-date interim period;
  • Eliminating quantitative thresholds for determining when certain financial information is required;
  • Requiring any other quantitative or qualitative information that would be material to making an investment decision to be disclosed;
  • Evaluating all required disclosures based on materiality; and
  • Permitting required disclosures to be provided outside of the financial statements in certain circumstances. 

Additional provisions specific to guaranteed securities include:

  • Allowing for the presentation of parent, issuer and guarantor financial information on a combined basis while eliminating the requirement to disclose non-guarantor financial information separately;
  • Eliminating the requirement to provide pre-acquisition financial statements of recently-acquired subsidiary issuers and guarantors;
  • Replacing the requirement that a subsidiary issuer or guarantor be 100% owned with a requirement that it must  be consolidated in the parent company’s financial statements; subsidiary guarantees would no longer be required to be full and unconditional and joint and several; and
  • Allowing a parent to stop providing the disclosures once the issuers and guarantors have suspended their reporting obligations under the Exchange Act.

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.

 

Why is this important?

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.  

What's next?

Comments on the proposal will be due 60 days after publication in the Federal Register.

To have a deeper discussion contact:

Wayne Carnall

Partner, National Professional Services Group, PwC US

Email

Diane Howell

Partner, National Professional Services Group, PwC US

Email

Mike Dean

Senior Manager, National Professional Services Group, PwC US

Email

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David Schmid

IFRS & US Standard Setting Leader, National Professional Services Group, PwC US

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