FRA Rules for Issuing Short-Term Bo

The Board of Directors of the Financial Regulatory Authority (“FRA”) issued decision No. 172 of 2018 with the regulations for issuing and offering short-term bonds (the “Decision”)[1] in what could be considered an incentivizing step for investment in the debt instruments market. The Decision does not change the nature or legal status of bonds or financing instruments. Rather what characteristically distinguishes short-term bonds is that their term does not exceed two years, which is why they in effect represent a microcosm of the procedures for issuing bonds and debt instruments that addresses a segment of investors who might wish to enter this market. The Decision elaborates on the general and structural frameworks related to the issuance process. In addition to licensed joint-stock companies, companies limited by shares, and banks, it adds small-and medium-sized enterprises (“SMEs”) – according to their definitions by FRA or the Central Bank of Egypt (“CBE”) – and international and regional financial institutions, to the list of entities that are allowed to issue short-term bonds. Such an expansion of who could issue short-term bonds to include SMEs is likely a positive step as it increases the forms of possible financing available to SMEs. In another distinguishing factor, the Decision mandates that the term of independent issuance does not exceed 12 months and is not less than seven days. However, if the issuance is through a program that entails issuance on several stages or segments, then the duration can extend to a maximum of two years. The Decision grants the issuing joint-stock company’s board of directors the power of approving the issuance provided that it has the general assembly’s prior authorization. In such a case, the board has the right to decide on issuance-related terms and conditions, which facilitates the process by avoiding recourse to the general assembly in every issuance process to decide on or amend the rules. The supervisory board in companies limited by shares has an equivalent right, while the relevant authority in banks, international and regional institutions, has that right respectively. In addition, the Decision requires the issuing company to obtain a credit rating of at least BBB- and that the administration of the offering is delegated to an entity that is licensed to undertake investment banking activities in order to ensure the safety of the issuance and offering process. A bank supervised by CBE or an investment bank is to act as the payment agent. As for the process of issuance itself, the Decision highlights certain regulations including that the nominal value of the bond must not be less than EGP 100 and its multiples, or the equivalent in foreign currency; that the dividend rate could be either fixed or variable; that the bonds must be registered in the central depository system; and that the prospectus and the information memorandum could include the possibility of forming an association for the short-term bond owners. The issuing company or entity is also given the right to offer short-term bonds in a public or private offering with the possibility of listing said bonds on the Egyptian Stock Exchange, given that private offerings must be limited to qualified investors and high net worth individuals. Finally, the Decision includes an exception from the credit rating requirement if the issuer is a CBE-supervised bank that obtained the CBE’s approval for issuing,  or a regional or international financial institution with credit rating, or if the issuer had  credit rating that is valid for a year, or if its liabilities are guaranteed by another financial institution with credit rating that is valid for a year, or if the issuer is issuing bonds on behalf of another entity that has valid credit ratings.   [1] FRA Board of Directors Decision No. 172/2018 with the regulations for issuing and offering short-term bonds, available through this link (in Arabic).