SGX Regulator’s Column on Death Spiral Convertibles

On 25 August 2016, the Singapore Exchange (SGX) issued a Regulator’s Column setting out its views of and requirements for convertible bonds with floating conversion prices where the conversion price is at a discount to the prevailing market price of the shares at the time of conversion. It made clear that it reserved the right to reject a company’s application to issue such convertible bonds if the company failed to comply with the disclosure requirements set out in the Regulator’s Column.

The SGX explained in the Regulator’s Column that where an issuer intends to issue convertible bonds with a floating discounted conversion price, the issuer would need shareholders’ approval under the Listing Rules if the conversion price is at a discount of more than 10% of the prevailing market price of the shares. In addition, while a Main Board listed issuer may obtain a general mandate annually to issue new shares of up to 20% of the existing number of shares if not issued on a pro rata basis, a specific shareholders’ approval will need to be obtained if the number of shares to be issued exceeds this 20% cap.

An issuer that seeks to obtain shareholders’ approval for the issue of such convertible bonds must make the following disclosures in the circular to shareholders:

• The circular must make clear that such a bond could cause a downward spiral of the share price and result in massive dilutions detrimental to investors.

• The issuer must state the “floor”, or minimum conversion price and the maximum number of shares which could be issued on exercise.

• The front of the circular must carry a warning highlighting all of the following disclosures in a manner easily understood by shareholders at a glance:

  • features and risks associated with the issuance of the convertible;

  • rationale for the issuance of convertible issuance as a form of financing and the use of proceeds;

  • basis for the discount to the market price at the time of conversion;

  • whether the board of directors had sought alternative sources of financing and the outcome of these exercises; and

  • opinion by the board that the issuance of the convertible as a form of financing is in the interest of the company and its shareholders.

• The circular must disclose in plain English the terms of the convertible agreement, including any restrictions and pre-emptive rights, as well as any up-front fees and possible break fees.

The SGX also explained that it expects directors to ensure that such a financing arrangement is in the interest of the issuer and its shareholders.