Improved Disclosure Requirements for Registered Debt Offerings

On March 2, 2020, the SEC adopted final rule release 33-10762, Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities.

The rule is intended to improve the required disclosures for certain registered debt offerings, and encourage issuers to offer guaranteed or collateralized securities on a registered basis by reducing the cost of compliance for registrants.

The guidance is effective as of January 4, 2021, and early compliance is permitted.

Here’s an overview of key provisions and amended disclosures.

Key Provisions

The final rule amends the disclosure requirements in Rule 3-10 of Regulation S-X for subsidiary issuers and guarantors of registered debt securities. It also amends the disclosures in Rule 3-16 of Regulation S-X for affiliates whose securities are pledged as collateral for registered securities.

The amended disclosure requirements—now located in new Rules 13-01 and 13-02 of Regulation S-X—focus on the material, relevant, and decision-useful information.  In addition, they eliminate the requirements that have imposed unnecessary burdens on issuers of registered securities with guarantees and other credit enhancements.

The amended rule is based on the principle that investors in guaranteed or collateralized securities rely primarily on:

  • Consolidated financial statements of the parent company or registrant
  • Supplemental details about the subsidiary issuers and guarantors or affiliates whose securities are pledged when making investment decisions

Issuers and Guarantors of Registered Debt Securities

A guarantee of debt or debt-like security is considered to be a separate security under the Securities Act. Rule 3-10 of Regulation S-X generally requires financial statements to be filed for all issuers and guarantors of securities that are registered or being registered.

When certain conditions are met, and the parent company provides supplemental disclosures in its consolidated financial statements, separate financial statements for qualifying subsidiary issuers and guarantors may be omitted.

The amended rule eases the conditions that must be met to omit the separate financial statements of a subsidiary issuer or guarantor. The condition that a subsidiary issuer or guarantor be 100% owned by the parent company is replaced with a condition that it be consolidated in the parent company’s consolidated financial statements.

In addition, the amendments streamline the alternative disclosures that are currently required to be included in the footnotes to the parent company’s consolidated financial statements when subsidiary financial statements have been omitted.

The amended financial and nonfinancial disclosures would only be required when an issuer or guarantor has an Exchange Act reporting obligation with respect to the guaranteed securities.

Under the amended rule, the parent company would:

  • Provide disclosure of summarized financial information, as defined in Rule 1-02(bb)(1) of Regulation S-X, of each issuer and guarantor, rather than condensed consolidating financial information
  • Present the summarized financial information of each issuer and guarantor on a combined basis unless further disaggregation is required
  • Present the summarized financial information as of and for the most recently ended fiscal year and year-to-date interim period included in the parent company’s consolidated financial statements
  • Provide expanded qualitative disclosures about the guarantees and the issuers and guarantors, including additional information about each guarantor if it would be material for investors to evaluate the sufficiency of the guarantee
  • Disclose the terms and conditions of the guarantees
  • Disclose how the issuer and guarantor structure, or other factors, could affect payments to holders of the guaranteed securities

The amended disclosures are permitted to be provided outside the footnotes to the parent company’s audited annual and unaudited interim consolidated financial statements in all filings.

Affiliates Whose Securities Are Pledged as Collateral

Rule 3-16 of Regulation S-X requires a registrant to provide separate financial statements for each affiliate whose securities constitute a substantial portion of the collateral for any class of registered securities as if the affiliate were a separate registrant.

The amended rule replaces the existing requirements in Rule 3-16 of Regulation S-X to provide separate financial statements for each affiliate whose securities are pledged as collateral with amended financial and nonfinancial disclosure requirements outlined in new Rule 13-02 of Regulation S-X. 

The amended requirements are similar to those discussed above for subsidiary issuers and guarantors. They require certain financial and nonfinancial disclosures about the affiliate and the collateral arrangement as a supplement to the consolidated financial statements of the registrant that issues the collateralized security. 

This information is permitted to be disclosed outside the footnotes to the audited annual and unaudited interim consolidated financial statements. 

We’re Here to Help

For more information on how the amended disclosure requirements for registered debt offerings may impact your business, contact your Moss Adams professional.