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Alternative Performance Measures (APMs): Impact of Omnibus II and ESMA Guidelines on debt prospectuses and timing of transactions

From 3 July 2016, ESMA's guidelines for the disclosure of alternative performance measures (the Guidelines) will require additional disclosure in Prospectus Directive-compliant prospectuses and supplements and regulated information, published under the Transparency Directive or Market Abuse Regulation, which include such measures. The application of the Guidelines in conjunction with the requirements flowing from the Omnibus II Regulatory Technical Standards in relation to APMs in advertisements (as defined in the Prospectus Directive) could affect the timing and, potentially, the costs on deals.

What are APMs?

An APM is defined in the Guidelines as "a financial measure of historical or future performances, financial position, or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework". Examples of financial measures which qualify as APMs, include, "operating earnings", "cash earnings", "EBITDA", "net debt" and "autonomous growth". However, any non-GAAP or non IFRS financial measure is potentially caught.

The Guidelines do not apply to APMs which have been disclosed pursuant to the requirements of the Prospectus Regulation disclosure annexes, for example, pro forma financial information or profit forecasts and estimates.

Affected documents from a debt securities perspective

Prospectus Directive-compliant prospectus and supplements – The Guidelines will apply to Prospectus Directive-compliant prospectuses and supplements which are produced on or after 3 July 2016 in relation to issuers with securities admitted to trading on an EEA regulated market.

Investor presentations and marketing materials (including roadshow materials) – The Guidelines do not directly apply to investor presentations. However, Article 12 of Omnibus II Regulatory Technical Standards which came into force on 24 March 2016, prohibits the inclusion of APMs in documents that fall within the Prospectus Directive advertisement regime, which would include investor presentations, unless such APMs are also disclosed in the related prospectus.

Certain parts of annual and interim financial reports – The Guidelines do not apply to APMs in periodic financial statements prepared in accordance with IFRS, EEA, GAAPs or equivalent third country (ie non-EEA jurisdiction) GAAP. However, APMs included in management reports or performance overviews contained in the financial reports are within scope.

Additional disclosure requirements

If APMs are used in a relevant prospectus, additional disclosure will be required to, among other things, (i) define the relevant APMs and explain why they are being used, (ii) state whether they relate to past or future performance and (iii) give them meaningful labels. APMs also have to be reconciled to the amounts presented in the financial statements. If they cannot be reconciled, then an explanation of how consistent the APMs are with the accounting policies applied in the financial statements should be provided. The definitions and calculations of APMs should be consistent over time and an explanation given if changes are made.

Impact on debt securities transactions

Where relevant, it is important to consider the potential impact of the Guidelines as early on as possible to ensure that adequate provision is made with respect to timing. Investor presentations (including roadshow materials) should be reviewed for APMs, to ensure that any disclosed APMs are also included in the relevant prospectus along with the necessary additional disclosure. Additional disclosure will also need to be  included in relevant prospectuses which include or incorporate APMs by reference. 

Implementation of the Guidelines

It is up to each EEA Competent Authority to implement the Guidelines. The UK's Financial Conduct Authority, Central Bank of Ireland and Commission de Surveillance du Secteur Financier in Luxembourg have each confirmed that they will be complying with the Guidelines. However, none has yet produced any guidance on their specific requirements. We will continue to watch this space.

Legal and Regulatory Risk Note