Access To The International Capital Markets By Latin American Companies ~ Part 1

The international debt capital markets are comprised of investors, underwriters and dealers in two separate markets: an off-shore market, comprised of institutional investors, managed funds, private bank accounts, and underwriters and dealers located principally in London and other off-shore financial centers, and a U.S. market, comprised principally of institutional investors, managers of mutual funds and U.S.-based underwriters and dealers. The debt securities discussed in this memorandum are not registered with the U.S. Securities and Exchange Commission (the "SEC"), but are issued in transactions exempt from the registration requirements of U.S. federal securities law.

Debt securities issued in the international capital markets are categorized on the basis of their maturity: debt securities with a maturity of one year or longer are customarily referred to as "Eurobonds", or, if issued under a medium term note program, "medium term notes ¹ ", and debt securities with a maturity of less than one year are customarily referred to as "Euro-commercial paper".²

Medium term notes ("MTNs") can be generically described as continuously offered debt securities with a wide range of maturities and pricing features to meet specific borrowing needs of the issuer or the needs of a particular investor. The specific terms of an MTN or series of MTNs, including the principal amount, maturity, interest rate or method of calculating the interest rate, the currencies of issue and payment, call provisions and other features, are set by agreement between the issuer and the relevant dealer at the time of sale. As discussed in further detail below, MTNs have become a major source of flexible funding for issuers, especially Latin American issuers.

Because of the legal and financial complexities involved in the issuance and sale of debt securities in the international capital markets, there are a number of different participants in the offering process. Other than the issuer, the most significant participant in the offering is the investment bank which will be responsible for underwriting or placing the securities with investors. Typically, the underwriter or dealer will be represented by international as well as local counsel, and the issuer will be represented by local counsel. In some instances, the issuer may also be represented by international counsel. In addition, a fiscal agent or trustee will be responsible for issuances of and payments with respect to debt securities. The issuer's independent auditors will also play an important role in reviewing the financial information contained in the offering circular and in providing "comfort" to the underwriter/dealer with respect to such information. If Eurobonds or MTNs are to be issued and are to be listed on an exchange, a listing agent will be engaged to act as intermediary between the issuer and the exchange. Finally, a financial printer will be engaged to print the offering document.

Eurobonds are customarily distributed by one or more investment banks, which, in their capacity as underwriters, purchase the securities from the issuer, as principal, and resell them to institutional (and, in some cases, to retail) investors. Where more than one underwriter (the group of underwriters being commonly referred to as a "syndicate") agrees to purchase and resell the securities from the issuer, a "lead manager" and one or more "co-managers" will have responsibility for coordinating the offering.

The first step to be taken by an issuer in implementing a Eurobond offering is to select one or more lead managers, who in turn will, if appropriate, invite other underwriters to participate in the offering. The lead manager or managers will coordinate the offering process, which includes conducting (together with counsel for the underwriters and counsel for the issuer) a "due diligence" investigation of the issuer and its business (discussed in greater detail below), supervising the preparation of an offering circular that summarizes the business and financial condition of the issuer and the terms of the securities to be offered and of the offering, arranging for the marketing and distribution of the Eurobonds, and organizing the closing.

In contrast to Eurobonds, which are typically purchased by the underwriters in a single transaction, MTNs and Euro-commercial paper are issued and sold on a continuous basis with one or more investment banks acting as dealers on an "uncommitted" basis. Euro-commercial paper is typically issued at a discount from the face amount, with the discount representing interest on the obligation. MTNs, on the other hand, can be either interest-bearing or issued at a discount, dependent upon the maturity of the notes being issued. For both MTNs and Euro-commercial paper, in accordance with the agreement between the issuer and the dealer(s), the issuer notifies the dealer(s) of its desire to issue and sell its notes. After reaching agreement with a dealer concerning the price (expressed as a spread over LIBOR for deposits of the same maturity as the notes or U.S. Treasury bonds) and maturity of the series of notes to be issued, and, in the case of MTNs, additional applicable terms (such as currency), the dealer(s) will purchase the notes for resale to investors.

Among the factors which are important in choosing a lead manager or dealer are the reputation and experience of the firm in the relevant market (both from the standpoint of the issuer, other investment firms and investors), the knowledge of the firm with respect to the issuer and its industry, and the firm's commitment of resources to the transaction. A sample time schedule for a Eurobond offering by a Latin American issuer is attached as Exhibit A.

Typically, the issuer and underwriter or dealer will employ their own local counsel, although often only the underwriter or dealer will be represented by international counsel. If the issuer has engaged international counsel, then the issuer's counsel will have primary responsibility for drafting the offering circular pursuant to which the securities will be offered. Where only the underwriter has engaged international counsel, that firm will have the responsibility for preparing the offering circular. Issuer's counsel will also be responsible for delivering certain legal opinions at the closing of the offering. The underwriter's counsel will have primary responsibility for conducting legal due diligence (discussed more fully below) and for drafting the necessary underwriting agreements.

Among the factors which are important in choosing its legal counsel, an issuer will typically consider a firm's reputation and experience in the relevant market, as well as recommendations from potential underwriters or dealers. Local counsel for the issuer and the underwriter or dealer will have responsibility for coordinating any local regulatory requirements, assisting in the performance of due diligence, and for delivering certain opinions at the closing.

In implementing an offering of debt securities in the international capital markets, the issuer will need to select a commercial bank with offices in Europe and, if securities are being distributed in the United States, in New York, to serve as a fiscal agent. The fiscal agent is responsible for coordinating the issuance of, and the payment of principal and interest on, the securities, and also performs certain administrative responsibilities on behalf of the issuer. The bank serving as fiscal agent will charge an annual fee for provision of these services, and may also charge a fee for each security issued or paid. (In the case of a Euro-commercial paper program, the bank is referred to as an "issuing and paying agent" rather than a "fiscal agent", but its functions are the same).

Frequently, the securities will be issued pursuant to a trust indenture, rather than a fiscal agency agreement. In such cases, the trustee will typically have responsibility for coordinating the issuance of, and the payment of principal and interest on, the securities, and also performs certain administrative responsibilities on behalf of the issuer but will act in a fiduciary capacity on behalf of all noteholders to protect their rights and enforce their remedies.

The issuer's independent auditors play an integral part in the offering process. The underwriters or dealers will generally seek assurance that the issuer's independent accountants have reviewed the financial information contained in the offering circular, and have undertaken customary procedures which ensure that the issuer's financial circumstances since the date as of which the latest audited or unaudited financial statements are presented has not changed in any material respect. In this connection, the outside auditors generally are asked to prepare and deliver a letter, known as a "comfort letter", outlining the procedures which they have taken and their conclusion as to the financial condition of the issuer as of the date on which the underwriting agreement is executed and, thereafter, a "bringdown" letter from the auditors on the closing date.

If the bonds are to be listed on the Luxembourg Stock Exchange, a local Luxembourg financial institution will act as intermediary between the issuer and the exchange. The listing agent will have responsibility for introducing the issue to the exchange, preparing the listing application and other required documentation and transmitting the exchange's comments on the draft offering circular. The listing agent will charge a fee for its services, and there will be a fee payable to the Luxembourg Stock Exchange for listing the bonds.

Because it will be distributed to a large number of potential investors, the offering circular is typically printed. The ability to make significant revisions in a short period of time and to quickly and efficiently distribute draft and final offering circulars to different countries requires that the financial printer have experience in printing offering circulars for securities offerings. Of course, having offices or correspondent relationships with printers in the different locations of each of the parties is an advantage.

When an issuer desires to issue MTNs, it may do so in a number of ways. An infrequent issuer may choose to inquire of its dealers at what rates the dealers are willing to subscribe for MTNs of a given maturity, principal amount and with other identified terms. The dealers will then quote an interest rate or a spread over an applicable benchmark (e.g., LIBOR or U.S. Treasuries), generally based upon their perception of the market and their ability to resell the MTNs. The issuer may choose to accept or reject the quoted rates.

A more frequent issuer may choose to "post" offering rates through its dealers over a range of maturities (i.e., the issuer will indicate for different maturity ranges what interest rate it is willing to pay). The dealers will disseminate this offering rate information to their clients. When an investor expresses interest in an MTN offering, the dealer contacts the issuer to obtain a confirmation of the terms of the transaction. The issuer will lower its posted rates once it has raised the desired amount of funds at a given maturity. An issuer may withdraw from the market altogether by not posting any rates or by offering low rates at all maturities.

An issuer desiring to issue a large series of MTNs in a single series may ask its dealers to firmly underwrite the issue. Firmly underwritten offerings of MTNs are similar to traditional Eurobond offerings in that they are underwritten and are often syndicated using the fixed-price reoffering method.

Finally, an issuer may also issue MTNs directly to investors without the assistance of dealers. In such cases, the issuer can avoid paying a commission on the sale of the MTNs. Either the issuer may identify a potential investor, or a potential investor may contact (commonly referred to as a "reverse inquiry") the issuer directly regarding the purchase of MTNs. Of course, a potential investor may also request that a dealer contact a particular issuer.

One significant advantage of MTN programs is the flexibility of the terms with which MTNs can be issued. MTNs can be sold in maturities ranging from as short as three months to as long as 40 years, though most MTNs are issued with maturities of between one and five years. By selling MTNs in specific maturities, companies can match debt repayments to expected income. Fixed rate MTNs can be used to lock in favorable interest rates, while floating rate MTNs can be used, in conjunction with interest rate swaps, to lower the effective cost to the issuer. Other features of MTN programs include the option to issue MTNs redeemable at the option of the issuer or repayable at the option of the holder. One other feature of MTN programs is the ability to issue MTNs in different currencies. While regulatory restrictions currently limit the ability to issue MTNs in some currencies (e.g., French francs and Swiss francs), MTNs can be, and often are, issued in U.S. dollars, Canadian dollars, English pounds sterling and German deutsche marks.

Another aspect of the flexibility of MTNs is the speed with which MTNs can be sold. Because the legal documentation has already been executed and the offering circular has already been prepared, an issuer may issue MTNs at any time, subject only to the delivery to investors of a pricing supplement setting forth pertinent information relating to the MTNs being issued. This flexibility allows issuers to take advantage of short windows of opportunity to issue at lower rates. Since MTNs can be sold to dealers on an underwritten basis, issuers can take advantage of windows of opportunity to issue even large principal amounts of MTNs.

Depending on the borrowing needs of the issuer, an MTN program can reduce the borrowing costs to the issuer. Since the fixed costs of issuance (i.e., legal, accounting and documentation costs) are incurred at the commencement of the program, an MTN program permits an issuer to borrow in small tranches cost effectively. Furthermore, issuing in smaller tranches allows an issuer to price discriminate. For example, if an issuer desires to issue $100 million of Eurobonds, it must offer an interest rate on the entire issue sufficient to place the last $10 million of Eurobonds with the marginal buyer. In contrast, with an MTN program, an issuer could sell a $50 million tranche with one interest rate, another $40 million tranche with a slightly higher rate, and the last $10 million tranche with yet a slightly higher rate.

An MTN program allows an issuer to take advantages of opportunities generally not available in the underwritten market. In view of the fact that MTNs are sold in small units (as small as $100,000), MTNs can be sold to suit particular financing needs of a borrower, or to take advantage of a particular market advantage, which could not be achieved in reliance upon an underwritten note offering. MTNs have been widely used by companies to issue one-to-three year notes to refinance commercial paper or the final years of high coupon debt. It is generally thought to be impractical to underwrite short term notes, as the expenses of issuance cannot be amortized over a sufficiently enough period. Of course, MTNs can also be issued in several maturities at once. An issuer can issue MTNs incrementally to average its interest cost or can use tranches of MTNs to match fund obligations.

After signing an engagement letter with an underwriter or dealer and engaging legal counsel, the next stage in an international securities offering will consist of a "due diligence" investigation performed by the underwriters or dealers and their counsel (which will typically include both international and local counsel). "Due diligence" is the process through which the underwriters or dealers and their counsel familiarize themselves with the issuer's business and its financial condition. In addition, the due diligence process permits the underwriters and their counsel to obtain sufficient information with which to draft an accurate and meaningful offering circular describing the issuer's business and financial condition.

In performing their due diligence investigation, the underwriters or dealers and their counsel typically will meet with senior management, the financial staff and the independent auditors of the issuer, and will typically visit the issuer's more important facilities. In addition, counsel for the underwriters will expect to review the issuer's corporate documents, debt agreements and other documents relating to financial obligations, material contracts, relevant governmental licenses and approvals, and other material agreements relating to the issuer's business.

This review also serves to establish a record that the underwriters have made a reasonable investigation upon which a "due diligence" defense can be based, under U.S. federal securities law, against potential liability arising from claims that the offering circular misstated, or omitted to include, material information concerning the business or financial condition of the issuer (or any guarantor). Where the issuer is not represented by international counsel, counsel for the underwriter or dealer will prepare an offering circular intended to furnish all material information concerning the issuer and the securities to potential investors, and to thereby facilitate the offering. The offering circular sets forth (i) a reasonably detailed description of the issuer's business (and the business of any guarantors), together with a management's discussion and analysis of the issuer's financial condition, (ii) a summary of the terms of the securities and of the offering, including applicable selling restrictions (and, in the case of an MTN program, the applicable currencies and maturities), (iii) any relevant risk factors, including a summary of the local political and financial environment, and (iv) copies of audited financial statements of the issuer (and guarantor, if applicable) for at least two fiscal years and a summary of unaudited financial information for the most recently completed fiscal quarter.

In the case of MTN programs, the issuer will be expected to update the offering circular periodically to reflect important changes in its business, and to update the audited financial information, as more recent audited financial statements become available. Upon the issuance of each successive series of MTNs, the issuer and dealer would also distribute a supplement which reflects the terms relating to the notes being issued.

For each successive series of MTNs issued under the program, the dealers will typically require certain closing documents, including a supplement to the offering circular, referred to above, and a confirmation of the continuing accuracy of representations and warranties. In addition, upon the occurrence of significant corporate events or the publication of annual or interim financial statements, the dealers may request updated opinions of counsel and, if appropriate, a comfort letter from the issuer's auditors concerning any such financial statements.

If bonds are to be offered and listed on an exchange, the exchange will likely require an opportunity to comment on the draft offering circular.

Historically, debt securities distributed to European and other off-shore investors have been issued in bearer form. As discussed below, Eurobonds and MTNs may be issued in global form for a short period of time to comply with certain legal requirements but may, thereafter, be issuable in definitive bearer form. However, increasingly market practice favors issuing Eurobonds, MTNs and Euro-commercial paper in the form of permanent global notes in registered form, with transfers implemented through the books of the depositary. This practice has developed in response to the increasing dominance of large institutional investors in the European and United States markets which generally hold debt securities through a clearing organization, rather than in certificated form.

With the growing importance of the U.S. capital markets in distributions of debt securities by foreign issuers, international offerings of debt securities are now frequently placed simultaneously in both the traditional Euromarket and, in reliance upon Rule 144A, in the United States to institutional investors. In these "dual tranche" offerings, the securities sold to U.S. investors are always in registered form (typically evidenced by a global registered note), and the securities sold to off-shore investors are also frequently in registered (as opposed to bearer) form, which facilitates cross-market trading of the securities. A discussion of the settlement procedures for these "dual tranche" offerings is set forth below.

As discussed above, most investors, at least initially, hold their securities through one of two European clearing organizations: the Euroclear System ("Euroclear"), which is operated by Morgan Guaranty Trust Company of New York, located in Brussels, and Cedel Bank S.A. ("Cedel"), which is located in Luxembourg. Once the securities are entered into either clearing system, transfers of securities between participants in either system may then be made by means of book-entry notations without the need for delivery of physical certificates. In order to simplify transfers between the two different systems, certificates are often held by a common depositary.

With increasing frequency, international bond offerings by Latin American companies are targeted to U.S. investors, and as a result include a significant Rule 144A component. In that circumstance, the 144A notes are typically evidenced by a global note, in registered form, which is held by The Depository Trust Company ("DTC"), and noteholders hold their interests in the global note in book-entry form. Typically, definitive registered notes will be available to investors only upon the occurrence of certain limited events (such as the inability of DTC to continue to serve as depository for a global note).

Until several years ago, "dual tranche" offerings of debt securities which involve a simultaneous off-shore distribution (under Regulation S) and U.S. private placement (under Rule 144A) were structured so that the Regulation S notes were evidenced initially by a temporary global note, in bearer form, which is exchangeable for definitive bearer notes after the expiration of the 40-day restricted period. Under this approach, the temporary global note is held by the fiscal agent for the common depositary on behalf of Euroclear and Cedel. The 144A notes issued as part of the offering are in registered form, and are issued either in the form of a global note (registered in the name of a nominee of DTC, with book-entry interests) or, less frequently, in definitive form.

A variation on this structure, which has gained broad acceptance, involves the issuance at closing of two permanent global notes in registered form, without coupons. The structure is intended to facilitate transferability of interests between the global notes in the secondary market. Both notes are deposited with the fiscal agent as custodian for, and are registered in the name of, a nominee of DTC, and each global note is assigned a separate CUSIP number. The Regulation S Global Note is held for the accounts of Euroclear and Cedel, and beneficial interests in the Regulation S Global Note may be held (i) only through those clearing systems during the 40-day restricted period ³ and (ii) thereafter, through organizations other than Euroclear and Cedel that are DTC customers. Except in limited circumstances, noteholders are not entitled to receive physical delivery of certificated notes.

Because certain institutional investors may only invest in securities which are listed on an exchange, and because an exchange listing may add to the liquidity of the issue, many Eurobond issues and MTN programs are listed on a European exchange. In the recent past, the most common listing has been on the Luxembourg Stock Exchange, primarily because of the relative ease with which issues can be listed.

Euro-commercial paper cannot currently be listed on the Luxembourg Stock Exchange.

Typically, payments of principal and interest on securities distributed in the international capital markets will be made free of any applicable withholding taxes. To that end, the form of the securities will indicate that in the event of the imposition of withholding taxes by any local, United States (in some instances) or United Kingdom taxing authority after the date of issuance, the issuer will make additional payments to investors so that the net amount received by investors, after deduction or withholding, will be not less than the amount provided for in the security. In such event, the issuer is typically provided a right to redeem all of the securities at their principal amount plus accrued interest, whether or not the securities are then redeemable at the option of the issuer.

The first step in engaging the lead manager for an offering of debt securities is typically the engagement letter. The engagement letter ordinarily formalizes the mandate received by the lead manager from the issuer and provides for a period of exclusivity during which the issuer cannot undertake a similar offering with other firms. The engagement letter may also formalize the parties' agreement as to the underwriting discount or commission and as to the reimbursement by the issuer of certain of the lead manager's expenses, including, in some instances, attorneys' fees.

In the case of underwritten bond offerings, the agreement by the underwriters to purchase the securities will be formalized in an underwriting agreement. In the case of an MTN or Euro-commercial paper program, the issuer and dealer(s) will enter into a dealer agreement which, as indicated above, does not obligate the dealer to purchase any debt securities. The underwriting agreement and dealer agreement will typically contain a number of representations and agreements of the issuer (and, if applicable, any guarantor). At the time the underwriting agreement is signed, or, in the case of an MTN program, when a pricing supplement for a particular series of MTNs is entered into, a comfort letter will be deliverable by outside auditors for the issuer (and, if applicable, for any guarantor). Closing of the offering will typically be subject to a number of conditions, including the delivery of opinions of counsel and a "bringdown" of the comfort letter. An additional condition typically is that, since a specified date, there has not been a material adverse change in the business, properties, prospects, results of operations or condition (financial or otherwise) of the issuer (and, if applicable, for any guarantor). Underwriting agreements and dealer agreements typically also will contain a provision under which the issuer agrees to indemnify the underwriters or dealers against any liability for material misstatements in or omissions from the offering circular. Finally, the underwriting agreement and dealer agreement will typically contain what is commonly referred to as a "market out" clause that permits the underwriters or dealers to terminate the agreement in the event of certain events which could affect the market for the securities or the underwriters' ability to resell the securities. The underwriting agreement and dealer agreement, as well as the other relevant agreements, may be governed by New York or English law. The applicable law will generally depend on the underwriter or dealer and the law firms involved.

In addition to the underwriting agreement, the various underwriters and dealers engaged in the selling effort typically will enter into various agreements among themselves, including an agreement among managers and a selected dealers agreement, detailing the various agreements necessary to insure an orderly distribution of the securities.

As discussed above, the issuer and the fiscal agent will enter into an agreement pursuant to which the fiscal agent will agree to coordinate the issuance of, and the payment of principal and interest on, the securities. The fiscal agent will also agree to perform certain administrative responsibilities on behalf of the issuer. The fiscal agency agreement will also contain the issuer's agreement to indemnify the fiscal agent against any liabilities or expenses it may incur in connection with its activities on behalf of the issuer. The form of the security to be issued will typically be included as an exhibit to the fiscal agency agreement. Where, noteholders are represented by a trustee, rather than a fiscal agent, the operative agreement will be an indenture, rather than a fiscal agency agreement. In either event, affirmative and negative covenants (including financial covenants if any) will be set forth in the terms and conditions of the notes, which will be an exhibit to the fiscal agency agreement or indenture, as the case may be.

In the case of a Euro-commercial paper program, the agreement is often referred to as an "issuing and paying agency agreement" rSather than a "fiscal agency agreement", though they are substantially similar.

As discussed in greater detail below, under the terms of the U.S. Securities Act of 1933, as amended (the "Securities Act"), securities may not be offered or sold in the United States unless the securities are being sold pursuant to an effective registration statement, or the offering qualifies for one of several exemptions from registration. Traditionally, the SEC has taken an expansive view of its jurisdiction, and has regulated securities offerings by foreign companies where offers were made to U.S. residents, or there was some use of U.S. "interstate commerce" to effect an offering.

In 1990 the SEC adopted a new regulation - Regulation S - which was intended to clarify the application of the Securities Act to offshore offerings, and which formalizes certain procedures designed to ensure that foreign securities offerings are not made in the United States. Regulation S is now the U.S. securities law framework which governs the offshore offering and sale of securities which are not registered under the Securities Act. A memorandum summarizing Regulation S is attached.

Regulation S provides an exemption from the U.S. registration requirements for foreign issuers, securities professionals and persons acting on their behalf in connection with "offshore offerings", where there are no "directed selling efforts" made in the United States. To qualify for this exemption, no offer can be made to a person in the United States, and either the buyer must be outside the United States, or the sale must be executed in, on or through the facilities of a "designated offshore securities market" and neither the seller nor any person acting on its behalf knows that the transaction has been pre-arranged with a buyer in the United States.

Prohibited "directed selling efforts" include any activity that is undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for the securities (such as promotional seminars or advertisements), but do not include routine corporate communications (such as press releases).

Regulation S divides offshore offerings into three categories and applies different rules to each. While it is beyond the scope of this summary to discuss each category and the applicable restrictions, it is pertinent that, to comply with offering restrictions under Regulation S, as well as with certain U.S. tax rules relating to the offering to U.S. persons of debt securities in bearer form (known as the Tax Equity and Fiscal Responsibility Act of 1982, or "TEFRA"), bonds sold to non-U.S. investors are typically issued, initially, in global form for a period of 40 days, and may not be offered or sold in the United States or to any U.S. person during the 40-day period. After the 40-day restricted period has elapsed, the temporary global note is exchanged for a permanent global note (as discussed above) or, infrequently, securities in definitive form, which are then delivered to (or for the account of) each non-U.S. investor.

As mentioned above, the SEC takes an expansive view of the jurisdiction of the Securities Act. While there may be few, if any contacts, with the United States, substantially all Eurobond offerings, MTN programs and Euro-commercial paper programs for Latin American companies are structured so as to comply with Regulation S. It should be noted that compliance with Regulation S should not add materially to the cost or complexity of the transaction.

The high level of interest in the U.S. capital markets on the part of foreign issuers in large measure stems from the adoption (in 1990) of Rule 144A under the Securities Act by the SEC. Rule 144A establishes a non-exclusive safe harbor from the registration requirements of the Securities Act for resales of securities issued in a non-public offering. Its significance is best viewed against the background of the basic rule in the U.S. capital markets: securities may not be offered or sold in the United States except pursuant to an effective registration statement, or pursuant to one of several exemptions from registration. Registration of securities in the United States is a relatively burdensome and expensive process involving preparation of a registration statement, and compliance with SEC requirements concerning disclosure, accounting (including reconciliation of financial statements to generally accepted accounting principles in the U.S. ("U.S. GAAP")), and ongoing periodic reporting requirements pursuant to the U.S. Securities Exchange Act of 1934, as amended (the "Securities Exchange Act"). Precisely because Rule 144A provides a means of avoiding the registration process, it has significantly expanded and deepened the liquidity of the U.S. private placement market, making it easier, less expensive and less burdensome for foreign issuers to raise capital in the U.S. institutional market.

Prior to the adoption of Rule 144A, securities issued in a private placement in the United States could only be resold under very restrictive exemptions (principally Rule 144 under the Securities Act, and a non-statutory exemption recognized by the SEC). In a traditional private placement, an issuer will sell its securities to a small number of sophisticated investors identified by the issuer's investment banker. Resales of securities acquired in a private placement also require an exemption from the registration requirements of the Securities Act, and are permitted only under limited circumstances. Prior to the adoption of Rule 144A, investors who could not meet the safe harbor requirements of Rule 144 (which require a minimum two-year holding period) generally resold privately placed securities in further private transactions to other sophisticated investors. As a result of these restricted exemptions, privately placed securities were, until 1990, quite illiquid, resulting in higher costs of raising capital for the issuer.

Rule 144A provides a non-exclusive safe harbor from the 1933 Securities Act registration requirements for resales of certain securities to "qualified institutional buyers" ("QIBs"). So long as during the initial sale the issuer exercises "reasonable care" that subsequent sales will be made only in compliance with applicable securities laws, it need not police subsequent resales. The SEC's intent in adopting Rule 144A was to increase liquidity of privately placed securities and to increase access to the U.S. capital markets by foreign issuers.

In a Rule 144A offering, an issuer will sell, in a traditional Section 4(2) private placement, or in an offshore transaction exempt under Regulation S, its securities to one or more investment banking firms, which will then resell, in reliance upon Rule 144A, the securities to a larger number of QIBs. From the issuer's standpoint, a Rule 144A offering is similar to a traditional underwritten public offering, but without the necessity of preparing a 1933 Act registration statement.

Under Rule 144A, the seller and anyone acting on its behalf must reasonably believe that the purchaser is a QIB. A QIB is an institution (e.g., an insurance company, registered investment company or registered broker-dealer or pension or employee benefit plan) that in the aggregate owns or invests on a discretionary basis at least $100 million ($10 million for registered dealers) in securities of unaffiliated companies (which includes securities issued or guaranteed by the United States government). Certain other criteria apply to banks, savings and loan associations and registered broker-dealers. QIBs may not buy for managed or other fiduciary accounts that are not themselves QIBs.⁴

Both debt and equity securities are eligible, provided that when issued they were not of the same class as securities listed on a U.S. securities exchange or quoted in NASDAQ.

Sellers and prospective purchasers must have the right to obtain certain information about the issuer, if not publicly available. This right will be included in a covenant in the terms of the security. If the issuer is not a reporting company under the Securities Exchange Act or is not exempt therefrom under SEC Rule 12g3-2(b) (discussed below), it must make available certain information upon request. This information includes a brief statement describing the issuer's business and the issuer's most recent balance sheet and profit and loss and retained earnings statement and other financial statements (audited, if reasonably available) for two years (or as long as the issuer has been in operation).

Issuers qualifying as "foreign private issuers" may avoid the information requirement of Rule 144A by complying with Rule 12g3-2(b), although, as indicated below, very few foreign issuers seek to comply with the Rule when issuing debt securities. A "foreign private issuer" is a foreign issuer other than a governmental issuer unless (i) more than 50 percent of its outstanding voting securities are held of record directly or indirectly by U.S. residents and (ii) (A) the majority of its executive officers or directors are U.S. citizens or residents or (B) more than 50 percent of its assets are located in the United States or (C) its business is administered principally in the United States.

To comply with Rule 12g3-2(b), the issuer must furnish the SEC with whatever information the issuer, since the beginning of its last fiscal year, has made or is required to make public pursuant to the laws of its home country, has filed or is required to file with the stock exchange on which its securities are issued, and has distributed or is required to distribute to its security holders. Also, the issuer must provide the SEC with a list identifying the information described above and, if reasonably available, a list identifying the number of holders of each outstanding class of equity securities held by U.S. residents and the percentage of each class represented by such holdings. To maintain 12g3-2(b) status, the issuer must also furnish the SEC with the brief statement described in paragraph (c) above promptly after the information is made or is required to be made public. The information may be furnished in the language of the home country, except for shareholder communications and press releases.

It may take up to six months to appear on the SEC's list of 12g3-2(b) companies, but this need not delay the offering if the issuer commits to provide the 144A information if Rule 12g3- 2(b) status is not yet available or cannot be maintained.

Latin American companies which have not issued (and are not actively contemplating issuing) American Depositary Receipts will typically not seek to comply with Rule 12g3-2(b) in connection with the issuance of debt securities, and will simply agree to furnish information sufficient to comply with the requirements of Rule 144A.

The seller must take reasonable care to ensure that the buyer is aware of the seller's reliance upon Rule 144A. A confirmation notice from the buyer can fulfill this requirement.

1 Debt securities issued by foreign companies and governments that are registered with the SEC are referred to as "Yankee bonds".

2 While Euro-commercial paper may be issued with maturities of up to 365 days, it is typically issued with shorter maturities.

3 Euroclear and Cedel hold interests in the Regulation S Global Note on behalf of their customers through their respective depositaries (Citibank for Cedel, Morgan Guaranty for Euroclear), which in turn hold such interests in the Regulation S Global Note in customers' securities accounts in the depositaries names on the books of DTC

4 In 1992 the SEC adopted amendments to Rule 144A that (i) expanded the definition of QIB to include collective trust funds and master trust funds (arrangements which are often employed by pension and employee benefit plans to pool funds to facilitate common management) and (ii) recognized as purchases by a QIB insurance company the purchase of securities for separate accounts which are not required to be registered under the U.S. Investment Company Act.

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