Recent geopolitical developments have catalysed a reordering of European defence policy. The European Union has initiated significant efforts to revitalise and consolidate its defence and security industrial base through the Permanent Structured Cooperation, the European Defence Fund, the Strategic Compass for Security and Defence, the European Defence Industrial Strategy and the proposed European Defence Industry Programme. Other developments, such as a multilateral "Defence, Security and Resilience Bank" are planned to assist NATO countries and their allies to finance their defence needs, including by accessing the international capital markets.
In an effort to mobilise private capital to support the European defence sector, Euronext, a pan-European stock exchange and market infrastructure provider, recently launched the "European Defence Bond Label".
WHAT IS THE EUROPEAN DEFENCE BOND LABEL?
The European Defence Bond Label is a voluntary, market-driven framework to provide a set of nonbinding recommendations to help investors identify credible defence and security-related debt issuances listed on Euronext markets by corporates, financials, sovereigns and supranationals.
Issuers must be from the European Union, the European Economic Area (i.e., the EU, Norway, Iceland, Liechtenstein) or countries with formal cooperation agreements with the European Union (Switzerland, Ukraine, United Kingdom) or a country with bilateral security and defence partnerships or in active accession negotiations with the European Union (currently, Moldova, South Korea, Japan, Albania, North Macedonia and Montenegro) (each, "Eligible Countries").
Subject to limited exceptions, net proceeds (or an amount equivalent to the net proceeds) must be allocated to financing and/or refinancing, in part or in full, new and/or existing eligible European Defence and Security related activities, and/or used by sovereign or supranational entities that earmark the net proceeds of the bond for the financing of European Defence and Security capabilities.
See the Annex for a definition of "European Defence and Security" and a non-exhaustive list of "Eligible Use of Proceeds and Activities" along with certain "Exclusionary Criteria". We have set these out in full as they are detailed and will merit careful consideration by Issuers.
WHAT TYPES OF ISSUERS CAN USE THE EUROPEAN DEFENCE BOND LABEL?
Eligible non-financial corporates, sovereigns, quasi-sovereign, supranational entities and financial institutions can all use the label. There are slight variations in eligibility dependent on the nature of the Issuer:
NON-FINANCIAL CORPORATIONS
Eligible non-financial corporations must either:
- be headquartered or incorporated in Eligible Countries; or
- generate or incur more than 50% of their revenues, capital expenditures, operating expenditures or payroll expenses within Eligible Countries.
If the above eligibility criteria are met:
- proceeds may be allocated to finance or refinance Defence and Security-related or Dual-Use activities. At least 85% of the net proceeds must be allocated to projects or operations that demonstrably contribute to the development, support, or deployment of European Defence and Security capabilities. The remaining 15% may be allocated to other economic activities, provided they do not contradict the objectives of the European Defence Bond Label; or
- in cases where proceeds are used for general corporate purposes rather than project level allocations, use of the European Defence Bond Label is only permissible if the Issuer generates more than 50% of its total revenues from Defence and Security-related activities. Regulation FD does not define materiality. In the Regulation FD adopting release, the SEC cited and discussed the leading Supreme Court cases regarding materiality, TSC Industries v. Northway, 426 U.S. 438 (1976) and Basic v. Levison, 485 U.S. 224 (1988). Under those cases, information is considered material if there is a "substantial likelihood that a reasonable shareholder would consider it important" in making an investment decision, or if the facts "would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." The Regulation FD adopting release also includes a non-exhaustive list of information or events that the SEC noted should be reviewed carefully to determine whether any such information or event, if disclosed, would likely be considered material. This list includes information and events relating to earnings information (including historical earnings information, earnings estimates and changes in previously released earnings estimates) and, in some circumstances, confirmation of previously issued guidance.
SOVEREIGN, QUASI -SOVEREIGN OR SUPRANATIONAL ENTITIES
Eligible sovereign, quasi-sovereign or supranational entities must be or be established in an Eligible Country. Supranational entities operating under a European mandate originating from an Eligible Country are also eligible.
The following activities may be financed or refinanced:
- Defence and Security-related activities that contribute to the development, reinforcement, or protection of European strategic autonomy and collective security. To be considered eligible, such expenditures must (i) fall within the scope of the European Defence and Security, and (ii) be entirely dedicated to capabilities, programmes, infrastructures or beneficiaries located in Europe or serving exclusively European interests; and
- export and import operations authorised under national and
international regulations may also qualify as eligible activities,
provided that:
- For exports:
- the defence equipment is produced by an eligible entity under the European Defence Bond Label;
- the destination country is authorised under applicable national and European export control regimes; and
- the transaction is explicitly approved by the national competent authority (e.g., via an export licence or intergovernmental agreement).
- For imports:
- the defence equipment is acquired by a non-financial corporate, sovereign, quasi-sovereign, or supranational entity from a European or non-European supplier duly authorised under European and national procurement rules, and the acquisition demonstrably supports European defence capabilities.
- For exports:
- the financing of non-European defence capabilities, including foreign military assets, industrial bases, or strategic interests located entirely outside Eligible Countries, remains excluded from the scope of eligible use of proceeds, unless explicitly authorised under national and European regulations.
FINANCIAL INSTITUTIONS
Eligible financial institutions must be headquartered, incorporated, or operating under a regulatory framework of an Eligible Country.
For financial institutions, the following activities may be financed or refinanced through European Defence Bonds:
- assets (notably including loans, credit lines or structured
instruments) that benefit entities such as non-financial
corporates, sovereign, quasi sovereign, or supranational entities
that:
- are primarily active in the European Defence and Security sector; or
- use the financing for Defence and Security-related activities (CAPEX, OPEX, R&D);
- export and import operations strictly authorised under national
and international regulations may also qualify as eligible
activities, provided that:
- for exports:
- the defence equipment is produced by an eligible entity under this label, including eligible entities identified according to the Financial institutions' own eligibility assessment methodology, as defined below;
- the destination country is authorised under applicable national and European export control regimes;
- the transaction is explicitly approved by the national competent authority (e.g., via an export licence or intergovernmental agreement); and
- for imports:
- the defence equipment is acquired by a non-financial corporate, sovereign, quasi-sovereign or supranational entity from a European or non-European supplier duly authorised under European and national procurement rules, and the acquisition demonstrably supports European defence capabilities;
- for exports:
- assets (notably including loans, credit lines or structured instruments) dedicated to Defence and Security equipment, services contracts and transactions, in domains or activities listed as Eligible Use of Proceeds and Activities (as defined in the Annex).
Where the Financial institution does not have access to granular quantitative data (such as revenue, CAPEX, OPEX, or payroll breakdowns by geography), it must have a documented internal process in place to assess the eligibility of financed entities. This process may rely on credible sources such as:
- recognised industry lists;
- sectoral associations or industry syndicates;
- national or supranational defence registers; or
- classification frameworks which reasonably establish that the borrower is active in the European Defence and Security sector.
The financial institution is also required to document its eligibility assessment methodology and ensure traceability of the allocation of proceeds to qualified borrowers, contracts and transactions, in line with the label's objectives of supporting European strategic autonomy, security resilience, and the development of a robust European Defence and Security industrial base.
WHAT TYPES OF INSTRUMENT CAN BE ISSUED?
All debt instruments are eligible under the label, irrespective of their structure or seniority. This includes, but is not limited to senior unsecured and secured bonds, subordinated debt, hybrid instruments, convertible bonds, asset-backed securities, and multi-tranche issuances (with each tranche assessed independently).
They must be listed on a Euronext market.
WHAT CAN THE PROCEEDS BE USED FOR?
Net proceeds (or an amount equivalent to the net proceeds) must be allocated to financing and/or refinancing, in part or in full, new and/or existing eligible European Defence and Security related activities, and/or by sovereign or supranational entities that earmark the net proceeds of the bond for the financing of European Defence and Security capabilities.
See the Annex for a definition of European Defence and Security and a non-exhaustive list of Eligible Use of Proceeds and Activities.
ARE THERE EXCLUSIONARY CRITERIA FOR THE USE OF PROCEEDS?
Yes, see the Annex for the Exclusionary Criteria.
IS A SECOND PARTY OPINION OR EXTERNAL VERIFICATION REQUIRED?
No, the European Defence Bond Label relies on self-certification and does not require a second party opinion or external verification.
Euronext requires issuers to complete a standardised self-declaration confirming compliance:
- At issuance: the self-declaration must be signed at the time of listing as a condition for obtaining the label.
- Framework issuers: those with a published internal or external framework governing the allocation of proceeds to eligible defence and security activities may submit a single self-declaration annually, at Issuer level, on the anniversary of their first labelled issuance.
- Non-framework issuers: those without such a framework must submit a self-declaration for each labelled instrument, both at issuance and annually for each outstanding bond.
- Ongoing compliance: annual declarations are designed to ensure continued alignment with label requirements and disclosure of any material changes in use of proceeds, bond structure or issuer eligibility.
- Grandfathering: bonds already labelled under earlier rules retain that status until maturity, provided ongoing reporting obligations are met.
- Sanctions: failure to submit required declarations may lead to suspension or withdrawal of the label at Euronext's discretion.
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