credit-rating agency will provide what is known as an investment grade credit
rating for the bond. Where the risk of default is higher, the credit rating will be
below investment grade and investors will expect a higher interest rate and yield
on their investment to compensate for the higher risk. There are a number of
levels of rating and the high yield universe covers a reasonably wide spectrum,
from bonds rated just below investment grade to much riskier bonds which have
lost their credit rating entirely.3
A UK issuer seeking to issue securities for sale in the US market will normally
make a so-called Rule 144A offering.4Rule 144A provides a means for foreign
issuers to offer securities for sale to sophisticated investors in the US without
becoming subject to all US securities laws’ requirements for public offerings.5It
is popular as a means of persuading European investors that they will be able to
access the US secondary market in trading the securities which they purchase.6
The fact that a Rule 144A offering is included and that the bond is governed by
New York law does not, of itself, give any indication of the number of
purchasers who will actually be based in the US.7But even if the initial
purchasers are all based in Europe, European investors demand access to the US
secondary market when purchasing securities as a source of liquidity and ﬁnancial
advisers advising on the terms of issues are therefore focused on delivering a
product which will be attractive to US investors.8The Rule 144A offering seeks
to assure investors that a broad and deep market will be available to purchase the
securities, should they decide to sell.
In addition to liquidity concerns, the investor is also likely to be focused on
the possibility that the issuer will not be able to meet all of its debt obligations
(the risk of default) and on the extent to which the investor’s value will be
preserved in any subsequent debt restructuring. In the 1990s, a group of scholars
suggested that strong laws for minority shareholder protection needed to be in
place within a jurisdiction before dispersed equity capital markets could develop
3 For a description see Standard & Poor’s Financial Services LLC, High Yield Bond Primer (2014)
at http://www.highyieldbond.com/primer/ (last accessed 18 July 2013).
4 Under the Securities Act of 1933, s 5 all offers and sales of securities must be registered with the
SEC or qualify for some exemption from the registration requirements. Rule 144A is promulgated
under the Securities Act of 1933 and provides an exemption and permits the public resale of
securities if a number of conditions are met, including how long the securities are held, the way
in which they are sold, and the amount that can be sold at any one time.
5 See J. A. Fanto and R. S. Karmel, ‘A Report on the Attitudes of Foreign Companies Regarding
a US Listing’ (1997) (3) Stanford Journal of Business and Finance 51, 54–55.
6 For the beneﬁts of accessing US capital markets, ibid, 52.
7 It merely enables the securities to be purchased by investors in the US but where the securities are
offered for sale in the US and in other jurisdictions it gives no indication of how many investors
in each jurisdiction will purchase.
8 For the role of the secondary market in providing liquidity see V. Bencivenga, B. Smith and R.
Starr, ‘Liquidity of Secondary Capital Markets: Allocative Efﬁciency and the Maturity Compo-
sition of the Capital Stock’ (1996) 7 Economic Theory 19. For the importance of US investors as a
source of liquidity for bonds issued by European issuers, see G. Yago and S. Trimbath, Beyond Junk
Bonds: Expanding High Yield Markets (Oxford: OUP, 2003) 89 and A. Huang, A. Guoming, M.
Kalimipalli, N. Subhankar and L. Ramchand, ‘Pricing of International Private Debt: Evidence
from the US 144A Secondary Bond Market’ Asian Finance Association 2014 Conference Paper
at http://ssrn.com/abstract=2298671 (last accessed 2 December 2014).
UK High Yield Issuers, US Investors and Insolvency Law
© 2015 The Author. The Modern Law Review © 2015 The Modern Law Review Limited.
432 (2015) 78(3) MLR 431–460