Programme limit
Ordinarily — and as we will see, “ordinarily”, in the sense of “as long as you are not in America”, is an important caveat — the programme limit inserted in an MTN programme is a mere bagatelle: an arbitrary number included only out of a time-honoured sense of it being the right thing to do, since generations of legal eagles before us have always done it — that being the most compelling reason any legal eagle ever does anything.
The idea of a programme limit was that existing holders of an issuer’s medium term notes might want some comfort that the issuer of that note will not go batshit crazy and rack up trillions of dollars in indebtedness under the programme, levering its operation to breaking point and, thereby, prejudicing the market value of those existing notes. Thus, programmes would have a limit: you may only have, say, $10bn in MTNs outstanding at any time.
This is of course a blunt and rather useless tool since it does not stop an issuer levering up its balance sheet other ways (through bilateral loans or standalone bonds). And usually a programme limit did not amount to a negative pledge in any case (the issuer could amend its programme limit without noteholders’ consent) and since there are much more sophisticated means monitoring this sort of risk, it has increasingly become less important in the financial world outside America. (Important caveat). Especially with limited recourse SPVs running repackaging programmes it is totally pointless, since the SPVs are not levering up their balance sheets at all, and by their very nature the notes of separate series do not impact each other at all.
Thus, in recent times the fashion has been to drop programme limits as a concept, though you may still see them in older programmes.
Outside, it’s America
“Ordinarily” doesn’t count for anything if your programme is an SEC-registered shelf, however. In that case, your programme limit could not be less of a bagatelle. Inattention to it may bankrupt you.
On the question of “why you don’t mess around with the Securities Act of 1933”, here is a choice little titbit.
Violations of the registration provisions of Section 5 of the Securities Act of 1933 provide the purchaser a right to rescind the transaction within one-year under Sections 12(a)(1) and 14.
Section 12(a)(1) provides:
(a) In general
Any person who—
- (1) offers or sells a security in violation of section 77e of this title [includes Section 5 of the Securities Act of 1933]
- [...]
shall be liable [...] to the person purchasing such security from him, who may sue either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.
If your registration statement approves you to sell up to a maximum amount of securities, and — by misadventure, carelessness or design — you sell more than that, those who bought the securities in excess of the limit may force you to buy them back at purchase price plus accrued. Now, where your securities are bonds, issued at par, and accruing interest, this is manageable, though it gives your investors a call option should your credit spreads deteriorate.
Should you be selling structured notes whose performance might not be quite so linear, it might be a different story.
If you accidentally overissue structured notes linked to the VIX index to the tune of — ooh, $15 billion — and then the VIX index tanks ... Well, good luck explaining that on your next quarterly call.
We are partly sympathetic to Das Blau Adler: this is an absurd, draconian and utterly unjust outcome — but on the other hand, rules is rules; that’s the first thing any American Securities lawyer learns, right? Section 5 of the Securities Act of 1933: it’s on like about page 4.[1]
See also
References
- ↑ Of course it isn’t page 4. There are hundreds and hundreds of definitions and preliminaries, but you get my point right?