New Zealand: the 85% floor written into the conversion rule

New Zealand permits a convertible priced against the market, but not at any discount. NZX Listing Rule 4.11.1(e) requires that, where conversion consideration is fixed by reference to the market price of existing Equity Securities, it be at least 85% of the Average Market Price. The limb is a proviso, so a directors' certificate does not cure it; a standby facility draws on the same floor.

Key takeaways

• The rulebook names the instrument. Limb (e) of Rule 4.11.1 is drafted for Convertible Financial Products "where the consideration payable on Conversion is fixed by reference to the market price of existing Equity Securities".
• A certificate cures the entry price, not the conversion price. Below 85% of Average Market Price every director who voted in favour signs a fairness certificate. Limb (e) sits in the proviso to that certificate, not under it.
• Average Market Price is the lesser of two windows. The lower of the volume weighted average price over the 20 Business Days and over the 5 Business Days before the relevant day, from Main Board trades.
• Rule 4.5.1 counts the note, not the shares. A convertible is deemed the same Class and the same number as the securities it converts into, with any market-price reference read as Average Market Price.

A rule written for this instrument, not around it

Most exchanges reach a market-referenced convertible by inference — a placement rule, a discount cap, an anti-dilution principle applied by analogy. NZX does not. Rule 4.11, headed "Issue of discounted Equity Securities", engages where voting Equity Securities, or Financial Products convertible into them, are issued under Rules 4.3.1(c), 4.5.1 or 4.6.1 below 85% of the Average Market Price. Limb (c) supplies the remedy: every director who voted in favour signs a certificate that the consideration is fair and reasonable.

That certificate is why the rule is misread as curable. It cures a discounted issue price; the conversion floor is not under it. Limbs (d) and (e) are provisos to the certificate, and (e) states that for Convertible Financial Products whose conversion consideration is fixed by reference to the market price of existing Equity Securities, "any consideration payable on Conversion is at least 85% of the Average Market Price". A 5 July 2019 NZX Regulation ruling confirmed the limb bites only on the market-referenced case.

What the floor does to the deal, and how far it actually falls

An investor pricing against a trailing average is paid for the option and for the certainty that entry tracks a falling market. The floor caps the second at 15%, and in a sharp fall conversion can be uneconomic when the issuer most wants the money.

The definition softens that. Average Market Price is the lesser of the volume weighted average price over the 20 Business Days and over the 5 Business Days before the relevant day, from Main Board trades, or the last traded price if neither period traded. Taking the lower of a long and a short window means the reference falls quickly when the stock does. A New Zealand facility is therefore negotiated on size and tenor, and a committed equity facility here carries a stated floor.

Where the capacity comes from, and how the note is counted

Rule 4.5.1 permits an issue of Equity Securities provided the number, with all others of the same Class issued under that rule over the shorter of the previous 12 months or the period since listing, does not exceed 15% of that Class at the start of the period, adjusted for issues under the other specified rules, for ratified issues, and for securities acquired or redeemed. A buy-back reduces capacity rather than restoring it.

The counting rule is the part a term sheet gets wrong. Under Rule 4.5.1(f) the note is deemed to be of the same Class, and of the same number, as the Equity Securities into which it may Convert, and for that calculation any market-price reference in the conversion ratio or conversion price "will instead be to the Average Market Price". Capacity is consumed at issue on a conversion computed at today's reference, not at the worst case — unlike Australia, where ASX takes the highest number the formula could produce.

Resale is not the binding constraint

The shares are in the same class as products already quoted on the NZX Main Board, so the offer runs through the same class exclusion in Schedule 1 of the Financial Markets Conduct Act 2013 instead of a Product Disclosure Statement, and the investor sells on market. No analogue of the twelve-month Australian on-sale restriction was identified; a dual register still means Rule 144 and restricted securities. Alongside convertible notes for listed issuers, the New Zealand question is entry price, not exit.

Check whether the listing fits before a term sheet prices a discount the rulebook will not carry.

• All markets
• Australia
• United Kingdom
• South Africa
• Ireland

Primary sources

• NZX Listing Rules version 1.8.1 — Rules 4.5, 4.11 and the definitions
• NZX Regulation — ruling on Listing Rule 4.11.1(e), 5 July 2019
• NZX — Listing Rules, current version

Financing an NZX issuer: frequently asked questions

Can an NZX issuer use a conversion price set against VWAP?

It can use a conversion price fixed by reference to the market price of its existing quoted shares, and the rulebook says so in terms. What it cannot do is take that reference wherever the negotiation leads. Rule 4.11.1(e) states that any consideration payable on Conversion is at least 85% of the Average Market Price, and that limb is expressed as a proviso to the directors' certificate in Rule 4.11.1(c) rather than as something the certificate can satisfy.

How much stock can an NZX issuer place without a shareholder vote?

Rule 4.5.1 allows an issue of Equity Securities where the number, with all others of the same Class issued under that rule over the shorter of the previous 12 months or the period since listing, does not exceed 15% of that Class at the start of the period, adjusted for issues under the specified other rules, for ratified issues, and for securities acquired or redeemed.

Does the investor receive freely tradable shares?

The shares issued are in the same class as financial products already quoted on the NZX Main Board, so New Zealand routes the offer through the same class exclusion in Schedule 1 of the Financial Markets Conduct Act 2013 rather than a Product Disclosure Statement. The exclusion carries conditions, including one tied to orders the Financial Markets Authority can make, which should be confirmed before terms are agreed.

Is New Zealand a workable market for a standby equity facility?

It is workable and it is bounded. Nothing found prohibits an investor subscribing on the issuer's demand over time, and each drawdown is an ordinary placement into a quoted class. The constraint is that Rule 4.11.1 applies at each drawdown, so the facility prices against Average Market Price with a stated floor rather than an open discount.