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Untying the Knots: Simplifying Corporate Actions

29 October 2021 Madhu Ramu

Understanding the impact of corporate actions is necessary when contemplating the right investment strategy. This impact is driven by timely awareness, accuracy, and attention to detail. In this blog, IHS Markit's Managed Corporate Actions™ team will discuss some of the most dominant corporate actions announced each month and the roles they take in the marketplace.

US Debt Ceiling: Where Do We Go From Here?

Since September 2021, the Washington establishment and financial industry has consistently posted, published, broadcasted, and utilized all other publicity means to discuss the latest news on the US Debt Ceiling. So, what does it all really mean? Well, before we can dive into the details, there are a couple of foundational questions that need to be cleared up.

First things first, what is the 'debt ceiling?'

The debt ceiling is the terminology coined to express the limit on how much money the federal government can borrow. Just like any other loan, this consequently adds to the total amount of cumulative debt outstanding from generations past. And with no set schedule in place, Congress can vote every so often to have this limit raised when necessary.

Where is the debt ceiling now?

What started at US$1 billion around 1917 has increased to about US$28.5 trillion dollars… all in a matter of about 98 different requests to continuously increase its limit since its origin. The foundation of this concept works just like you and your credit cards.
As the United States government (or you, for the sake of the analogy) continuously spends more money, the country (you) must regularly borrow money to make up for the difference. In the case of the US government, this responsibility lands on the Department of Treasury, whose tactic is to issue many different forms of debt instruments, inclusive of Treasury Notes.

So, if this has happened about 98 different times, most recently in 2013, 2017, and 2019, what makes this time "all the rage"?

Treasury Secretary Janet Yellen said the recent increase in the debt ceiling provides only a "short reprieve this time" before the U.S. is set to run out of money again. If the US debt defaults, there could be disastrous effects seen around the globe—and the world of corporate actions will be one of the first segments to see and hear about it firsthand [1].

In financial markets, U.S. Treasury securities are considered the closest thing there is to a risk-free asset. Any number of financial instruments and transactions are indexed to the interest rate the federal government pays on its borrowings [2]. At current measure, there are about 430 tradeable treasury-note CUSIPs outstanding. Should these securities default due to disagreement found on the deadline day of December 3, 2021, corporate actions are in for an adventure. We cannot help but beg the question--if the limit or suspension is refused, will the restructuring be similar to what we saw with Puerto Rico or Argentina? The future of approval remains to be seen as Congress begins to slowly creep onto new acceptances, as seen with the latest Infrastructure Bill approved on November 5 [3].

Below is a high-level summary of the top 6 Debt Distributions marked by the Department of Treasury (Principal) [4]:

Debt TypeMillions%
Government Account Series6,243,31821.96
Floating Rate Notes579,3662.04

'Turn to the Nerds!'

Have you heard of Tim Chen yet?

On the cusp of the Great Recession in 2008, Tim Chen was one of many who found themselves unemployed from his job at a Hedge Fund. One day as he was "sitting around twiddling [his] thumbs [5]," he received a phone call from his sister questioning whether there was a credit card available with lower foreign transaction fees. As he continued to shop around, he found nothing aside from ads or marketing materials, and only after a weeks-worth of searching and reading multiple banks' murky documentation was he able to come up with a few game-plan options for her. Right then and there he realized that something needed to be done in order to provide consumers more transparency with online financial service advice. And thus, with his own $800 investment, NerdWallet (NASDAQ:NRDS) was formed.

So, what is NerdWallet and how are they structured?

NerdWallet is a free personal finance company aimed at empowering both individual consumers and small and mid-sized businesses to make smarter financial decisions through educational content, tools, and calculators. Revenue is generated from NerdWallet's ability to refer users from its site to their financial services partners.
Back in May 2021, NerdWallet filed an Initial Public Offering (IPO) for 7,250,00 shares of its Class A common stock, also granting underwriters an option to purchase up to an additional 1,087,500 shares. Following this offering, NerdWallet was set to have two classes of common stock: Class A and Class B. The rights of holders across both classes are identical, with some simple exception: voting rights. Each share of Class A common stock is entitled to one vote, while each share of Class B common stock is entitled to ten votes [6].

One Class B share is entitled to TEN Votes! Is that normal?

Well, when we're talking about an IPO - the answer is: it's not uncommon. Such a high number of voting shares for a certain class is understandable when you have investors that were there from the beginning—as was Tim Chen. And here, we see it.

Following the IPO announcement, Mr. Chen and his affiliated trusts will hold approximately 90.6% of Class B common stock voting power of NerdWallet's outstanding capital stock. Steady way to track control. There will be a total of 64,747,341 outstanding after the offering, with about 33.1 million Class A shares and 31.7 million Class B shares [7].

On October 27, 2021, NerdWallet announced the pricing of its initial public offering as US$18 per share, valuing the company at around US$1.2 billion. With the news will-received, NerdWallet's registration statement for registering the Class A shares was declared effective by Securities and Exchange Commission and were listed on the Nasdaq Exchange on November 4 under ticker NRDS [8].

All this in troubling times

As a company born from the ashes of the 2008-9 financial crisis, NerdWallet's current status could be deemed 'at risk' due to the revenue dependency on its financial services partners during this impactful global pandemic. Credit Card revenue declined 30% compared to 2019, while total revenue for 2021 increased by only 7% compared to 32% for 2019.

Nevertheless, as we distance ourselves from the height of economic uncertainty caused by the pandemic, so also could NerdWallet potentially see its declines a thing of the past. The nine months ending September 30, 2021, NerdWallet's credit card revenue has increased by 44% compared to 2020 [9]. Other vertical revenue streams are also on the rise. Surely this won't be the last we hear of NerdWallet and MCA looks forward to seeing what corporate actions they may have in store for us in the future.

It's All In The Details

In August 2021, Morses Club PLC (LON:MCL), a relationship-driven consumer finance provider, declared its proposed plans to reorganize its business and corporate structure to form a newly listed holding company for its business group. As it stands today, Morses Club PLC consists of:

  • Morses Club, the UK's second largest home collected credit (HCC) provider;
  • Shelby Finance Limited, Morses Club's Digital division, which operates under two online brands, Dot Dot Loans and U Money

Should the reorganization go through, the marketplace could expect to see a new AIM-quoted holding company for the group, soon to be referred to as U Money PLC [10].

So, what makes this any reorganization different?

Although the English Scheme of Arrangement is considered a very popular European restructuring tool, these types of transactions are commonly thought to involve some sort of target company. In the last decade or so, when you think back on of a few of the largest scheme of arrangements, you'll notice there was always a target company in mind. For example, Scottish Power and Iberdrola S.A., Alliance Boots and AB Acquisitions Limited, Reuters Group and The Thomson Corporation, and Gallaher Group PLC and Japan Tabaco Inc., to name a few [11].

Under the Morses Club PLC scheme however, we are seeing its transactional use as a way to develop a brand-new holding company and controller of the group altogether. How this would work is that essentially Morses Club shareholders will receive the same number of U Money ordinary shares as their current number of Morses Club ordinary shares, allowing them to enjoy the same rights and economic exposure to the Morses Club Group. This is what differentiates your common terminology of "scheme of arrangement" from a "'members' scheme of arrangement".

Where does the deal stand today and what's next?

The members' scheme was duly approved by shareholders by a requisite majority on a poll at the court convened meeting held on September 14, 2021. The proposal was extremely welcomed by shareholders, and was approved by 99.94% of the ordinary shares. The reorganisation is now subject to sanction by the High Court and FCA regulatory approval for U Money to become a controller of the Group.

Although expected to become Effective October 12, 2021, the company announced expected delays due to the completion of the formal processes. One thing remains the same: regardless of whether the scheme of arrangement aims at a target versus a newly formed company, these companies better have done their homework if they want to receive English court approval [12]!

Our Managed Corporate Actions Experts reached out to the London Stock Exchange (LSE) to inform them of the expected delay on the completion of the formal processes, which resulted in a new RNS issued by the LSE to inform the public [13].

Is the Adoption of Cryptocurrencies Truly Inevitable? Stay Tuned!

Since 2009, 'Cryptocurrencies' have remained one of the hottest topics trending in the financial industry by both investors and governments alike. Dubbed as the new and exciting digital asset class, the instrument has not come without its fair share of turmoil surrounding its usage, legitimacy, and adoption. One of the largest arguments against Cryptocurrencies has been tied to the fact that they are decentralized and cannot be regulated by Global Monetary Authorities.

If it's still a valid point, has anything changed?
On a global level, nothing groundbreaking has occurred to shift the nature of how cryptocurrencies work. Nevertheless, it seems that the negative sentiment faced in the previous years is slowly starting to turn a tide as we continue to see a wider acceptance in the world on its usage. Throughout the years, MCA has continued to track both the positive and not-so-positive global reactions to cryptocurrencies, and have found the following news-worthy elements:

Positive Global Events in Recent Years

  • April 2017 - Japan accepts cryptocurrencies as legal property under the Payment Services Act and crypto exchanges are allowed to operate under the AML/CFT obligations [14]
  • March 2020 - Australia allows cryptocurrency and defines it as a digital asset, subjected to the ATO's tax consequences [15]
  • December 2020 - One of Singapore's main banks, DBS, started a DBS Digital Exchange for Institutional Investors and Accredited Investors, with the Singapore Stock Exchange taking 10% in the venture [16]
  • February 2021 - Tesla Inc. (NASDAQ: TSLA) holds Bitcoin on its balance sheet [17]
  • April 2021 - Coinbase Global Inc. (NASDAQ: COIN) lists on NASDAQ on April 14, 2021 [18]
  • Septmeber 2021 - El Salvador adopts Bitcoin as the legal tender, allowing for completed transactions in BTC [19]
  • October 2021 - U.S. Securities and Exchange Commission approves ProShares' launch of a Bitcoin futures ETF on the NYSE (NYSE:BITO) [20]
  • November 2021 - Bitcoin tax provision passes in US Infrastructure Bill [21]

Alternative Reactions to Cryptocurrencies

  • April 2021 - Turkey bans cryptocurrency payments [22]
  • October 2021 - China cracks down on all financial transactions involving cryptocurrency and issues a countrywide ban on cryptocurrency mining [23]
  • There remains 9 countries which have totally banned Bitcoin and Cryptocurrencies. See the full list here.

What does MCA make of it all?
From a corporate actions' perspective, each sovereign country gives a different definition towards cryptocurrency and its legalization within the country's own financial structure. Therefore, it seems that cryptocurrencies might eventually be supported as a digital asset class and could be traded like a financial instrument.

However, due to its decentralized nature, governments may implement a fixed percentage of cryptocurrency allowed in portfolios, implement stringent tax rules around acquisition and disposal of cryptocurrency, and tougher auditing rules around cryptocurrency transactions. And so, the evolution continues!

Our Managed Corporate Actions Experts will continue to monitor future announcements made to all the above postings to ensure the most accurate and reliable corporate actions data coverage. Please reach out for more information or questions.

Interested in more? Please find:

Managed Corporate Action's September Postings

Managed Corporate Action's August Postings

Managed Corporate Action's July Postings

Managed Corporate Action's June Postings

Posted 29 October 2021 by Madhu Ramu, Managing Director, Corporate Actions, S&P Global Market Intelligence

IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

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