A sunny disposition — SEC rewrites S-X rules on disposals

Though there isn’t much we can be certain of these days, one old adage has remained a steady beacon of truth since the COVID-19 pandemic hit in March: Cash is King.

After a brief shutdown, the primary US and European leveraged finance markets leapt back to action with troubled, conservative and opportunistic credits alike rushing in to shore up balance sheets. Revolving facilities, too, were amended, upsized and drawn to the hilt, with LCD estimating some $286 billion of revolvers borrowed across the ratings spectrum between March 5 and May 8.

While borrowing may be the short-term answer to a liquidity crunch, as corporates and sponsors take stock and gear up for Q2 results, it can’t be long before we start to see the other main means of bulking up bank balances: Disposals.

What luck, then, that the SEC has announced the adoption of its much-anticipated amendments to Regulation S-X’s disclosure requirements for material acquisitions and dispositions (effective January 1, 2021, but early adoption permitted).

In particular, the rules on what counts as a “significant” disposal (and thus requiring pro forma financial statements) are getting a serious re-write. Currently, pro formas for acquisitions must be prepared if they exceed a 20% assets/investments/income significance test. For dispositions, however, a 10% threshold applies. The new rules align both by creating a 20% materiality test across the board.

In a world where the new normal will likely involve liquidity-driven sales of business lines or other strategic non-core dispositions, the revamped Regulation S-X will certainly be welcome. Not least for issuers looking to access the high yield market where the complexity, costs and time constraints of preparing pro forma financials for offering documents can be a serious obstacle to getting to market while the going's still good.