SEC proposes opening up off-the-shelf sales to big junk issuers

New York, July 2 - The Securities and Exchange Commission is considering rule changes that would allow the largest high-yield issuers to make off-the-shelf sales of debt securities.

Instead of using credit ratings as a test for eligibility, the new rules would use issuance thresholds.

The proposal is part of a series of changes being considered by the SEC that would reduce the use of credit ratings in securities market regulations. The commission is responding to the recent turmoil in the credit markets and concerns about credit ratings.

Two sets of recommendations were backed by commissioners on June 11 and the third and latest group on June 25.

"This action is designed to ensure that the role we assign to ratings in our rules is consistent with the objective of having investors make an independent judgment of the risks associated with a particular security," said SEC chairman Christopher Cox in a statement.

"It should be neither the purpose nor the effect of any SEC rule to discourage investors from paying close attention to what credit ratings actually mean."

"I believe the proposed amendments will further promote the commission's goals of strengthening the ratings process by reducing any undue reliance on NRSRO [Nationally Recognized Statistical Rating Organizations, i.e. rating agencies] ratings and by encouraging independent evaluation and analysis of credit risk," added Erik R. Sirri, director of the SEC's Division of Trading and Markets.

Currently issuers can use the shelf process via forms S-3 and F-3 if they meet various eligibility requirements. One of those tests permits companies to register primary offerings of non-convertible securities if they are rated investment grade by at least one rating agency.

Under the new proposal, the shelf process could be used for primary offerings of non-convertible securities if the issuer has issued for cash more than $1 billion in non-convertible securities, other than common equity, through registered primary offerings over the prior three years.

Similar to its approach with well-known seasoned issuers, the SEC said it believes that "having issued $1 billion of registered non-convertible securities over the prior three years would lead to a wide following in the marketplace."

The SEC noted, however, that it does not intend for the rule change to significantly affect the number of issuers eligible to use the shelf process.

Using the $1 billion threshold, the SEC estimated that for issuances so far this year the proposed change would result in approximately six issuers filing on form S-1 instead of on a short-form registration statement.

"We realize that it is now possible that some offerings of non-investment grade securities, such as high-yield bonds (also known as 'junk bonds') may be registered for sale on form S-3," the SEC added.

These issuers also would have to satisfy the other conditions of the eligibility requirement. The SEC noted that they could only include non-convertible securities issued in registered primary offerings for cash, not registered exchange offers.

Also covered by the rule change would be Canadian companies selling under form F-9, although the investment-grade test would remain in place in this case.

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