On the Radar
SEC Reporting Considerations for Guarantees and
Collateralizations
SEC registrants may issue a variety of debt or debt-like securities
to finance their operations. In certain cases, they may offer credit enhancement
arrangements under which subsidiaries of the registrant guarantee the debt or the
registrants pledge the stock of their affiliates as collateral. In addition, for
various reasons, a subsidiary of the registrant (rather than the registrant) may
issue debt or debt-like securities. While these structures or credit enhancement
arrangements may be beneficial from a cost-of-capital perspective, registrants
should consider the SEC reporting implications and related complexities.
Guarantees of debt and of preferred stock that is
registered under the Securities Act of 1933 are considered securities themselves
under that legislation. Therefore, such guarantees, in addition to offerings of the
guaranteed securities, must be registered with the SEC unless they are exempt from
registration. Once a company registers them, an SEC reporting obligation is
established for each subsidiary issuer or guarantor under which the following (not
all-inclusive) must be provided separately:
- Full annual financial statements prepared in accordance with applicable accounting standards and audited in accordance with PCAOB standards.
- An annual assessment of internal control over financial reporting.
- Quarterly reporting of condensed financial information.
- MD&A.
Given how burdensome these requirements may be, the
SEC typically permits registrants to provide alternative nonfinancial and financial
disclosures as follows in their financial statements or MD&A as a form of relief
in certain circumstances:
Nonfinancial Disclosures
- A description of the issuers and guarantors.
- The terms and conditions of the guarantees, including whether a subsidiary guarantee is not full and unconditional or joint and several.
- Factors that may affect payments to holders of the guaranteed securities,
including, but not limited to:
- The structure of and relationship between issuers, guarantors, and nonguarantors.
- Restrictions on dividends.
- Limitations on enforceability of the guarantees.
- The rights of noncontrolling interests.
Financial Disclosures
Summarized financial information of the issuer and
guarantors consisting of the following line items, together with a brief description
of the basis of presentation:
- Current and noncurrent assets.
- Current and noncurrent liabilities.
- Redeemable preferred stock.
- Noncontrolling interests.
- Revenues.
- Gross profit.
- Income (loss) from continuing operations.
- Net income (loss).
- Net income (loss) attributable to the entity.
It is significantly less costly and
burdensome for a registrant to provide these alternative disclosures than comply
with separate SEC reporting obligations for each subsidiary issuer and guarantor.
Thus, before issuing securities, a registrant should determine whether it qualifies
for such relief on the basis of the contemplated legal structure and consult with
SEC legal counsel as appropriate. A registrant is eligible to provide alternative
disclosures if its securities are issued or fully and unconditionally guaranteed by
a parent company registrant, all issuers and guarantors are consolidated
subsidiaries of the parent company, the securities are debt or debt-like, and one of
the following guarantee structures is used:
- The parent company registrant issues or coissues (on a
joint-and-several basis with one or more of its consolidated subsidiaries)
securities that are guaranteed by one or more consolidated subsidiaries.
- A consolidated subsidiary issues or coissues (with one or
more other consolidated subsidiaries of the parent company registrant) the
securities, and the securities are fully and unconditionally guaranteed by
the registrant/parent company.
A registrant whose debt securities meet these requirements may provide alternative
disclosures in lieu of separate financial statements for the subsidiary issuers or
guarantors. Note that while such alternative disclosure requirements apply only to
publicly registered securities with these features, investors in private placement
debt securities with similar guarantee structures may expect companies to disclose
similar information.
A registrant that issues securities that are collateralized by the stock of an
affiliate must also provide certain financial and nonfinancial disclosures about the
affiliates whose stock collateralizes the debt. This includes summarized financial
information about such affiliates and certain other nonfinancial disclosures.
For a comprehensive discussion of the
disclosure requirements for these securities, see Deloitte’s
Roadmap SEC Reporting Considerations for Guarantees and
Collateralizations.
Contacts
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John Wilde
Partner
Deloitte & Touche LLP
+1 415 783 6613
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Matt Burley
Partner
Deloitte & Touche LLP
+1 720 264 4866
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