The Evolution of Issuers’ Disclosure Packages in the Eye of the COVID-19 Storm

After a period of volatility and dislocation in the debt capital markets, quality issuers are now finding ample access to liquidity at reasonable pricing through the investment-grade debt markets. However, investors are keenly interested in understanding the impact of the COVID-19 pandemic and its effects on an issuer, and companies looking to go to market should be prepared to include thoughtful disclosure in the disclosure package for investors.

And investors are not the only ones interested in disclosure packages. The Securities and Exchange Commission (SEC) and the plaintiffs’ bar are paying attention to how things are unfolding. The SEC published detailed guidance on March 25, 2020, with some suggestions on how registrants should think about COVID-19-related disclosure. As to the latter, the rise of “event-driven” securities litigation is not expected to end anytime soon as COVID-19 continues to create turbulence in the capital markets. For issuers, thoughtful disclosure can help mitigate securities litigation risks in the fallout of COVID-19.

There is no one-size-fits all approach to disclosures relating to COVID-19, and companies are taking a variety of approaches depending upon the nature and extent of the recent or potential impacts on their particular circumstances. Many issuers entering in the market during the early days of the pandemic relied mainly on risk factors, in large part because of the high degree of uncertainty about those impacts. But once a risk has actually materialized or impacts have been realized, it’s no longer just a “risk or uncertainty” and is more appropriately addressed through a qualitative and/or quantitative update, which many issuers are doing ever-increasingly with disclosure under the heading of “Recent Developments.” At this point in time, many issuers are finding it appropriate to include both a disclosure of recent developments describing recent impacts and forward-looking risk factors warning of the continuing risks and uncertainties.

Disclosure Example: Carnival

Of recent transactions, the prospectus supplement dated March 31, 2020, for the $1.25 billion offering of common stock by Carnival Corporation (Carnival) may win the prize for the most extensive discussion regarding COVID-19. That prospectus supplement includes 46 total references to either “COVID” or “coronavirus,” including a COVID-19 recent developments section that spans across four pages and a new COVID-19 specific risk factor that spans three pages.

The breadth of Carnival’s recent developments disclosure is not all that surprising. The company and the cruise line industry have been on the front lines of the COVID-19 outbreak going back to early February. Some of the first American citizens diagnosed with the virus were passengers on Carnival’s Diamond Princess cruise ship, which was quarantined off the coast of Japan for two weeks. Subsequently, Carnival has faced additional outbreaks on other vessels and resulting passenger deaths. The company has since paused its global fleet and realized a negative impact on bookings, which the company expects to continue to impact its financial results and liquidity possibly “well beyond the containment of such outbreak.”

While a lengthy discussion of material developments may not be applicable for all companies, any issuer going to market should consider what risks have truly materialized and are no longer simply a risk or uncertainty. While the SEC seemingly recognizes the practical difficulties that companies are faced with when undertaking this analysis, it has reminded companies to “provide investors with insight regarding their assessment of, and plans for addressing, material risks to their business and operations resulting from the coronavirus to the fullest extent practicable to keep investors and markets informed of material developments.”

Advice for Issuers Preparing to Go to Market

• In this rapidly evolving environment, it is often appropriate to include both disclosure about recent developments to-date in addition to the forward-looking risk factors about potential risks and uncertainties as the situation continues.
• Because the impacts of COVID-19 vary greatly from company to company and because the situation continues to evolve rapidly, there is no one-size-fits-all approach to this disclosure. Relevant internal stakeholders should give careful thought to the right disclosure
• Many issuers have generic risk factors in their Annual Reports on Form 10-K about epidemics and other national or global emergencies or disasters. Do not assume such generic risk factors are adequate disclosure in the current environment.
• Quantitative disclosure is often appropriate, but you’ll want to be prepared to provide appropriate backup or auditor comfort as part of the due diligence process.
• In volatile markets, it is not unusual for issuers to finalize documentation to allow entry into the markets as soon as possible, but to assess conditions each day until market conditions offer a satisfactory launch window. It may be tempting to consider COVID-19 disclosure “put to rest” when the prospectus supplement is first locked for a potential launch, but given the rapid developments we continue to see, it is important for issuers and underwriters to continuously evaluate that disclosure as time passes to ensure it continues fairly present the issuer’s situation at the time of sale for a transaction.

Given the volatility and fast-evolving nature of the capital markets during this crisis and the importance of thoughtful, tailored disclosure called for in these circumstances, it is critical for issuers contemplating a capital markets transaction to consult early with knowledgeable counsel.

Faegre Drinker’s Coronavirus Resource Center is available to help you understand and assess the legal, regulatory and commercial implications of COVID-19.