Since 1997 the Portuguese securities market has been
considered a developed market and has evolved to become
increasingly sophisticated and competitive at a European Union
A significant step towards a modern capital market has been
the integration of the Lisbon and Oporto Stock Exchanges into
Euronext, which took place on January 30 2002. The merger has
allowed Euronext Lisbon's stock exchange to participate in a
wider European capital market that also includes the stock
markets of Euronext Paris, Euronext Amsterdam and Euronext
Brussels. This integration process envisages the creation of a
common European capital market, in which investors may have
access to a single equity and derivatives trading platform with
common netting, clearing and settlement services and harmonized
market rules and procedures.
The evolution of the Portuguese capital market has been
accompanied by the creation of a new legal framework for the
securities market implemented through the 1999 Securities Code,
as well as by the introduction of new financial instruments or
structures, such as warrants, securitization operations,
certificates, credit-linked notes or convertible bonds.
Most of these new securities (due to their debt nature) are
proving to be very useful for Portuguese public companies
considering the adverse current financial and economic
circumstances. In fact, since traditional equity solutions such
as rights issue are often inadequate within the current
securities market context, market players are searching for new
financial approaches specifically designed around debt
The Portuguese securities market commission, the
Comissão do Mercardo de Valores Mobiliários
(CMVM), has recently enacted two regulations that recognized
new debt securities available to the Portuguese market:
convertible bonds and credit linked notes.
Under the convertible bonds regulation, it is now possible
to issue reverse convertibles or mandatory convertibles in the
Portuguese securities market.
According to international practice, companies usually issue
convertibles as deferred equity which may be an especially
attractive option in case of adverse market conditions or other
constraints. On the other hand, it is also common to issue
convertibles instead of straight debt instruments because of
convertibles greater appeal as a sweetener whose equity element
compensates for the risk.
Convertible bonds may also be used by issuers as or within a
monetization instrument or structure. From investors'
perspective, exchangeable bonds may also be attractive as a
medium or long term investment that associates periodic
revenues with the eventual or mandatory right to receive the
securities of a specific issuer.
From a conceptual point of view, reverse convertibles
essentially consist of a combined financial instrument that
assembles a typical bond instrument with a put option right
over a certain underlying security.
Under Portuguese law, these put options may be exercised at
the bonds issuer's discretion if the underlying security market
price is equal to or lower than a pre-determined reference
price indicated in the offering materials. If this is the case
the issuer may on the maturity date choose to either settle the
transaction by delivering the underlying securities or by
paying the corresponding amount. If the underlying security's
market price is higher than the reference price on the maturity
date then the issuer must settle the convertible in cash.
Mandatory convertible bonds, on the other hand, are
compulsorily exchanged into shares or bonds on maturity, in
accordance with the terms laid down in the offering decision.
However, the applicable regulation requires that the
exchangeable shares or bonds are issued by the convertibles
offeror or by group related companies, which results in a
certain limitation in the use of this financial instrument.
In order to protect the interests of investors, both types
of convertibles may only be issued by banks or by entities that
have entered into a suitable agreement with a bank (subject to
supervision rules similar to those applicable within EU
countries) or with the parent company, in which the offeror's
obligations are guaranteed by such bank or parent company.
Other investors protection rules have been implemented. On
the one hand, if redemption of convertibles is due in a period
of more than five years the offeror must ensure investors the
right to exercise earlier redemption at the end of a five-year
period under equitable conditions. On the other hand,
advertisement of convertible bonds must include a reference to
the characteristics of those securities emphasizing eventual
cash settlement alternative and conditions for the delivery of
the underlying securities, as well as the risk of partial or
total loss of their investment.
The other type of debt security introduced by recent CMVM
regulations is credit-linked notes.
Credit-linked notes' major attraction lies on the capacity
to make an economic investment in a certain underlying asset
without the necessity to make a direct investment in such
The demand for credit-linked notes is often driven, from the
investor's perspective, by the need for diversification or
hedging of credit risk In the case of banks and financial
institutions, credit-linked notes are often used to restructure
credit portfolio risk profiles.
Credit-linked notes constitute an advantageous instrument to
deal with the lack of specific underlying securities sought by
investors or a difficulty in trading in the underlying security
because of a lack of liquidity.
Under the new Portuguese regulation, the investor's credit
right under the credit-linked notes may be conditioned by
credit events set out in the offering materials. These credit
events may trigger either a reduction or increase in the cash
redemption amount or the delivery of debt securities listed in
regulated markets (or markets subject to similar regulatory
framework) issued by other entities.
The CMVM regulation on credit-linked notes requires full
disclosure of the securities' characteristics and of the risks
associated to the investment in such financial products. The
Commission's regulation also states that only banks and
entities that have a suitable agreement with a bank or parent
company may issue credit-linked notes. Subject to supervision
rules and those of EU member states, an entity which issues
credit-linked notes must have an agreement where its
obligations are guaranteed by the bank or parent company.
The special risks involved in this type of security have
lead the CMVM to impose a minimum nominal value of €25,000
($26,775) for credit-linked notes with no guaranteed
reimbursement. With this measure, it is expected that
credit-linked notes are mostly addressed to qualified
investors, which may have easier access to financial advisory
when investing in these instruments.
The securities described in this article allow issuers to
use more attractive instruments to raise financial resources in
the Portuguese debt securities market, albeit with a higher
As the number and type of securities available to issuers
and investors in the Portuguese securities market is subject to
previous legal recognition, Portuguese law does not allow as
much flexibility as other jurisdictions. But it is irrefutable
that important steps have been taken to keep financial players
interested in investing in the Portuguese capital market while
also attracting foreign investors. New competitive financial
products accompanied by an adequate tax treatment have become
an incentive for foreign entities to increase or initiate
investment in Portugal.