Top 10 Practice Tips: Liability Management Transactions – Finance and Banking & More News Here – Upjobsnews

This Top 10 Practice Tips provides key practice tips for
advising a client considering a liability management transaction.
Given recurring periods of market volatility, issuers in a wide
range of industry sectors from time to time evaluate potential
liability management transactions, including debt repurchases,
tender or exchange offers, and consent solicitations. Liability
management transactions allow an issuer to refinance or restructure
its outstanding obligations and may, under certain circumstances,
allow an issuer to achieve certain accounting, regulatory, or tax
objectives.

Issuers may derive significant benefits from a liability
management transaction including, but not limited to, evidencing a
positive outlook for the issuer in an uncertain market environment,
extending debt maturities, recording an accounting gain,
deleveraging, obtaining potential regulatory capital benefits,
increasing financing flexibility and potentially avoiding a more
fundamental restructuring or bankruptcy. Choosing the most
appropriate liability management transaction is critical and
requires that the issuer and counsel consider a number of factors,
as discussed below.

• Consider whether the transaction is an opportunistic or
  a distressed transaction. Choosing the right liability
  management alternative to restructure or retire outstanding debt
  securities or to manage risk and reduce funding costs depends on a
  number of factors. Understanding an issuer’s business
  objectives and financial health is critical when evaluating the
  feasibility of a given liability management transaction. Often,
  market participants assume that only issuers facing financial
  distress or that are highly leveraged will engage in a liability
  management transaction. Of course, this is not the case, but the
  type of transaction and the terms will depend on the issuer’s
  business objectives, whether the issuer has sufficient cash on
  hand, and on market conditions. The transaction may be motivated by
  an accounting, regulatory, or tax objective or may simply allow the
  issuer to refinance its outstanding indebtedness at attractive
  rates, extend its debt maturities, address its exposure to
  LIBOR-based indebtedness, or repurchase outstanding securities
  trading at a discount. Prior to considering any option, counsel
  must understand whether the transaction is opportunistic or
  whether the issuer faces financial challenges that need to be
  addressed as part of the transaction.




• Evaluate whether the issuer’s contractual
  agreements prohibit repurchases, tenders, or exchanges of its
  outstanding securities. An issuer’s existing
  commitments may prevent the repurchase, tender, or exchange of an
  outstanding security or trigger repayment obligations or
  requirements to use proceeds from a new issuance for other
  purposes. Therefore, the issuer’s existing financing
  arrangements and other material agreements must be carefully
  reviewed. For example, an existing credit facility may prohibit
  prepayment or redemption of the issuer’s outstanding debt
  securities or the debt security itself may have call protection
  features (preventing or limiting a redemption) that should be
  analyzed. Moreover, debt securities may be redeemable by the issuer
  only after a certain period has elapsed or a certain market return
  has been achieved.

  Additionally, an indenture may contain financial covenants that
  restrict the issuer’s ability to use available cash to pay down
  or retire other classes of outstanding debt securities. The
  indenture governing the securities to be redeemed will specify the
  redemption price and mechanics and typically requires notice of not
  less than 30 days nor more than 60 days be provided to holders.
  Often, the redemption price equals the face amount plus the present
  value of future interest payments. In certain situations, to permit
  a desired liability management transaction, an issuer may need to
  first or concurrently conduct a consent solicitation to amend or
  waive restrictive financial covenants or event of default
  provisions under an existing indenture that otherwise would limit
  its ability to engage in the liability management transaction.
  Because consent solicitations can increase flexibility under
  existing restrictive covenants they may serve as a useful tool when
  responding to challenges stemming from the COVID-19 pandemic.

  In connection with providing notice of redemption, a company
  typically issues a press release to announce its decision to redeem
  outstanding debt securities. This public disclosure should occur
  before contacting the company’s debtholders if the broader
  impact of the transaction on the company’s financial condition
  would be viewed as material.




• Assess whether the tender offer rules apply.
  An issuer repurchasing its securities, whether in privately
  negotiated transactions or in open market purchases, runs the risk
  that it may inadvertently trigger the tender offer rules. The
  tender offer rules were adopted by the Securities and Exchange
  Commission (SEC) to ensure that the issuer and other offering
  participants do not engage in manipulative practices. Because the
  term “tender offer” is not specifically defined by the
  SEC, courts have historically applied the tender offer rules to a
  broad range of transactions. The analysis of whether a particular
  offer constitutes a tender offer triggering requirements under the
  Securities Exchange Act of 1934, as amended, begins with the test
  set forth in Wellman v. Dickinson, 475 F. Supp. 783, 1979 U.S.
  Dist. LEXIS 11174, which provides that the following eight
  characteristics are typically indicative of a tender offer:
  • An active and widespread solicitation of public shareholders
    for the shares of an issuer.

  
  

  • A solicitation is made for a substantial percentage of the
    issuer’s securities.

  
  

  • The offer to purchase is made at a premium over the prevailing
    market price.

  
  

  • The terms of the offer are firm rather than negotiable.

  
  

  • The offer is contingent on the tender of a fixed number of
    shares, often subject to a fixed maximum number to be
    purchased.

  
  

  • The offer is open only for a limited period of time.

  
  

  • The offeree is subjected to pressure to sell his or her
    security.

  
  

  • Public announcements of a purchasing program precede or
    accompany a rapid accumulation of large amounts of the issuer’s
    securities.

    These eight characteristics need not all be present for a
    transaction to be deemed a tender offer, and the weight given to
    each element varies with the individual facts and circumstances of
    the offer. As a result, repurchase programs should be structured
    (i) for a limited number of securities; (ii) to a limited number of
    holders; (iii) over an extended period of time; (iv) at
    individually negotiated prices; and (v) with offers and acceptances
    not contingent on one another.




• Assess whether the issuer has (or wants to use its)
  available cash to effect the transaction. An issuer may
  not have sufficient cash to effect a redemption, repurchase, or
  tender offer, or the issuer’s management may view using cash to
  effect such a transaction as an inappropriate use of resources
  given market uncertainty. In that event, an issuer might instead
  consider a noncash transaction, such as an exchange offer or a
  consent solicitation (likely to require payment of a modest
  cash fee). In an exchange offer, the issuer offers to exchange
  a new debt or equity security for its outstanding debt or equity
  securities in a registered offering or in an offering exempt from
  registration pursuant to Section 3(a)(9) (15 U.S.C. § 77c) of
  the Securities Act of 1933, as amended (Securities Act), or other
  exemption from registration, as discussed below. An exchange offer
  can be an especially useful mechanism for an issuer to reduce its
  interest payments or cash interest expense, reduce the principal
  amount of its outstanding debt, manage its maturity dates, and
  reduce or eliminate onerous financial covenants. Coupled with a
  consent solicitation, an exchange offer may be an attractive option
  for an issuer seeking to significantly amend or waive restrictive
  indenture provisions.

  Conversely, issuers with sufficient cash may consider conducting
  privately negotiated repurchases, open market repurchases, or a
  cash tender offer. Repurchasing debt allows the issuer to obtain
  pricing based upon the current market price of securities that are
  likely trading at a discount. The issuer will often engage a
  financial intermediary to negotiate and effect the repurchase or to
  repurchase the debt securities on a principal basis. A debt
  repurchase is an efficient means of refinancing because it requires
  little preparation, limited or no documentation, and modest
  transaction costs, particularly when the issuer is seeking to
  repurchase only a small percentage of debt or if the debt is not
  widely held. An issuer also may consider a cash tender offer for
  all, or a significant portion, of a class of its outstanding
  securities.




• Assess the composition of the holders of the
  issuer’s securities. The issuer should consider
  whether the securities that are the subject of the liability
  management transaction are widely held, as well as the status
  (predominantly retail or institutional) and location of the holders
  of such securities (foreign or domestic holders). For example,
  privately negotiated repurchases are usually most effective if the
  issuer is seeking to repurchase a small percentage of an
  outstanding series of debt securities held by a limited number of
  holders. A tender offer may be more appropriate if the security is
  widely held, and the issuer would like to retire all or a
  significant portion of the outstanding securities. Tender offers
  are the most common type of transaction and may be for “any
  and all” of the outstanding securities of one or more series
  or for a maximum principal or purchase amount. Because issuers in
  certain industries continue to face challenges as a result of the
  COVID-19 pandemic, tender offers have become even more relevant as
  they may be used to refinance outstanding debt at lower
  interest rates (and at a discount to the current applicable
  redemption price). The issuer may consider requiring, as a
  condition to the tender or exchange offer, that a substantial
  percentage of the outstanding securities be tendered as part of the
  transaction. Finally, an issuer relying on the exemption of Section
  4(a)(2) of the Securities Act (15 U.S.C. § 77d), or Regulation
  D thereunder, to conduct a private exchange offer will need to
  confirm the status of the participating holders to ensure that the
  offering requirements are satisfied.




• Consult specialists to assess tax
  implications. An issuer engaging in a liability management
  transaction must be aware of applicable tax consequences relating
  to cancellation-of-indebtedness (COD) income. Issuers with
  outstanding debt may be subject to tax on COD income when all or a
  portion of such debt has been effectively cancelled. COD income can
  arise in several circumstances, including forgiveness of debt by
  the debt holder, repurchase of debt by the issuer at a discount,
  exchange of one debt instrument of the issuer for another,
  modification of debt, and exchange of debt for the issuer’s
  equity. Additionally, repurchases or exchanges by persons related
  to the issuer may inadvertently result in COD income. The Internal
  Revenue Code provides a number of exceptions to the inclusion of
  COD income, including exceptions related to insolvency and
  bankruptcy. Issuers and counsel are also advised to consider the
  tax and spending measures intended to benefit businesses and
  individuals under the recently passed Coronavirus Aid, Relief, and
  Economic Security Act.




• Consider applicable stock exchange requirements and
  other securities law issues. An issuer must review
  applicable securities exchange provisions if the security to be
  offered as part of a liability management transaction is the
  issuer’s common stock or a security convertible or exercisable
  for the issuer’s common stock. The New York Stock Exchange and
  The Nasdaq Stock Market each require listed companies to obtain
  shareholder approval under certain circumstances for an issuance
  that will exceed more than 20% of the pre-transaction shares of
  common stock outstanding. The exchanges also require an issuer to
  obtain shareholder approval in advance of an issuance that would
  result in a change of control of the issuer.

  may trigger disclosure obligations under SEC Regulation FD
  (disclosure of any material nonpublic information (MNPI) to certain
  market professionals or holders of its securities may require the
  issuer to inform the rest of the market). Issuers should also be
  aware that “testing the waters” for a transaction
  may also trigger this obligation. Therefore, issuers should
  disclose MNPI (e.g., unreleased earnings, potential changes to
  credit ratings) prior to engaging in such repurchases. Issuers
  should also be aware that repurchases may trigger Regulation M
  concerns. Regulation M makes it unlawful for an issuer to “bid
  for, purchase, or attempt to induce any person to bid for or
  purchase, a covered security during the applicable restricted
  period.” Repurchases of convertible debt may be deemed a
  “forced conversion” and thus a distribution of the
  underlying equity security under Regulation M.




• Determine if offering qualifies for abbreviated tender
  offer relief. Historically, a tender or exchange offer of
  non-investment grade debt had to be held open for at least 20
  business days (with 10-business day extensions for certain
  modifications). Investment grade debt was not subject to the
  20-business day offer period and 10-business day extension
  requirements. However, in January 2015 the SEC Staff issued The
  Abbreviated Tender or Exchange Offers for Non-Convertible Debt
  Securities no-action letter 2015 SEC No-Act. LEXIS 22 that provided
  limited relief to certain tender and exchange offers (regardless of
  credit rating) to the extent specified conditions were met. In
  2016, the SEC Staff issued Tender Offer and Schedules compliance and
  disclosure interpretations 162.01–162.05 clarifying the
  2015 no-action letter. This relief permits debt tender offers
  (including tender offers conducted in the context of certain
  exchange offers) to be held open for as few as five business days
  with potential extensions as short as five business days following
  changes to the offered consideration or three business days
  following modifications to other material terms.

  Noteworthy conditions to the relief include, among others, that (i)
  the offer to purchase must be made for any and all nonconvertible
  debt of a particular class or series (however, abbreviated offers
  can have minimum tender conditions); (ii) the offer must be open to
  all record and beneficial holders of that class or series of debt;
  (iii) the offer must be conducted and designed to provide all
  record and beneficial holders of that particular class or series of
  security a reasonable opportunity to participate; (iv) the offer
  must not be made in anticipation or response to other tender offers
  for the issuer’s securities; and (v) the offer must be made
  solely for cash or other qualified debt securities (certain
  nonconvertible debt securities with a longer maturity date) and the
  consideration must be fixed-price or real-time fixed-price spread
  (only a fixed-price spread set two days prior to the expiration of
  the exchange offer is permitted for non-investment grade
  debt). The offer must be announced through a widely disseminated
  press release before 10:00 a.m. on the first business day of the
  five-business-day period, which, if the issuer or offeror is an
  SEC-reporting company, must be furnished to the SEC on a current
  report on Form 8-K (or Form 6-K for a foreign private issuer)
  before noon on the first business day of the offer. The abbreviated
  tender offer relief is not available if the offer is made in
  connection with a consent solicitation, if there is a default under
  the issuer’s material debt agreements, if the offer is made
  concurrently with a tender offer for any other series of the
  issuer’s securities made by the issuer, or in connection with a
  material acquisition or disposition.




• Determine if the exchange offer will be registered or
  exempt. An exchange offer involves the offer of new
  securities and, as a result, must comply with, or be exempt from,
  the registration requirements of the Securities Act. An issuer may
  rely on the private placement exemption provided by Section 4(a)(2)
  of the Securities Act or Regulation D thereunder. In addition,
  offers and sales outside the United States may qualify for the safe
  harbor exemption of Regulation S.

  Another option frequently used by issuers is an exchange offer
  exempt from registration pursuant to Section 3(a)(9) of the
  Securities Act. Section 3(a) (9) exempts from the registration
  requirements “any securities exchanged by the issuer with its
  existing security holders exclusively where no commission or other
  remuneration is paid or given directly or indirectly for soliciting
  such exchange.” Section 3(a)(9) has the following five
  requirements: (i) the security being issued and the security for
  which it will be exchanged must be issued by the same issuer: (ii)
  the holders must not be asked to part with anything of value
  besides the outstanding security; (iii) the exchange must be
  offered exclusively to the issuer’s existing security holders;
  (iv) the issuer must not pay any commission or remuneration for the
  solicitation of the exchange; and (v) the exchange must be in good
  faith and not as a plan to avoid the registration requirements of
  the Securities Act. Securities issued as part of a Section 3(a)(9)
  exchange remain subject to the same transfer restrictions as the
  original securities.

  If an issuer is unable to conduct a private exchange offer, or to
  rely on Section 3(a)(9), it may instead conduct a registered
  exchange offer. A registered exchange offer must be registered on a
  Form S-4 registration statement (or Form F-4 for foreign private
  issuers) and include descriptions of the securities being offered,
  the terms of the exchange offer, description of the issuer,
  risk factors, financial information and, if applicable, pro forma
  financial statements. The exchange offer may not be commenced until
  the registration statement is declared effective by the SEC. The
  SEC review process, cost to prepare the registration statement, and
  uncertainty concerning timing often make a registered exchange
  offer a less desirable option for issuers. Additionally, the issuer
  and other offering participants in a registered exchange offer are
  subject to potential liability under Sections 11 (15 U.S.C. §
  77k) and 12 (15 U.S.C. § 77l) of the Securities Act for
  material misrepresentations or omissions in the registration
  statement and prospectus.




• Consider recent Trust Indenture Act cases. In
  recent years, debtholders have sought to invoke the protections of
  the Trust Indenture Act of 1939, as amended (Trust Indenture
  Act), in connection with certain liability management transactions.
  Under most indentures, as well as Section 316(b) of the Trust
  Indenture Act (15 U.S.C. § 77ppp), consenting noteholders
  cannot reduce principal or interest, amend the maturity date,
  change the form of payment, or make other economic changes to the
  terms of the debt securities held by non-consenting noteholders.
  Several recent court cases have reinforced the significance of the
  Trust Indenture Act’s protections and the need to avoid any
  coercive consent solicitation that would deprive non-consenting
  noteholders of repayment on their securities.

Originally published by Lexis Practical
Guidance.

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