This practice note provides 10 practice tips that can help you as counsel to an issuer seeking to engage in a liability management transaction. Given recent market volatility, issuers in a wide range of industry sectors may now be evaluating 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 take advantage of significant benefits associated with a liability management transaction including, but not limited to, evidencing a positive outlook for the issuer in an uncertain market environment, deleveraging potential regulatory capital benefits, 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.

For additional information on various types of liability management transactions, see Top 10 Practice Tips: Debt Tender Offers, Debt Tender Offers, Debt Tender Offer Structuring Considerations, Market Trends 2018/19: Tender and Exchange Offers, Exchange Offers under Section 3(a) (9), Restructuring Outstanding Debt Securities Chart, and Debt Securities Restructuring Options.

  1. 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 may depend 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 issuers 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 be highly dependent on the issuer's business objectives, whether the issuer has sufficient cash on hand, and 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 in advance of an expected recession, address its exposure to LIBOR-based indebtedness, or repurchase its outstanding securities that are trading at a discount. Prior to considering any particular option, counsel must understand whether the transaction is opportunistic or whether the issuer faces particular financial challenges that need to be addressed as part of the transaction.
  2. 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 the proceeds from such a transaction for other purposes. Therefore, a careful review of the issuer's existing financing arrangements and other material agreements must be undertaken by counsel. For example, an existing credit facility may prohibit the 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 and taken into consideration as part of the transaction. Moreover, certain debt securities may be redeemable by the issuer only after a certain period of time has elapsed or a certain market return has been achieved. Additionally, the issuer's indenture may contain financial covenants that restrict its 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. In certain situations, in order to permit a desired liability management transaction, an issuer may need to first or concurrently conduct a consent solicitation in order to amend or waive restrictive financial covenants or events of default provisions under an existing indenture that otherwise would limit its ability to engage in the transaction.
  3. 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 transaction structures. The analysis of whether a particular offer constitutes a tender offer triggering Exchange Act requirements begins with the eight-factor test set forth in Wellman v. Dickinson, 475 F. Supp. 783 (SDNY 1979). The following eight characteristics are typically indicative of a tender offer:
    1. An active and widespread solicitation of public shareholders for the shares of an issuer.
    2. A solicitation is made for a substantial percentage of the issuer's securities.
    3. The offer to purchase is made at a premium over the prevailing market price.
    4. The terms of the offer are firm rather than negotiable.
    5. The offer is contingent on the tender of a fixed number of shares, often subject to a fixed maximum number to be purchased.
    6. The offer is open only for a limited period of time
    7. The offeree is subjected to pressure to sell his or her security.
    8. 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 particular offer. As a result, repurchase programs should be structured (1) for a limited amount of securities, (2) to a limited number of holders, (3) over an extended period of time, (4) at prices that are individually negotiated, and (5) with offers and acceptances not contingent on one another

  4. 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 the use of cash to effect such a transaction as an inappropriate use of resources given market uncertainty. In that event, an issuer might instead consider a transaction that does not require deploying cash, 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, private, or Section 3(a)(9) (15 U.S.C. § 77c) exempt exchange as described below. An exchange offer may enable 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. If an issuer would like to significantly amend or waive restrictive indenture provisions, an exchange offer coupled with a consent solicitation may be an attractive option. Conversely, issuers with sufficient cash may consider conducting privately negotiated repurchases, open market repurchases, or a cash tender offer. A debt repurchase allows the issuer to obtain pricing based upon the current market price of the securities that are likely trading at a discount. An issuer also may consider a cash tender offer for all or a significant portion of a class of its outstanding securities.

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Originally published by Lexis Nexis on 29 May, 2020

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