The Situation: The novel coronavirus (COVID-19) global pandemic has resulted in extreme market volatility with many listed bonds trading at a significant discount to par.
The Opportunity: In the current environment, Latin American issuers with bonds listed on the Irish, Luxembourg, or Singapore Stock Exchanges that are trading at a significant discount may start to consider whether they should repurchase their bonds.
Looking Ahead: Bond repurchases, or debt buybacks, may present an opportunity for Latin American issuers to improve their overall capital structure and reduce their interest expense. However, conducting bond repurchases requires an issuer-specific analysis.
Bond repurchases, from the open market or through privately negotiated purchases from bondholders, present a quick and cost effective opportunity for Latin American issuers to improve their overall capital structure and potentially reduce their interest expense if they have sufficient liquidity to operate their business. They offer a way for issuers to capitalize on depressed bond prices due to the current market volatility. Issuers may consider other liability management tools, such as tender or exchange offers, but none offer the simplicity and flexibility of bond repurchases, which generally do not require an offering document, or mandated offer periods. When structuring a bond repurchase, Latin American issuers should consider the following.
Avoiding the "Creeping Tender"
Latin American issuers and their affiliates considering bond repurchases must be careful not to conduct what could be considered a "tender offer" under United States securities laws. The tender offer rules in the United States may apply if any of the bond repurchases target US bondholders or the issuer conducts a "creeping" tender offer including U.S. bondholders (open market repurchases that, when grouped together, violate the U.S. tender offer rules). Because the term "tender offer" is not defined in U.S. regulations, courts, at their discretion, have applied different tests developed through case law, the most prominent being the eight factor test known as the Wellman test. Under this test, bond repurchases could be deemed a tender offer subject to the U.S. tender offer rules if one or more of the following occurs:
- There is active and widespread solicitation for the bonds;
- The solicitation is for a substantial portion of the bonds outstanding;
- A premium over the prevailing market price is offered;
- The terms of the repurchase are not negotiable;
- There is a required bond purchase minimum;
- The offer is time limited;
- Bondholders are under pressure to sell; and
- The public announcement of the repurchases is followed by a rapid accumulation of bonds.
Ways to avoid a creeping tender offer include: approaching only a limited number of investors over a reasonable period of time with negotiable terms, limiting the size of the buyback to less than 25% of a particular class of bonds, engaging an investment bank to conduct the bond repurchases on the issuer's behalf, or conducting a combination of open market and privately negotiated repurchases. However, ultimately, judicial discretion remains and, in structuring the bond repurchases, the analysis should be done on a case-by-case basis.
Most bond indentures are unlikely to limit or restrict repurchases by the issuer or its affiliates. Some may even include a statement that such purchases are permitted and do not require repurchased bonds to be cancelled. However, bonds repurchased and held by the issuer or its affiliates are not considered outstanding for voting purposes.
Issuers must also consider other contractual obligations, including those in credit agreements that may restrict or even prohibit repurchases of other debt, or require pro rata repayment, upon prepayment of equally and ratably secured debt. Repurchases of subordinated debt could also be "restricted payments" under documents governing senior debt securities. Issuers must review these and other covenants before repurchasing any bonds.
Issuers and affiliates considering repurchasing bonds must evaluate whether they are in possession of any material non-public information including, during the current crisis, information about the impact of COVID-19 on its financial condition and operations. The fact that an issuer is considering debt repurchases could in itself be considered material non-public information that should be disclosed to the market in advance of the repurchases.
Issuers with bonds trading in Ireland or Luxembourg need to comply with the requirements of the European Union's Market Abuse Regulation ("MAR"). The scope of MAR encompasses conduct or actions, including trading based on inside information, that may have an effect on securities trading on an EU market. To comply with MAR requirements, an issuer must inform the public as soon as possible of inside information in a manner that enables fast access to the information and complete, correct, and timely assessment of it. Issuers are also required to keep such information on their website for a period of at least five years. Disclosure is often made by way of a press release submitted to the EU exchanges. Bond repurchases of a significant portion of an outstanding class of bonds, which, if made public, would have a significant effect on the price of such bonds, would constitute inside information that needs to be disclosed.
In Singapore, a jurisdiction that has proved increasingly popular with Latin American issuers, similar considerations regarding disclosure of material inside information apply. The rules of the Singapore Stock Exchange require issuers to immediately disclose, via its announcement portal, any information that may have a material effect on the price or value of their debt securities or on an investor's decision to trade in such securities. Where bonds are repurchased and cancelled, immediate disclosure of such repurchase and, if applicable, cancellation, must be made for every 5% of the total principal amount of a class of bonds (calculated based on the principal amount at the time of initial listing) that is redeemed or cancelled.
In addition to the requirements mentioned above, local disclosure requirements may apply. Issuers considering bond repurchases should also consult their tax advisors to confirm the tax treatments of the proposed repurchases.
Three Key Takeaways
- Latin American issuers considering bond repurchases should analyze their forecast liquidity before repurchasing outstanding debt.
- Issuers must review the documents governing their other indebtedness to ensure that the proposed repurchases of bonds are permitted.
- The structuring of bond repurchases is not a "one-solution for all" and issuers should consult their legal and tax advisors before repurchasing any bonds.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.