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THE SEC STAFF'S HISTORICAL NO-ACTION RELIEF

FOR ISSUER TENDER OFFERS OF

NON-CONVERTIBLE INVESTMENT-GRADE DEBT SECURITIES

 

The tender offer rules lost their new car smell decades ago. These rules were adopted in 1968 when the U.S. Congress adopted the Williams Act that amended the Exchange Act. This far-reaching legislative action was taken in response to  a wave of s̶t̶r̶e̶e̶t̶ ̶r̶a̶c̶i̶n̶g̶ hostile, coercive takeovers launched by corporate raiders using cash equity tender offers on a compressed timetable that left hapless target shareholders little to no time to make informed investment decisions. As a reasonable means to effect the mandate of the Williams Act, the SEC adopted Regulation 14E that, among other reforms, imposed the 20 / 10 Business Day tender offer and extension periods on tender offers for equity as well as debt securities and imposed disclosure requirements on issuer and third-party tender offers.

 

About a decade or so after the enactment of the Williams Act came the 1980s, a remarkable period in the U.S. debt capital markets that will be recalled for the Leveraged Buyout Boom, eye-watering (for the time) issuance of j̶u̶n̶k̶ high-yield bonds to fund highly-leveraged acquisitions and, cough, Michael Milken. It was against this colorful backdrop that issuers of high-yield as well as investment-grade debt securities were increasingly using the cash tender offer as an important liability management and debt refinancing vehicle. Quickly, their efforts were slowed down by the mandatory 20 Business Day tender offer period and the volatile uncertainty it injected into the refinancing engine. (See "Are We There Yet" on previous page). By the mid-1980s, issuers and their Wall Street dealer managers approached the SEC Staff for no-action relief that could accelerate the issuer cash tender offer process for debt securities. (For general information on the purpose and role of No-Action Letters, please click the orange button at the top of this page.)

Pursuant to these No-Action Letters, the SEC Staff g̶r̶e̶a̶s̶e̶d̶ ̶t̶h̶e̶ ̶w̶h̶e̶e̶l̶s̶ granted substantial relief for issuer cash tender offers for non-convertible debt securities and later limited such relief to only investment-grade non-convertible debt securities in a No-Action Letter to Salomon Brothers (October 1, 1990). The SEC Staff agreed that they would not recommend that the SEC take any enforcement action under the Exchange Act if an issuer cash tender offer for any and all non-convertible investment-grade debt securities remained open only for seven to ten calendar days instead of the 20 and 10 Business Day mandatory periods set forth in Rule 14e-1(a) and Rule 14e-1(a).

In 1986, which was a renaissance year for debt tender offer reform before 2015, the staff of the Division of Corporation Finance of the SEC (the "SEC Staff") issued notable (and now vintage) No-Action Letters, including the following: 

 

1.   Salomon Brothers Inc. (March 12, 1986);

2.   Goldman Sachs & Co. (March 26, 1986);

3.   First Boston Corporation (April 17, 1986);

4.   Kidder, Peabody, & Co Inc. (May 5, 1986); and

5.   Merrill Lynch, Pierce, Fenner & Smith Inc. (July 2, 1986).

Proving that there is no such thing as a "free ride," the SEC Staff hitched several important requirements to an issuer's ability to use the dramatically shortened seven to ten calendar day tender offers for any and all non-convertible investment-grade debt securities.

 

"Route 1986" has been decommissioned and its requirements have been completely superseded by the SEC Staff's January 2015 No-Action guidance for shortened Five Business Day Debt Tender Offers (discussed later in this guide). Nevertheless, understanding these historical requirements will speed up your appreciation of how the SEC Staff has souped up vintage engineering to build a 21st century model for shortened debt tender offers. 

  • Only non-convertible investment-grade debt securities were permitted to be subject to the shortened tender offer. High-yield debt securities were excluded. 

 

  • Tender offers were required to be for for "any and all" outstanding debt securities of the class or series that was subject to the tender offer. No partial tender offers or "waterfall" tender offers were permitted.

  • Offer was required to be open to all record and beneficial holders of the class or series of debt securities that was subject to the tender offer.

 

  • All record and beneficial holders of such class or series of debt securities were be given a reasonable opportunity to participate in the tender offer. No specific guidance on what "reasonable opportunity to participate" means.

  • Tender Offer could remain open for as few as seven to ten calendar days. 

 

  • Any extension of the tender period following a change in consideration offered or amount of securities sought could be less than ten business days. No specific guidance on how much shorter the extension period can be.

 

  • Cash-only tender offers.

    • No restrictions on source of cash.

    • Early settlement was OK with payments made to holders as they tendered securities

 

  • No exchange offers permitted.

 

  • A concurrent "exit consent solicitation" was permitted for the purpose of amending the governing indenture, including to change or eliminate any covenants.

 

  • Offer was required to be disseminated on an expedited basis only if the tender offer is open for less than 10 calendar days. No specific guidance on what "expedited" means.

 

  • No requirement to provide withdrawal rights to holders.

 

  • No requirement to file a current report on Form 8-K or Form 6-K (for foreign issuers).

 

  • Offer could not made in anticipation of or in response to any other tender offers for the issuer’s debt or equity securities.

Why Did The SEC Staff Adopt Route 1986?

 

In some of the 1986 no-action letters, the SEC Staff stated that they recognized that the tender offers for "any and all" non-convertible debt securities (not partial tender offers) may, in certain circumstances, present significantly different timing considerations than those involved in equity tender offers, including tender offers for convertible debt securities that are treated like equity. 

 

What different timing considerations?

 

In many equity tender offers, a significant premium is offered to the issuer's equity holders to induce them to participate in the tender offer and sell their equity securities back to the issuer. This presents a head-scratching decision for such equity holders as they weigh, among others, the value of the known tender premium versus the unknown/possible/probable equity upside of continuing to own the equity securities.

 

In contrast, in the case of a cash tender offer for any and all outstanding non-convertible debt securities, the holder has a whole lot less head scratching to do in making its "to tender or not to tender" decision because:

 

  • the tender offer price is typically either a modest premium over the prevailing market price of the debt securities subject to the offer or, in the case of callable debt securities, a close approximation to the then-applicable optional redemption price set forth in the indenture;

 

  • the holder does not have to weigh the tender premium against any potential equity upside that may be lost by tendering its securities; and

 

  • the holder does not have to consider the consequences of continuing to own a "stub" portion of its debt securities after the tender offer as in the case of a partial or waterfall tender offer.

 

Less Head Scratching  = Shorter Tender Period

AN ILLUSTRATIVE DRIVE DOWN ROUTE 1986

 

Issuer Company Inc. desires to drive down the historical (and now permanently closed) express Route 1986 to conduct a cash debt tender offer. Issuer Company Inc. has $300 million principal amount of Senior Notes due 2018 outstanding, which, let's say for simplicity's sake, are held in equal amounts of $50 million by each of six institutional holders. Please note that the highlighted features below have been substantially revised, and in some cases eliminated, by the SEC Staff's 2015 guidance on Five Business Day Tender Offers.

 
 
 

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