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Anchor 10
Good Intentions Bad Results

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The SEC Staff's Route 1986 no-action guidance, that permitted seven to ten calendar day issuer cash tender offers for any and all investment-grade non-convertible debt securities, was paved with the best of intentions. The SEC Staff recognized and responded to the debt refinancing exigencies of certain issuers subject to the vicissitudes of fluctuating interest rates. At the same time, the SEC Staff sought to protect investors by requiring, among others, that the debt tender offer would be open to all record and beneficial holders of the subject debt securities and that all such holders must be given a meaningful opportunity to participate in the tender offer.

The SEC Staff included these investor protection requirements in its no-action guidance to reflect the statutory mandates of Section 14(e) of the Exchange Act, which prohibits, among others, "fraudulent, deceptive or manipulative practices" in connection with any tender offer. 

The SEC Staff intended its Route 1986 no-action guidance to serve as a clear roadmap that, if followed scrupulously, would permit qualifying issuer cash debt tender offers to take a major detour from the 20 Business Day tender offer period required by Rule 14e-1(a) of the Exchange Act. 

Prime Directive

It is safe to assume that the SEC Staff fully expected that "shortcut" issuer debt tender offers would not cut corners with the "prime directive" of its Route 1986 no-action guidance, namely to give all record and beneficial holders of the subject debt securities a reasonable opportunity to participate in the tender offer.

Now, a roadmap that has smudged and blurry lines AND is drawn without fully taking into account the contours of the tricky terrain it passes over is likely to:


(A)      cause well-meaning drivers who'd like to stay on the straight and narrow to l̶a̶n̶d̶ ̶i̶n̶ ̶t̶h̶e̶ ̶d̶i̶t̶c̶h̶ go astray, 


(B)      open the door to drivers with a penchant for derring-do to crumple the map and chart their own adventurous course, and/or


(C)      make you yearn for that bleeding-edge GPS that talks to the "internet of everything" to provide real-time traffic alerts that you longingly ogled in the tech aisle at Costco. (This author has been there).


Vocal and vigorous critics of Route 1986, including issuers, dealer managers, legal counsel who advise them and, above all, a coalition of debt investors, have been complaining to the SEC Staff for years that Route 1986 was a woefully outdated roadmap that suffered from a lack of bright line specificity in its guidance AND its provisions did not take into account market practices and mechanics that effectively frustrated its good intentions. (Hint: Replace "drivers" with "issuers" in clauses (A) and (B) above.)  It was the rising drumbeat of concerns from multiple affected constituencies that rose into a crescendo in 2014 that finally resulted in the SEC Staff issuing brand new no-action guidance around shortened debt tender offers in January 2015 that we will get to starting on the next page.


Debt investors who have been at the receiving end of aggressively structured Route 1986 issuer debt tender offers

have been demanding to know:

DUDE, Where's my Reasonable Participation?

Now, you dear reader might indeed ask: "What are these guys smoking?"  and "What do these folks not like about Route 1986?"


Well, as to the second question, a few things:

All Business Days are Calendar Days, but all Calendar Days are not __________ Days. Fill in the blank to reveal the problem.


Saturdays, Sundays, bank holidays and national holidays count as Calendar Days for purposes of the "seven to ten calendar day tender offer period" permitted by Route 1986, but those are not Business Days!

Calendar vs Business Day

Depending on the time of year, especially during holiday season in the United States, an issuer debt tender offer structured with a seven calendar day tender offer period may remain open for less than five business days! 


Another eroder of reasonable opportunity to participate for the holders was the common practice of issuers delivering their tender offer documents to the Depository Trust Company (DTC), as registered holder, only a few minutes before midnight on the "launch day" of the tender offer period, and have that "day" still count for the seven to ten calendar day tender offer period. This effectively knocked out one day off the period that debt investors had to decide on whether or not to participate in the tender offer. (Heyyy, watchu complanin' about? No one said its gotta be a FULL calendar day!!)

Market mechanics threw a mean monkey wrench into meaningful participation by most beneficial holders of the subject debt securities. These twisted the tender timeline too tightly for comfort, truly!


Most investors hold debt securities through banks or other intermediaries who serve as custodians for such beneficial holders of those securities. Upon receiving a tender offer, these custodians typically insisted that their beneficial holders effectively tender securities by an earlier deadline (often two or three business days in advance of the actual expiration date of the tender offer) in order to enable the custodian to gather and compile final responses to the issuer.


No wonder these market mechanics made beneficial holders GO BANANAS!!

Market Mechanics

With a custodian-imposed earlier tender deadline bolted on, a Route 1986 seven to ten calendar day tender offer, if made over a holiday period, could be open effectively only for one or two business days! (Read that aloud slowly to savor the full-flavored ludicrousness of this result).


The provisions of Route 1986 did not specifically require issuers to account for such market mechanics and mitigate their effects by providing for "guaranteed delivery procedures" that would permit holders to tender securities up until the official expiration date of the tender offer. 


These were problematic issues. Debt refinancings and issuer cash tender offers present serious business considerations for issuers as well as debt holders. However, there is profound information disparity between the players. Unlike debt holders who have to act within a shortened time frame, the issuer is in the driver's seat and has all the time to design, build and wind-tunnel test its debt tender offer with the expert assistance of its financial and legal advisors. As permitted by Route 1986, such debt tender offer could include an exit consent solicitation to amend or strip covenants, thus further complicating the decision making for holders in a compressed time frame. 


In situations where debt holders were presented with a shortened debt tender offer that remained open effectively for only one or two business days, it is understandable why beneficial holders especially felt:

Stealth Offers

A holder cannot even begin to consider, much less reasonably participate in, a tender offer that that flies under its radar. Most holders of debt securities have "day jobs" that typically do not involve scouring the horizon for incoming debt tender offers in positions they hold. With an already compressed time frame under Route 1986, it was imperative that a shortened debt tender offer was vigorously publicized by the issuer through multiple channels and tender offer materials were available for review by holders immediately upon launch.

To the chagrin of debt investors, Route 1986 did not specifically require issuers to: (1) make any public announcement of the tender offer by press release or otherwise, (2) in the case of publicly reporting issuers, to alert the market about the debt tender offer by filing a current report with the SEC on Form 8-K (or Form 6-K for foreign issuers) and, in practice, few issuers filed such Form 8-Ks or 6-Ks, or (3) make tender offer materials available online, which is hard to comprehend for anyone who knows what a "hyperlink" means.


To be fair, Route 1986 required issuers to disseminate the debt tender offer on an "expedited basis" in cases where the tender offer was held open for less than ten calendar days. Confoundingly, Route 1986 did not specify what "expedited" meant. Individual issuers were left to their own devices (translation: expensive and time consuming consultations with counsel) to expedite dissemination on a case-by-case basis leading to disparate treatment of debt investors in different tender offers. Not a good result!

BOOM! Pushing The Envelope

"Pushing The Envelope:" The phrase has its origins in the world of aviation, where “envelope” means a set of performance limits of an aircraft that may not be safely exceeded.”  Test pilots are often called on to “push” a new aircraft's performance envelope by going beyond known safety limits, to determine just how fast such new aircraft can be flown. A visible and audible "Sonic Boom" generated as a supersonic plane breaks the sound barrier is a classic indication that its envelope is about to be pushed, hard!

Critics of Route 1986 allege that its lack of specific and bright line guidelines led to sonic booms reverberating throughout the U.S. debt refinancing landscape. Issuers of investment-grade securities deployed their formidable resources and advisors in engineering debt tender offers with c̶r̶a̶f̶t̶y̶ creative structures that, critics allege, were designed to transfer value from creditors to the issuer's equity holders. Issuers and their advisors sought bespoke no-action guidance from the SEC Staff for their own unique "tweaks" that they believed complied with Route 1986's flexible standards. The "issuers with a penchant for derring-do" were charting their own adventurous course and outdoing the "issuers who'd like to stick to the straight and narrow" and debt holders were feeling that they were "landing in the ditch."

The Straw That Finally Put Steel

As reported, in a fine piece of journalism, by Stephanie Russell-Kraft in "Attys, SEC Slog Long Road To Debt Tender Offer Reform," (Law360, February 04, 2015), one mega LBO transaction in 2006 was the poster child for "debt tender offers gone wild" and galvanized the debt investor community like never before. 


2006. It was the day after Christmas. At a time when the world had checked out for the holidays and the impending New Year, Santa stealthily snuck down the chute a belated l̶u̶m̶p̶ ̶o̶f̶ ̶b̶l̶a̶c̶k̶ ̶s̶t̶o̶n̶e̶ "gift" for a group of unsuspecting bond investors. On that day, New York private equity firm The Blackstone Group made a previously unannounced tender offer to bondholders in the largest LBO ever for Equity Office Properties Trust, one the largest real estate conglomerates in the country. The deal had "MEGA" stamped all over it . . . except on the purchase price offered by Blackstone to holders of certain long-dated bonds of Equity Office. These investors, despite being caught unawares and thrust into the unenviable position of reacting to the tender offer over the holiday week, gathered their wits and each other, formed a united front and rejected outright what they saw as a patently underwhelming offer by Blackstone. Spirited negotiations ensued that forced Blackstone to reach deeper into its pocket and sweeten the tender offer price for this bondholder group by over 150 million dollars.


tipping-point had been reached. The searing experience of the Blackstone / Equity Office LBO forged investors' steely resolve to rein in what they regarded as "wild west" excesses in the debt tender offer arena. A coalition of

of fixed-income institutional investors and money managers, which included former Equity Office bond holders, organized themselves as the Credit Roundtable and made it their mission to restore Camelot in the U.S. debt capital markets. In the following years, the Credit Roundtable made several attempts to engage the SEC Staff in serious negotiations to clarify and update its Route 1986 debt tender offer guidance. Early attempts were thwarted because the SEC Staff's resources and attention were diverted by the Great Recession of 2008 and, thereafter, by the immense work load of implementing Dodd-Frank regulations. Leading debt capital markets counsel, who were rightfully wary of the hazards of giving legal opinions on debt tender offers in the absence of clear guidance, joined the chorus calling upon the SEC Staff to focus on debt tender offer reform. In April 2014, the SEC's Office of Mergers and Acquisitions chief Michele Anderson convened an unprecedented summit meeting of representatives of the Credit Roundtable and investment banks, as well as over 60 attorneys from 18 (eighteen!) law firms to collaborate with the SEC Staff and reengineer its 30-year old debt tender offer guidance for the 21st century. For additional fine reporting, see Ellen Rosen's "Eighteen Law Firms, One Letter to SEC: Business of Law" (BloombergBusiness, January 29, 2015).


Finally on January 23, 2015, almost 30-years after the SEC Staff adopted Route 1986, the SEC Staff blessed a compromise set of guidelines arrived at with the multi-headed working group by issuing brand new no-action guidance on "abbreviated debt tender offers."

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