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THE TOUR
CONTINUES
Here's a Proverb:
Give Consideration to Get Consideration.
This elementary truth has fueled all trade deals for thousands of millennia. A tender offer is a "classic trade," and without consideration good luck getting any holder to consider your offer.
Well, to be clear, not offering any consideration is not an option. Cold hard cash continues to be an option.
What's new is that Route 2015 gives offerors the option to offer "Qualified Debt Securities," either alone or in combination with cash, in exchange for the outstanding subject securities. We have covered exchange offers using Qualified Debt Securities in Item 8 below.
Route 2015 introduces a number of new provisions and requirements affecting the consideration offered in a shortened tender / exchange offer:
The consideration offered in a Route 2015 shortened tender offer can be either a fixed amount or based on a fixed spread to a benchmark. Please look for the "Benchmark Pricing" logo in Item 8 below for a full discussion.
Under old Route 1986, it didn't matter where the cash fueling the issuer's cash debt tender offer came from. Well, things have changed.
Under Route 2015, the cash consideration offered in a Five Business Day tender offer cannot be financed from the proceeds of "Senior Indebtedness."
Under old Route 1986, issuers could pay for tendered securities on a "rolling basis" as and when they were tendered, including at any time prior to the expiration date.
Under Route 2015, the days of rolling early settlement are over. Route 2015 mandates that an offeror cannot pay the tender offer consideration "until promptly after the expiration of the offer, as required by Exchange Act Rule 14e-1(c)."
“Senior Indebtedness” means indebtedness that is incurred to finance all or a portion of the consideration in the Five Business Day Tender Offer (excluding indebtedness or borrowings under any credit or debt facility existing prior to the commencement of the offer) if such indebtedness:
(1) has obligors, guarantors or collateral (or a higher priority with respect to collateral) that the subject debt securities do not have;
(2) has a weighted average life to maturity less than that of the subject debt securities; or
(3) is otherwise senior in right of payment to the subject debt securities.
This prohibition ensures an issuer does not push down the subject debt securities deeper down into its capital structure by incurring debt that is senior to subject debt securities.
This prohibition does not apply to the proceeds of debt incurred under any credit or debt facility existing prior to the commencement of the Route 2015 debt tender offer. This is likely to raise some interesting questions such as:
(1) Can such pre-existing credit or debt facility be put in place for the specific purpose of financing the issuer's planned future debt tender offer for subordinated debt securities?
(2) What "cooling off period" must elapse between the time the pre-existing credit or debt facility is put in place and the launch of the shortened debt tender offer?
If Route 2015 had an "on ramp," its road sign would state:
PURE REFINANCINGS ONLY
The idea is to not overwhelm holders with head-scratching and ponderous decisions in the abbreviated Five Business Day tender offer period. Many new components of Route 2015 work together to permit a shortened debt tender offer only if its terms present holders with a straightforward financial trading decision and nothing else.
In line with this policy, and in a notable departure from old Route 1986, consent solicitations have been banned under Route 2015. Now, a shortened debt tender offer cannot be made in connection with a solicitation of consents to amend the indenture, form of security or note or other agreement governing the subject debt securities.
Historically, exit consent solicitations to strip covenants have been the linchpin of tender offers for high-yield securities. The ban on consent solicitations under Route 2015 is likely to substantially limit the popularity of shortened debt tender / exchange offers involving high-yield securities. We foresee that some high-yield issuers may attempt to mitigate the inability to conduct a consent solicitation as part of a shortened debt tender / exchange offer by setting high minimum tender thresholds for the outstanding subject securities. Doing so may help to to limit the stub amount of subject securities outstanding after completion of the tender offer. Such issuers could then try to "mop up" the remaining stub amount of subject securities either through open market purchases or by exercising any available contractual optional redemption provisions of the governing indenture.
Offerors driving down Route 2015 can offer Qualified Debt Securities, exclusively or in combination with cash, in exchange for the subject debt securities to holders that are QIBs or non-U.S. persons. Issuers conducting "pure refinancing" transactions without consent solicitations under Route 2015 will benefit from this additional flexibility.
A "Qualified Debt Security" must be:
Qualified Debt Securities:
(1) must have all interest payable only in cash;
(2) must have a weighted average life to maturity that is longer than the subject debt securities; and
(3) may have different:
- maturity date,
- interest payment and record dates,
- redemption provisions, and
- interest rate.
Qualified Debt Securities are required to be "identical in all material respects" to the outstanding subject securities. The intent is to ensure that a holder is required to make only a streamlined "trading decision" in the shortened offer period that is similar to the one made in a cash tender offer, i.e., are the financial terms of the tender offer a good deal or not?
The Route 2015 No-Action Letter touts the following benefits of exchange offers using Qualified Debt Securities:
(1) Eligible holders of debt securities will have an efficient mechanism to nicely match up, on a dollar-for-dollar basis, the acquisition of new Qualified Debt Securities and the disposition of the old subject securities in a single streamlined transaction, and
(2) Issuers will be able to eliminate the timing lag, and resulting financial drag of "negative carry," between the issuance of the new Qualified Debt Securities and the retirement of the old subject debt securities.
We are concerned about the spin that some enterprising issuers might put on the phrase "in all material respects" that qualifies the word "identical" in the definition of Qualified Debt Securities. That one can be a potential trouble maker, especially if an issuer decides to push the envelope (and that is not unheard of)! Materiality is in the "eye of the beholder" and disagreements over whether any changes made to the terms of the Qualified Debt Securities are material or not have the potential to cause "road rage" for folks attempting to drive down a Route 2015 exchange offer. For example, must covenants in Qualified Debt Securities be "identical" to covenants in subject debt securities . . . or "identical in all material respects?" If it is the latter (as the definition literally states), then good luck to us all especially in the context of high-yield debt securities that ooze covenants (yeah, even the "high-yield-lite" variety!). If an issuer starts tinkering with the terms of Qualified Debt Securities to make changes that it believes are not material (and thus asserts that the "end product" is still "identical in all material respects" to the subject debt securities), then, among other potential headaches, those changes could raise issues for issuer's counsel who may be called on to give a legal opinion on the validity of a Route 2015 exchange offer. Such legal opinions will have to include a critical judgment call on whether any changes made to the terms of the Qualified Debt Securities are material or not.
Very similar issues regarding "materiality" are raised when an issuer seeks to make ostensibly "clerical" or "immaterial" amendments to its bond indenture without seeking the requisite consent of the bondholders required by such indenture. On numerous transactions, this author has been in the midst of epic discussions surrounding such proposed indenture amendments and is intimately familiar with the incredible hand-wringing that can accompany any decision of whether a particular indenture amendment is truly immaterial. In most cases, it is our experience that issuer's counsel and the indenture trustee, if consulted, will default (no pun intended here for once) to advising the issuer to seek the requisite consent of bondholders to amend the indenture rather than risk getting the "materiality" call wrong.
We will be watching this space with great interest!
Similar to its predecessor old Route 1986, Route 2015 requires that a shortened debt tender offer must to be open to all record and beneficial holders of the subject debt securities. However, given that any exchange offer of Qualified Debt Securities invokes the registration and other requirements of the Securities Act, this requirement has been modified for exchange offers using Qualified Debt Securities.
Route 2015 provides that Qualified Debt Securities can be offered as part of a shortened tender/exchange offer only to: (1) Qualified Institutional Buyers as defined in Rule 144A under the Securities Act, and/or (2) non-U.S. persons within the meaning of Regulation S under the Securities Act (collectively, “Eligible Exchange Offer Participants”) in a transaction exempt from the registration requirements of the Securities Act.
To be clear, the foregoing provisions prescribe only the legal eligibility status of permitted offerees of Qualified Debt Securities and do NOT limit the type of Securities Act registration exemption that can be relied on for purposes of the tender/exchange offer. The widespread publication of any Route 2015 tender / exchange offer pursuant to the IWD and IWD + requirements discussed above will likely constitute "general solicitation." Accordingly, exchange offers of Qualified Debt Securities can be structured under one or more available exemptions from registration under the Securities Act that do not prohibit general solicitation, including:
(1) the private placement exemption under Rule 506(c) of Regulation D which was introduced by the JOBS Act, specifically permits general solicitation, requires exclusion of "bad actors," and requires reasonable verification that all recipients of the new Qualified Debt Securities are accredited investors (which all QIBs will be). These bad actor and verification requirements will have to be developed and weaved into the mechanics of the Route 2015 exchange offer. Any Qualified Debt Securities issued in reliance on Rule 506(c) will be "restricted securities," which may not be further sold or transferred without SEC registration or pursuant to another available exemption from such registration;
(2) exchange offers under Section 3(a)(9) of the Securities Act. Any Qualified Debt Securities issued in reliance on Section 3(a)(9) will "mirror" the restricted / unrestricted status of the subject debt securities that they are being exchanged for and in this respect may be a more attractive alternative to Rule 506(c). The issuer and any dealer manager(s) will have to comply with the requirements of Section 3(a)(9), including the prohibition against providing remuneration for soliciting tenders or exchanges. Section 3(a)(9) also would not require bad actor and reasonable verification protocols that are required by Rule 506(c), and/or
(3) exchange offers to non-U.S. persons in offshore transactions under Regulation S of the Securities Act.
What about the u̶n̶w̶a̶s̶h̶e̶d̶ ̶m̶a̶s̶s̶e̶s̶ debt holders of subject securities who are not Eligible Exchange Offer Participants? Under market practice prevalent prior to the adoption of Route 2015, these folks were routinely excluded from exchange offers. But, worry not folks for Route 2015 has you s̶h̶o̶w̶e̶r̶e̶d̶ covered with cash! (nice, huh?).
Under Route 2015, each holder who is not an (1) Eligible Exchange Offer Participant or (2) affiliate of Eligible Exchange Offer Participant (each, an “Ineligible Holder”) must be given an option to receive cash from either the offeror or a dealer manager for such Ineligible Holder’s debt securities in a fixed amount determined by the offeror, in its reasonable judgment, to approximate the value of the Qualified Debt Securities that such Ineligible Holder would have received had it been a participating Eligible Exchange Offer Participant (the “Optional Cash Offer”). The Optional Cash Offer can be made concurrently with the tender / exchange offer and can be part of the same offer to purchase document.
IWD Alert
If Qualified Debt Securities are offered, the following items must be announced at the commencement of the tender/exchange offer as part of the IWD press release published on or prior to 10:00 a.m., Eastern time, on the first business day of the Five Business Day tender offer period:
(1) The interest rate and a "minimum acceptance amount" with respect to Qualified Debt Securities,
(2) Any Optional Cash Offer and details of the Maximum Cash Condition (defined below), if any.
Route 2015 is pragmatic and recognizes that offerors should not be required to turn on an unlimited money spigot to fund Optional Cash Offers to Ineligible Holders.
Route 2015 permits offerors to rig up their tender/exchange offers with a t̶r̶i̶p̶ ̶w̶i̶r̶e̶ condition precedent that b̶l̶o̶w̶s̶ ̶u̶p̶ terminates both the Optional Cash Offer and the concurrent exchange offer if more that a stated maximum amount of cash will be required to be paid out to all participating Ineligible Participants as part of the Optional Cash Offer (the “Maximum Cash Condition”).
Offerors should be careful to not misunderstand the Maximum Cash Condition. On closer inspection, it can create a "Hobson's Choice" for offerors.
Thomas Hobson (1544 – 1631)
Source: Wikipedia
The immortal Mr. Thomas Hobson ran a thriving stable and horse rental business in Cambridge, England, around the turn of the 17th century. Mr. Hobson rented out horses, mainly to Cambridge University students who rode his horse pretty hard and ragged. Mr. Hobson hit upon an idea to rotate his horses. Upon walking into his fine establishment, customers encountered the following sign:
If Mr. Hobson were resurrected today and (having developed an astonishing interest in U.S. debt tender offer regulations) reviewed the Route 2015 provisions relating to Ineligible Holders and the Optional Cash Offer, he would likely slap his knee and exclaim “By Golly, they’re still doing business my way!” (To be said aloud in your best faux English accent).
Really? Yes, really!
When you parse the requirements of the Optional Cash Offer and the terms of the Maximum Cash Condition, here is the Hobson's Choice the could face offerors:
(1) Pay the full amount of cold hard cash to ALL the Ineligible Holders that accept the Optional Cash Offer. No limits, no ifs and no buts; or
(2) Insert a Maximum Cash Condition into your shortened tender / exchange offer. However, if widespread acceptance of the Optional Cash Offer by Ineligible Holders requires you to pay more cash than your stated "maximum" limit, then either you come up with the extra cash (and modify the offer) or both the Optional Cash Offer AND the entire exchange offer with those elite Eligible Exchange Offer Participants blows up!
There is no scenario where an offeror can complete a Route 2015 exchange offer without paying the full amount of "optional cash" to all properly participating Ineligible Holders. That is the “singular” bottom line!
The consideration in a Route 2015 tender / exchange offer of cash and/or Qualified Debt Securities may be (1) a fixed amount, or (2) based on a fixed spread to a benchmark and, in the case of Qualified Debt Securities, the coupon may be based on a spread to a benchmark.
A “benchmark” includes U.S. Treasury Rates, LIBOR, swap rates and, in the case of securities denominated in currencies other than U.S. dollars, sovereign securities or swap rates denominated in the same currency as the securities subject to the offer, in each case that are readily available on a Bloomberg or similar trading screen or quotation service.
If a spread is used to determine any portion of the tender offer consideration (cash and/or Qualified Debt Securities), then offerors should pay careful attention and comply with the requirements listed below.
The IWD press release, which that is required to be published on or before 10:00 am, Eastern time, on the first business day of the shortened tender offer, must:
(1) announce the spread used to determine the amount of consideration offered, and
(2) if Qualified Debt Securities are offered and the interest rate or spread is not fixed on day one, announce a range of not more than 50 basis points applicable to the interest rate or spread for such Qualified Debt Securities.
Offerors should carefully comply with the following additional deadlines:
(1) 9:00 a.m., Eastern Time, on the Business Day Immediately Prior to Expiration Date: Announce the final interest rate or spread applicable to Qualified Debt Securities in any instance where the 50 basis point range was used and announced in the IWD press release.
(2) 2:00 p.m., Eastern Time, on the Expiration Date: Fix the exact amount of consideration and the interest rate (in the case of cash amounts or interest rate based on fixed spreads to a benchmark) on any Qualified Debt Securities.
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