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There are important "No Entry" situations in which an offeror's "License to Drive" on Route 2015 is revoked and offerors are banned from using Route 2015 for shortened debt tender / exchange offers.

 

These disqualifications are designed to, among others, keep out any transactions that would require target debt holders to make "credit decisions" about an issuer's business, capital structure, ability to pay its debts or strategic direction. The general idea is to permit entry only to "pure trading / refinancing" transactions.

The "pure refinancing only / investor protection" policies that lie at the heart of Route 2015 are the "prism" through which all of Route 2015's provisions, including the "No-Entry" disqualifications described below, should be viewed. 

 

In its support letter to the SEC Staff, the Credit Roundtable articulated the policies underpinning Route 2015 well in the following words: "[A]s a guiding principle, the Requested Relief is designed to be available for transactions that require decisions by investors that are based almost exclusively on the financial terms of the transaction (what we often refer to as “trading” decisions) and is not designed to be available for transactions that require investors to evaluate the substantive characteristics of the issuer, its operations and the subject securities (what we often refer to as “credit” decisions)."

 

Our observations below are driven by our views on how successful or not these disqualifications are likely to be in prohibiting transactions that will likely require target holders to make critical credit decisions (and not merely trading decisions) from availing of Route 2015 shortened tender / exchange offer provisions.

 

If there is uncertainty over whether the existence or anticipated occurrence of a particular set of facts or circumstances constitutes a disqualification under one or more categories described below, then we think it is a good idea to "come back" to the policies underpinning Route 2015 for guidance. If an issuer can confidently and credibly conclude that the disclosure to the target holders of the facts or circumstances in question will not require such holders to make a "credit decision," then the likelihood of such issuer crossing the line on these disqualifications will be substantially reduced.

 

A Route 2015 shortened tender / exchange offer cannot be made if at the time of the offer: 

 

(1)     the issuer is the subject of bankruptcy or insolvency proceedings,

 

(2)     the issuer has commenced a solicitation of consents for a “pre-packaged” bankruptcy proceeding, or

 

(3)    the issuer's board of directors has authorized discussions with creditors of the issuer to effect a consensual restructuring of the issuer’s outstanding indebtedness.

This disqualification does not extend to bankruptcy, insolvency or restructuring events (collectively, "bankruptcy events") affecting (x) any parent or subsidiary guarantor of the issuer's subject debt securities, or (y) any of the issuer's subsidiaries, including any "material subsidiaries," regardless of whether or not such subsidiaries guarantee the subject debt securities. As such, this disqualification, by itself, critically fails to take into account that the occurrence of such bankruptcy events will raise "credit issues" that will be material to a target holder's decision on whether or not to participate in the issuer's shortened tender / exchange offer.

Depending on the terms of the indenture governing the issuer's subject debt securities, it is possible (though by no means certain in all cases) that the occurrence of bankruptcy events with respect to a guarantor and/or material subsidiary may trigger a cross-acceleration or cross-default event of default under the issuer's indenture governing the subject debt securities. In such case, Route 2015 will be unavailable for a shortened tender / exchange offer for such subject debt securities under a separate disqualification discussed next below. We should point out that any bankruptcy events affecting the issuer will certainly trigger an automatic event of default under the indenture govering the subject debt securities and, therefore, be covered by the next disqualification as well. Despite this, the framers of Route 2015 thought it sufficiently important to make such issuer-related bankruptcy events a standalone category of disqualification. This makes the exclusion of bankruptcy events affecting guarantors and/or material subsidiaries from this disqualification that much more harder to understand.

 

The decision to limit the disqualification at hand to bankruptcy events affecting only the issuer but not guarantors and/or material subsidiaries is also perplexing when you consider that Route 2015 permits shortened tender / exchange offers for high-yield securities. High-yield securities are often issued by parent holding companies that have no independent operations and revenue generating ability and depend exclusively on upstream distributions from one or more operating subsidiaries to service their own debt. Any bankruptcy events affecting such operating subsidiaries will create material "structural subordination" credit issues for the holders of such parent holding company's subject debt securities. In these situations, it is troubling that this disqualification would, by itself, fail to prohibit such holding company "issuer" from launching a Route 2015 shortened tender / exchange offer for its own debt securities at a time when there were one or more, potentially crippling, bankruptcy events affecting one or more of its operating subsidiaries.

 

A Route 2015 shortened tender / exchange offer cannot be made if a default or event of default exists under:

 

(1)     the indenture governing the subject debt securities, form of security or note or any other agreement governing the subject debt securities (collectively, "Indenture"), or

 

(2)     any other indenture or material credit agreement to which the issuer is a party.

This disqualification has real bite, couple of grey areas and one area of concern related to its narrow "issuer-focused" scope.

This disqualification will have greater impact on issuers of high-yield securities which are, compared to their investment-grade cousins, more susceptible to the occurrence of defaults and events of default due to their affirmative and negative covenants, financial and other reporting requirements and, for publicly-reporting issuers, requirements to timely file periodic and other Exchange Act reports with the SEC. Any garden-variety default, including any default that does not impinge an issuer's ability to make debt service payments, will ban the issuer from making a shortened tender / exchange offer under Route 2015. This can be devastating for an issuer that desperately needs to refinance its outstanding debt securities ASAP to stave off an impending financial crisis but finds itself shut out from Route 2015.

 

While clause (1) above is, relatively, a model of clarity, clause (2) is . . . errr . . . not. Under clause (2), a Route 2015 offer could not be made if a default or event of default exists under " . . . any other indenture or material credit agreement to which the issuer is party."

Clause (2) refers to solely to "indenture," but unlike clause (1) does not pick up defaults or events of default under the form of security or note or any other agreement that might govern the issuer's indebtedness. We see no apparent basis for this the more limited scope of clause (2). It is vitally important that a disqualification that can make all the difference between an issuer being able to launch a shortened Route 2015 offer . . .  or not . . . be crystal clear. By definition, time is of the essence for an issuer seeking to pull of a "quickie" debt refinancing.

 

 

Clause (2) qualifies only the term "credit agreement" (and not the term "indenture") with the adjective "material." There seems to be a presumption that all other indentures, if any, that an issuer is a party to are automatically material. Fine. But what yardstick must an issuer use to determine if any "credit agreement" that it is a party to is "material." Is it the amount of debt outstanding under such credit agreement at the time the issuer desires to launch a Route 2015 offer? Or is it particular contractual terms of a credit agreement that make it material? Again, the potential uncertainty that may be caused by the lack of bright line specificity can be an impediment to an issuer's ability to react nimbly to windows of favorable h̶e̶r̶e̶ ̶t̶o̶d̶a̶y̶ ̶g̶o̶n̶e̶ ̶t̶o̶m̶o̶r̶r̶o̶w̶ refinancing opportunities in the market. These challenges are likely to be far less pronounced for a publicly-reporting issuer who would have had already made relevant "materiality" judgments with respect to any of its credit agreements to comply with its SEC filing and/or Exchange Act reporting requirements.

These ambiguities can potentially put debt holders in a situation where they are forced to make a "credit decision" in the shortened time frame of a Route 2015 offer. For example, an issuer could take the position that certain existing defaults or events of default under an ostensibly "immaterial" credit agreement fall outside the four corners of the foregoing disqualification, proceed to launch a purported Five Business Day tender offer for its subject debt securities, and disclose the existence of such purported "non-disqualifying" defaults in its offer to purchase document. In such situation, regardless of the issuer's stance, the holders of the subject debt securities will likely be forced to make a credit decision with respect to such disclosed defaults and be thrust into precisely the situation which the disqualification was intended to avoid in the first place. 

The scope of this disqualification is significantly limited by language of clause (2) that includes defaults and events of defaults only under an indenture or material credit agreement "to which the issuer is a party." This disqualification does not cover defaults and events of defaults under indentures, credit agreements or other debt agreements to which any guarantor of the subject debt securities and/or any material subsidiary of the issuer is a party and to which the issuer is not a party. Unless such defaults or events of default trigger a cross-acceleration or a cross-default under the Indenture governing the issuer's subject debt securities, they will not disqualify such issuer from launching a shortened Route 2015 offer. 

 

A Route 2015 shortened tender / exchange offer cannot be made in anticipation of or in response to, or concurrently with:

 

(1)     a change of control involving the issuer, or

 

(2)     any other type of extraordinary transaction involving the issuer, such as a merger (or similar business combination), reorganization or liquidation or a sale of all or substantially all of its consolidated assets.

The previous disqualification dealing with defaults and events of defaults used the phrase "to which the issuer is a party." In contrast, this disqualification is focused on a change of control or an extraordinary transaction "involving the issuer." That begs the question what does "involving" mean here? Can a transaction that "affects" or "implicates" an issuer's business and/or financial condition but to which such issuer is not a contractual party be said to "involve" such issuer? We think so . . . but we are certain that others can make spirited arguments opposing such interpretation. That can make the application of this disqualification uncertain in situations where an affiliate, parent or subsidiary of an issuer is engaged in a transaction which has or will have material business and/or financial implications for the issuer but to which the issuer itself is not a party. 

This disqualification does not expressly cover change of control or extraordinary transactions that involve any guarantors of the subject debt securities or any material subsidiary of the issuer but that do not involve the issuer (it will be fun figuring that out). Such transactions could have a material bearing on the target holders' decision to participate in the tender offer but, as written, will not disqualify the issuer from relying on Route 2015.

 

A Route 2015 shortened tender / exchange offer cannot be made in anticipation of or in response to other tender offers for the issuer's securities.

 

The intention appears to be to ensure that any Route 2015 offer is a stand alone event and does not compete with other tender offers by the issuer or any third-party for the issuer's equity or debt securities.

 

The open ended and general nature of this disqualification will make the application of this disqualification an intensely "facts and circumstances" based analysis made on the basis on information known or available to the issuer at or around the time that such issuer desires to launch a Route 2015 offer for its debt.

 

A Route 2015 shortened tender / exchange offer cannot be made concurrently with a tender offer for any other series of the issuer’s securities made by the issuer (or any subsidiary or parent company of the issuer) if the effect of such offer, if consummated (by way of amendment, exchange or otherwise), would be to:

 

(1)     add obligors, guarantors or collateral for the benefit of the holders of such other series,

 

(2)     increase the priority of liens, if any, securing such other series, or

 

(3)     shorten the weighted average life to maturity of such other series.

Route 2015's provisions are designed to work in tandem toward a common goal of permitting shortened debt tender / exchange offers only for "pure refinancing" transactions which don't burden the target holders with anything more than making a straightforward "trading decision" on whether or not to participate. For this reason, among others, Route 2015 bans consent solicitations to amend the terms of the subject debt securities and requires that any Qualified Debt Securities offered in exchange are identical in all materials respects to the subject debt securities.

 

This disqualification is steering Route 2015 toward the same goal. It prevents issuers from (x) making an end run around the ban on consent solicitations to amend the provisions of target securities, and (y) creating a negative incentive for target holders to continue to own their target securities whose relative position in the issuer's capital structure could be adversely affected as a result of the issuer's actions to materially improve the credit quality of another outstanding series of debt securities. Such material improvements with respect to other debt securities could take the form of additional obligors, guarantors, collateral; improved lien priority; and/or a shortened weighted life to maturity. 

A Route 2015 shortened tender / exchange offer cannot be commenced within ten business days after (x) the first public announcement or (y) the consummation of the purchase, sale or transfer by the issuer or any of its subsidiaries of a material business or amount of assets that would require the furnishing of pro forma financial information with respect to such transaction pursuant to Article 11 of Regulation S-X (whether or not the issuer is a registrant under the Exchange Act).

 

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