Recent judicial decisions1 have interpreted Section 316(b) of the Trust Indenture Act of 1939 (the TIA) as prohibiting amendments to an indenture that would impair the issuer’s ability to pay amounts due on the debt securities even if those amendments are otherwise expressly permitted by the indenture. Amendments are typically conditioned on the delivery of an opinion of counsel to the effect that the proposed amendments comply with the indenture (including Section 316(b) and other TIA provisions that are included in or, for TIA-qualified indentures, deemed to be part of the indenture). The recent decisions have called into question whether those opinions can be delivered in connection with a debt restructuring or in circumstances where the issuer may be in financial distress. In light of this uncertainty, a group of national law firms, including Sidley, has promulgated an Opinion White Paper (the White Paper), available here, that provides guidelines for rendering legal opinions in these situations. This Sidley Update discusses the recent rulings and the related guidance provided in the White Paper.
Section 316(b) provides that a holder’s right to receive payments due on debt securities “shall not be impaired or affected without the consent of such holder.”2 The recent judicial decisions challenge the prevailing interpretation of Section 316(b) of the TIA.
Historically, practitioners have interpreted Section 316(b) as prohibiting amendments that affect the contractual right to receive payments (for example, amendments that reduce interest rates or principal amounts or change the time for payment). By contrast, these recent judicial decisions have interpreted Section 316(b) as prohibiting amendments that impair the actual ability of the issuer to make those payments (for example, amendments that release collateral or guarantees or that transfer income producing assets to entities that are not obligors or guarantors under the indenture).3 In short, the recent judicial decisions focus on whether indenture amendments, such as those made in connection with a debt restructuring, negatively affect the likelihood that holders will actually receive all payments on the debt securities when due. This means that the question of whether an amendment passes muster under Section 316(b), previously a purely legal question, may also require a type of factual analysis that falls outside a law firm’s professional expertise and therefore may require factual support or assumptions, as discussed below.
Situations Where Section 316(b) Applies
The White Paper notes that Section 316(b) comes into play in the following two situations:
- the amendments to the indenture affect its “core terms” (i.e., payment terms); or
- under the recent judicial decisions, the amendments are effected by action of the issuer and some percentage (usually a majority) of the holders of its debt securities in connection with a “debt restructuring” (including a debt readjustment plan and an out-of-court debt reorganization).4
Under Section 316(b), core terms cannot, as a practical matter, be amended without the consent of each holder.5 The following section examines situations where counsel should be able to give an unqualified opinion with respect to amendments to non-core terms.
Situations Where Amendments to Non-Core Terms Are Permissible
The White Paper states that, absent unusual circumstances, a law firm should be able to render an unqualified legal opinion to a trustee in connection with proposed amendments to one or more “non-core” indenture terms—that is, terms that do not pertain to payment-related issues—including amendments to material covenants, if:
- the amendments are not effected in connection with a debt restructuring, or
- the amendments are effected in connection with a debt restructuring, the law firm has received satisfactory evidence that, after giving effect to all related transactions, “the issuer will likely be able to make all future payments of principal and interest to non-consenting noteholders when due.”6
The White Paper states that the type of evidence confirming the issuer’s ability to make all payments when due that is required to support a legal opinion rendered in connection with a debt restructuring will depend on the facts but, in appropriate circumstances, counsel may conclude that a solvency certificate from an officer or a solvency opinion from a third party is sufficient. The White Paper further states that, even in the absence of such evidence, a law firm may conclude that it is positioned to issue an unqualified opinion if it has received “evidence satisfactory to [it] that the issuer’s ability to make all future payments of principal and interest to non consenting noteholders when due is not harmed by, or is improved by,” the proposed transactions.7 Alternatively, the White Paper suggests that a firm may include in its opinion letter an express assumption regarding any of the foregoing facts.
The White Paper sets forth the following non-exclusive list of circumstances under which a law firm should be able, absent unusual circumstances, to deliver an unqualified opinion in connection with indenture amendments, provided that the law firm has no reason to believe that a debt restructuring is involved or has received satisfactory evidence that the issuer will be able to make all future payments on the debt securities to non-consenting holders when due:
- the release of guarantees or collateral;
- the waiver of a “Change of Control” offer or an amendment to the definition of “Change of Control”;
- an exit consent for a customary covenant strip or other indenture amendments to non-core terms in connection with a refinancing of outstanding debt securities implemented by way of a cash tender offer or exchange offer;
- amendments to non-core terms of an indenture to facilitate, or in connection with, a leveraged buyout; and
- amendments to permit an internal reorganization involving asset transfers among the issuer and its subsidiaries.
The White Paper notes that the recent judicial decisions should not affect the ability of legal counsel to provide routine closing opinions to the effect that an indenture is enforceable or non-contravention opinions stating that a given transaction does not violate an existing indenture or other financing arrangement.8
The White Paper provides some practical guidance to law firms requested to give the required indenture opinions in the context of the recent judicial decisions. As a result, some of the uncertainty created by these decisions has been mitigated, which, under the circumstances described above, should permit amendments to proceed where the opinion requirement may have previously been an impediment. The White Paper is of course not binding on a court and, if an indenture amendment is challenged, there is no guarantee that a court will find that the transaction in question complies with Section 316(b) or similar contractual language.
1 Marblegate Asset Management v. Education Management Corp., 2014 WL 7399041, 75 F.Supp. 3d 592 (S.D.N.Y. 2014); Marblegate Asset Management v. Education Management Corp., 2015 WL 3867643 (S.D.N.Y. 2015); Meehancombs Global Credit Opportunity Funds, LP v. Caesars Entertainment Corp., 2015 WL 221055, 80 F.Supp. 3d 507 (S.D.N.Y. 2015); and BOKF, N.A. v. Caesars Entertainment Corp., 2015 WL 5076785 (S.D.N.Y. 2015).
2 Section 316(b), as well as certain other provisions of the TIA, is deemed to be part of any indenture that is used in an SEC-registered public offering; indentures for Rule 144A offerings often include a provision substantially similar to Section 316(b) and sometimes expressly provide that they are subject to the TIA.
3 In support of this interpretation, the courts in Marblegate and Caesars referred to legislative history of the TIA indicating that Section 316(b) was intended to force bond restructurings to be adjudicated before a bankruptcy court, thereby preventing a majority of the bondholders from approving out-of-court debt restructurings to the detriment of minority bondholders.
4 The White Paper points out that it may be difficult to determine whether a “debt restructuring” is involved and suggests that a debt restructuring “is only implicated if the issuer is experiencing sufficient financial distress that, absent debt modifications, it will likely be unable to pay its debts when due or will be likely to file for protection under the bankruptcy code (or any similar regime).”
5 Under Section 316(b), amendments to core terms bind only consenting holders. Holders who do not consent retain their rights under the core terms.
6 This may be a difficult standard to meet depending on the condition of the issuer and the tenor of the debt security.
7 This may be a difficult conclusion for a law firm to reach if the issuer is in distress or if its ability to make all payments due on the debt securities remains questionable notwithstanding the debt restructuring and related transactions.
8 Nonetheless, a qualified opinion or discussion of the recent judicial decisions may be appropriate where the firm has reason to believe that a transaction or series of transactions constitutes a debt restructuring and has not received satisfactory evidence that the issuer will likely be able to make all future payments to non-consenting noteholders.
If you have any questions regarding this Sidley Update, please contact the Sidley lawyer with whom you usually work, or
|Craig E. Chapman
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|Eric S. Haueter
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|Edward D. Ricchiuto
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Sidley Securities Practice
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