Introduction and Overview
On January 23, 2015, the staff of the Division of Corporation Finance (the “staff”) of the United States Securities and Exchange Commission (the “SEC”) issued a no-action letter (the “Letter”) amending and expanding its long-standing positions regarding abbreviated (i.e., less than the 20 business days as required by Rule 14e-1(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) cash tender offers or exchange offers for non-convertible debt securities. A copy of the Letter can be found at: http://www.sec.gov/divisions/corpfin/cf-noaction/2015/abbreviated-offers-debt-securities012315-sec14.pdf. The Letter was issued in response to a request submitted by a number of law firms, including Sidley Austin LLP, who regularly represent issuers, dealer managers and investors in connection with debt tender offers. This update describes the Letter, which, subject to certain conditions and limitations, permits tender offers for debt securities to be conducted over a period as brief as five business days.
The Letter is the result of extensive discussions and negotiations among the law firms, the Credit Roundtable and the staff. It is intended, among other things, to bring the staff’s no-action positions into the 21st Century, recognizing that many of the staff’s prior positions, as reflected in a series of no-action letters dating back to 1986, may be outdated because of advancements in technology. The Letter specifically states that it “supersedes the letters issued to Goldman Sachs & Co. (March 26, 1986); Salomon Brothers Inc. (March 12, 1986); Salomon Brothers Inc. (October 1, 1990); and any similar letters relating to abbreviated offering periods in non-convertible debt tender offers. None of the foregoing letters should be taken to express the Division’s position with respect to tender offers commencing after the date hereof.” Accordingly, we are in a new age.
One of the biggest changes reflected in the Letter is the extension of its no-action position to exchange offers as well as to cash tender offers. The relief granted by the Letter is limited, as in the past, to offers for non-convertible debt securities. Offers for convertible debt securities are not covered by the Letter. Convertible debt securities are considered “equity securities,” and offers for those securities must be analyzed in the same manner as offers for other equity securities. The Letter is a departure from prior SEC relief in that it is not limited to debt securities with an “investment grade” rating. Accordingly, high-yield debt securities are eligible for the relief.
As in the past, the Letter only reflects the staff’s positions on compliance with Rule 14e-1 and not on other anti-fraud and anti-manipulation provisions of the federal securities laws.
In order to be eligible to rely on the Letter, the offer must:
- be made for any and all of a series of non-convertible debt securities;
- be made by the issuer of the target securities, a direct or indirect wholly owned subsidiary of the issuer or a parent company that directly or indirectly owns 100% of the capital stock (other than directors’ qualifying shares) of the issuer;
- be made solely for cash and/or “Qualified Debt Securities” (described below) of the issuer; and
- be open to all record and beneficial holders of the target debt securities.
An exchange offer can now be conducted in the abbreviated offer period if both:
- The new securities offered are “Qualified Debt Securities.” These are non-convertible debt securities, which are identical in all material respects (including, but not limited to, the issuer(s), guarantor(s), collateral, lien priority, covenants and other terms) to the debt securities that are the subject of the exchange offer except for the maturity date, interest payment and record dates, redemption provisions and interest rate. The Qualified Debt Securities must have (i) all interest payable only in cash and (ii) a weighted average life to maturity that is longer than the debt securities that are the subject of the exchange offer.
- The holders of the target debt securities who are not “Eligible Exchange Offer Participants” or an affiliate thereof (i.e., Qualified Institutional Buyers as defined in Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and/or non-U.S. Persons within the meaning of Regulation S under the Securities Act) would, instead of being excluded from the offer, as is current practice, be given the option to receive cash (from either the offeror or a dealer manager) for such holder’s debt securities in a final amount that is determined by the offeror, in its reasonable judgment, to approximate the value of the Qualified Debt Securities being offered and that is set forth at the commencement of the offer.
Any abbreviated offer (for cash and/or Qualified Debt Securities) is subject to the following limitations:
- it must not be made in connection with a solicitation of consents to amend the indenture, form of note or other agreement governing the subject debt securities;
- it must not be made if a default or event of default exists under the indenture or any other indenture or material credit agreement to which the issuer is a party;
- it must not be made at the time the issuer is the subject of bankruptcy or insolvency proceeding or has commenced a solicitation of consents for a “pre-packaged” bankruptcy proceeding or if the board of directors of the issuer has authorized discussions with creditors of the issuer to effect a consensual restructuring of the issuer’s outstanding indebtedness;
- it must not be financed with “Senior Indebtedness.” “Senior Indebtedness” is indebtedness that is incurred to finance all or a portion of the consideration in the abbreviated offer, excluding indebtedness or borrowings under any credit or debt facility existing prior to the commencement of the offer, if such indebtedness (i) has obligors, guarantors or collateral (or a higher priority with respect to collateral) that the subject debt securities do not have; (ii) has a weighted average life to maturity less than that of the subject debt securities; or (iii) is otherwise senior in right of payment to the subject debt securities;
- it must permit tenders prior to the expiration of the offer through a guaranteed delivery procedure by means of a certification by or on behalf of a holder that such holder is tendering securities beneficially owned by it and that the delivery of such securities will be made no later than the close of business on the second business day after the expiration of the offer;
- it must provide for withdrawal rights that are exercisable (i) at least until the earlier of (x), the expiration date of the offer, and (y), in the event the offer is extended, the 10th business day after commencement of the offer, and (ii) at any time after the 60th business day after the commencement of the offer if for any reason the offer has not been consummated;
- it must provide that the offeror will not pay the consideration in the offer until promptly after expiration of the offer (i.e., no early settlement); and
- it must not be (i) made in anticipation of, in response to, or concurrently with, a change of control or other type of extraordinary transaction involving the issuer, such as a merger (or similar business combination), reorganization or liquidation or sale of all, or substantially all, of its consolidated assets; (ii) made in anticipation of, or in response to, other offers for the issuer’s securities; (iii) made concurrently with an offer for any other series of the issuer’s securities made by the issuer (or any subsidiary or parent of the issuer) if the effect of such offer, if consummated (by way of amendment, exchange or otherwise), would be to add obligors, guarantors or collateral (or increase the priority of liens securing such other series) or shorten the weighted average life to maturity of such other series; or (iv) commenced within 10 business days after the first public announcement or 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).
Any abbreviated offer must be announced by means of a press release through a widely disseminated news or wire service disclosing the basic terms of the offer and containing an active hyperlink or Internet address at which a record or beneficial holder could obtain copies of the offer to purchase and letter of transmittal, if any, and other instructions or documents (including a form of guaranteed delivery instructions) relating to the tender of the securities (collectively, “Immediate Widespread Dissemination”) in each case at or prior to 10:00 a.m., Eastern time, on the first business day of the five business day offer period. In addition to Immediate Widespread Dissemination, the offeror would also be required to (i) use commercially reasonable efforts to send the press release announcing the offer via email (or other form of electronic communication) to all investors subscribing to one or more corporate action e-mails or similar lists; (ii) use other customary methods in order to expedite the dissemination of information concerning the tender offer to beneficial holders of the subject debt securities; and (iii) issue a press release promptly after the consummation of the offer setting forth the results of the offer.
If the issuer or the offeror is a reporting company under the Exchange Act (including “voluntary filers”), it must furnish the press release announcing the offer in a Current Report on Form 8-K filed with the Commission prior to 12:00 noon, Eastern time, on the first business day of the offer.
The offer must provide for communication by Immediate Widespread Dissemination, at least five business days prior to the expiration of the offer, of any change in the consideration being offered, and at least three business days prior to the expiration of the offer of any other material change to the offer, in each case at or prior to 10:00 a.m., Eastern time, on the first day of such five or three business day period. If the issuer or the offeror is a reporting company under the Exchange Act (including a “voluntary filer”), it must describe any change in the consideration being offered in a Current Report on Form 8-K filed with the Commission prior to 12:00 noon, Eastern time, on the first day of the five business day period.
The consideration offered may be a fixed amount of cash (and/or Qualified Debt Securities) or an amount of cash (and/or Qualified Debt Securities) 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, London Interbank Offered Rate, 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.
The spread used for determining the amount of consideration offered must be announced at the commencement of the offer.
In the case of an offer of Qualified Debt Securities, if the interest rate or the spread used for determining the interest rate for such securities is not fixed and announced at the commencement of the offer, it must be announced at the commencement of the offer as a range of not more than 50 basis points, with the final interest rate or spread to be announced by 9:00 a.m., Eastern time, on the business day prior to the expiration of the offer.
The exact amount of consideration and the interest rate (in the case of amounts or interest rates based on fixed spreads to a benchmark) on any Qualified Debt Securities must be fixed no later than 2:00 p.m., Eastern time, on the last day of the offer. In addition, in the case of an offer of Qualified Debt Securities, a minimum acceptance amount must be announced at the commencement of the offer.
In order to limit the amount of cash that an offeror (or a dealer manager) may have to pay to holders who are not Eligible Exchange Offer Participants (or their affiliates), an offeror may decide to include a condition precedent to its offer that no more than a specified maximum amount of cash would be required to be paid in the offer or else both the cash offer and the concurrent exchange offer would terminate.
As a result of the Letter, the staff has taken a step towards updating and standardizing the rules that relate to tender offers (cash and exchange) for non-convertible debt securities.
This will hopefully address much of the uncertainty regarding various structures that have developed in the market and result in a level playing field for all. By applying these new procedures across the board to all non-convertible debt securities, regardless of rating, an additional level of fairness will also exist.
This certainly does not come without a price. The Letter imposes additional requirements on issuers who wish to rely on it that were not required by the superseded letters.
Some of the important new requirements are:
- Timing. Instead of being able to launch an offer at any time during the day, the offer must now be launched by 10:00 a.m., Eastern time, to count that day as the first business day of the offer period.
- Withdrawal Rights. While often provided voluntarily before the Letter, withdrawal rights are now required.
- Settlement. Under the Letter, settlement may not take place prior to the expiration of the offer.
- Notice of Guaranteed Delivery. As a result of the Letter, holders must be allowed to use guaranteed delivery.
- Filings. Public companies (including “voluntary filers”) must file a Current Report on Form 8-K announcing the commencement of the offer.
- Disqualifying Acts. The Letter sets out an extensive list of facts and circumstances that will prohibit reliance on the Letter.
It has taken the staff a long time to arrive at the point set forth in the Letter. While we believe this is a positive step, we hope that it is only an interim step and that the staff will continue to seek input on additional ways to liberalize the rules related to debt tenders so as to allow this market to function in the most efficient manner possible. In the Letter, the staff said that it will monitor developments in cash tender and exchange offers for non-convertible debt securities and may reconsider the positions expressed in the Letter.
The following Sidley lawyer or your regular contact at the firm would be pleased to provide more information.
|Edward D. Ricchiuto
Sidley Austin provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Attorney Advertising - For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, 212.839.5300; One South Dearborn, Chicago, IL 60603, 312.853.7000; and 1501 K Street, N.W., Washington, D.C. 20005, 202.736.8000.