In the midst of the global economic and financial turmoil caused by the coronavirus disease 2019 (COVID-19) pandemic, many Latin American issuers are increasingly exploring how to reduce interest expense, extend maturities or otherwise ease the burden of existing debt service obligations under outstanding dollar-denominated debt securities on their businesses.
In this note, we outline the main types of so-called liability management transactions available to Latin American issuers to reprofile or restructure their New York law-governed debt securities. We also provide a brief overview of certain US federal securities law issues that are implicated in each of those transactions.
If enough cash resources are not available to retire outstanding debt securities, issuers may seek to obtain, through a process known as a consent solicitation, the consent of bondholders to modifications to the terms and conditions in the indenture or other instrument governing the bonds that (i) eliminate or amend restrictive covenants that may become too burdensome going forward (such as to increase debt capacity or loosen financial ratios) or (ii) waive any existing or potential defaults.
Issuers need to analyze carefully (and consult with their legal and financial advisors) whether the package of relief requested through the consent solicitation strikes the right balance between the issuer’s interest in maintaining a viable business and the bondholders’ interests in protecting against a meltdown. Generally, the more targeted the relief sought, the more likely the consent solicitation is to be successful (and any negotiated consent payment ultimately paid to be lower in amount).
When conducted on a stand-alone basis, consent solicitations do not involve the issuance of new securities, which means that the US securities laws generally are not implicated in such transactions (other than compliance with the anti-fraud provisions thereunder). Care should be taken, however, to comply with any securities laws in any jurisdiction where the debt securities may be listed and the rules of the relevant stock exchange.
Exchange offers consist of offers to holders of existing debt securities to exchange them for a package of newly issued securities of the issuer (which may include both debt and equity securities), subject to the terms and conditions included in the issuer’s exchange offer memorandum. Importantly, exchange offers can present a cashless alternative to cash tender offers, and for that reason may be more attractive to issuers facing a liquidity crunch.
To ensure a successful exchange offer, it is key to structure the transaction and design the new security or package of new securities offered in exchange for the existing security so as to maximize participation and thereby achieve the desired reprofiling of the capital structure. In this regard, exchange offers are frequently coupled with an “exit” consent solicitation, in which consents are solicited (as a condition to accepting the exchange offer) to amend the terms of the existing debt securities strategically to make the offer of new securities more attractive to holders of existing bonds and, conversely, to disincentivize “holdouts” (i.e., bondholders who decline to participate in the offer). Typically an exit consent solicitation will seek to remove (or “strip out”) substantially all the restrictive covenants and related events of default, thereby leaving holdouts with a toothless security that is essentially limited to the promise to pay principal and interest and other fundamental economic terms. Other features designed to incentivize participation and reduce the amount of existing notes held by holdouts include the payment of additional consideration (“early-bird fees”) to holders who tender early in the offer period, collateral, guarantees and equity kickers. Also, the higher the level of participation by holders, the less liquid a trading market there will remain for any untendered notes – a further incentive favoring participation in the exchange offer.
Considerations relating to US federal securities laws
Exchange offers for debt securities are subject to Section 14(e) of the US Securities Exchange Act of 1934 (the “Exchange Act”) and Regulation 14E thereunder. If the securities are convertible into a class of equity securities registered under the Exchange Act, the exchange offer must also comply with Rule 13e-4 (the “Tender Offer Rules”).
Section 14(e) prohibits fraudulent, deceptive or manipulative acts in connection with a tender offer and the making of any untrue statements or omissions of material fact. Regulation 14E sets forth certain procedural requirements that must be satisfied in conducting an exchange offer. In particular, Rule 14e-1 requires, among other things, that (i) a tender offer remain open for at least 20 US business days; (ii) the offer remain open for at least 10 business days after any change in the consideration offered, the percentage of existing securities sought, or the fee paid to any bank acting as dealer-manager; and (iii) prompt payment be made (i.e., generally understood to mean three business days) following acceptance of the securities tendered.
In practice, it will be key to the success of any liability management transaction to determine at the outset whether the Tender Offer Rules apply, as the timeline and structure of the transaction will be impacted by their requirements. However, the US federal securities laws do not define the term “tender offer,” and such question may ultimately depend on guidance under case law as applied to the specific facts and circumstances. Accordingly, certain open market repurchase programs have been deemed “creeping” tender offers, and certain consent solicitations seeking to amend fundamental financial terms (such as principal, interest rate or maturity) have in certain circumstances been held to constitute offers of new securities.
Since exchange offers involve the offering of new securities (for exchange), they are not only subject to the Tender Offer Rules but also require (as with an offering of securities for cash consideration) either registration under Section 5 of the US Securities Act of 1933 (the “Securities Act”) or that an exemption from registration be available, such as in (i) a private exchange under Section 4(a)(2) of the Securities Act; (ii) an exchange by the issuer exclusively with its own securityholders under Section 3(a)(9) of the Securities Act; or (iii) an offshore transaction under Regulation S under the Securities Act. Relatedly, disclosure liability and the anti-fraud provisions of the US federal securities laws will apply to exchange offers (particularly, Sections 10 and 14(e) of the Exchange Act and Rule 10b-5 thereunder).
Any issuer analyzing whether to undertake a liability management transaction in these challenging times should take into account these and other legal, tax and practical considerations, in addition to assessing the financial and other market conditions with its financial advisor.
Because of the generality of this note, the information provided herein may not be applicable in all circumstances and should be not be acted upon without specific legal advice based on the particular situation. If you have any questions please contact your DLA Piper relationship attorney.
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 Discussion of exchange offers for convertible securities and the requirements of Rule 13e-4 is beyond the scope of this note.