In brief...
The global markets are a facing a challenge unlike any
they have faced in peacetime history. A vast cross section
of the economy is expected to face financial distress in
the coming months given the upheaval caused by the
widespread outbreak of COVID-19. Corporates and/or
other issuers who had accessed the relatively robust
fixed income markets which existed up until the beginning
of the outbreak, may now want to assess their options
especially given the financial distress which certain
sectors are facing or expected to face in the near to
medium term. This may be an opportunity to reassess
their capital structure and engage with creditors
(including bondholders) early in order to avert or address
impending or existing defaults or insolvency situations
or, more proactively, seek to optimise their balance
sheet position.
Liability management can be employed to manage
or mitigate risks where, for example, covenants in
existing bond conditions are or will come under
stress or where the possibility of future breaches
could lead to events of default under the terms of
bonds which in turn could result in cross-defaults
across an issuer’s debt structure.
Various types of liability management techniques
Liability management methods include tender
offers, exchange offers, consent solicitations or open
market repurchases. Any of these methods or a
combination of such methods could be employed for
a successful liability management exercise, especially
in a distressed debt environment.

Tender offer: An offer by an issuer to purchase its
bonds by launching a public offer for the debt.
Exchange offer: An offer by the issuer to the holders of
outstanding bonds to exchange those bonds (in whole
or in part) for an amount of newly-issued bonds.
Consent solicitations, mandatory exchanges and
exit consents: A proposal to the bondholders to
consider an amendment to the terms of outstanding
bonds. A consent solicitation may be carried out to
avoid a potential breach of a particular covenant,
to cure or waive breaches or events of default that
have already occurred, or to introduce new terms to
the terms and conditions of bonds. The tender offers
and exchange offers may also be combined with a
bond holder meeting where such bond holders are
invited to consider a resolution giving the issuer the
right to call the bonds. This is often referred to as “exit
consent”. An exit consent and/or a mandatory exchange
are techniques for an issuer to consider where it is
necessary for an entire class of bonds to be retired.
Open market repurchases: An issuer may consider
repurchasing a portion of its bonds by inviting
and/or accepting bids or offers from participants
in the secondary market.
When undertaking a liability management exercise,
the question that will come up first is – what are the laws
and regulations which are relevant for this exercise. Some
of these laws and regulations which would be relevant are:
- the rules and regulations of the relevant
clearing system;
- the law governing the bonds or notes;
- securities laws, including the US Securities Act of 1933
and the securities laws and regulations of the issuer’s
home jurisdiction;
- rules and regulations of the stock exchange where
the bonds or notes are listed; and
- the laws and regulations of the jurisdictions where the
investors are located.
Some of the legal considerations when undertaking a liability management exercise
- Terms of the existing bonds: The terms and
conditions of the bonds or notes may contain, among
other things, restrictions on the manner and the
timing of bond buy-backs and the thresholds for the
passing of various resolutions.
- Oppression of a minority in exit consents: Issues
of oppression in liability management, and in the
context of distressed debt or an insolvency scenario
could, depending on the jurisdictions involved, be
mitigated through formal court-sanctioned processes
such as a scheme of arrangement.
- Voting incentives: It is generally allowed to offer
an incentive fee or a consent fee to holders who
vote in favour of a resolution provided that a full
and open disclosure of such fee arrangements is
made to all bondholders in the consent solicitation,
tender offer or exchange offer memorandum
serving as the offering document in the liability
management exercise.
- Treatment of holders: Considerations around the
treatment of bondholders and whether they are
treated equally is important in the context of tender
offers and market repurchases.
- Market abuse and insider trading: EU market
abuse rules extend to securities that are admitted
to trading on EU multi-lateral trading facilities, which
includes exchange-regulated markets such as the
London Stock Exchange’s Professional Securities
Market, the Irish Stock Exchange’s Global Exchange
Market and the Luxembourg Stock Exchange’s Euro
MTF market.
- Inside information: In a liability management
scenario, it will be important for the issuer to maintain
confidentiality and to ensure that any disclosure is
for a legitimate purpose (for example, commercial
negotiations with its advisers) and subject to
confidentiality undertakings.
The challenge presented by COVID-19 is
unprecedented. We expect that issuers with capital
markets debt will be looking at the liability management
techniques available to them in order to mitigate the
risks of a default or a possible insolvency situation. We
expect that market participants will be actively assessing
these options in the coming days and also availing of
the various bond buying programmes being introduced
by various governments.