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.

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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.