Debt-for-Debt Exchanges and Other Debt Modification Strategies in the Current Environment

April 13, 2009

In recent months, the equity markets have become increasingly more volatile, while the debt markets remain largely inaccessible for all but the most creditworthy issuers.  As a result, many corporate issuers are experiencing significant difficulties raising much needed capital to service and address upcoming maturity obligations on their indebtedness.  In February 2009, Moody’s Investors Service estimated that approximately $190 billion in debt will come due over the next three years.  As such, companies can expect to encounter increased tension between the tight credit markets and their maturing debt obligations.  Therefore, companies should begin to prepare for their upcoming put[1] or maturity obligations well in advance of critical dates and confer with their advisors regarding the myriad of corporate, tax and securities law issues raised by such transactions.

In many situations, when dealing with upcoming put or maturity obligations, one attractive approach for companies may be to negotiate with existing debt holders in an attempt to restructure or refinance the outstanding debt.  Such restructuring or refinancing transactions typically involve a modification of existing conversion, put or other terms.  This may be done through a consent solicitation where the company solicits consents from its debt holders to modify the existing terms of the debt, whether done on a standalone basis or in connection with an exchange offer.  Such solicitations may also include a consent payment to the debt holders to induce them to agree to the modification of debt terms.  Often the goal in these situations is to delay the upcoming maturity or put right in exchange for improved terms or concessions granted to the holder (e.g., higher coupon, greater principal amount, addition or improvement of a conversion feature, etc.).

Formal exchange offers in which a company offers to exchange a new debt or equity security for its outstanding debt have also become a popular method (and, in some cases, may be the only viable method) of refinancing an entire class or series of debt in order to avoid a potential default, and even bankruptcy.  Of course, these formal debt exchange offers can trigger the registration requirements of Section 5 of the Securities Act of 1933, as amended (the “Securities Act”), as well as the tender offer rules, which together can impose significant timing and other hurdles.  Often before commencing an exchange offer, the company will attempt to “lock-up” some of the larger holders of its debt to ensure that such holders are on board with the transaction.  Companies need to be cognizant that these “lock-up” arrangements, if not executed properly, can raise issues under Section 5 of the Securities Act and the tender offer rules.

However, the registration requirements and tender offer rules are not always implicated in a debt exchange transaction.  In some instances a public exchange offer can be structured so that it is exempt from registration under Section 3(a)(9) of the Securities Act.[2]  Securities that are received in a Section 3(a)(9) exchange will have the same status as the securities surrendered.  For example, if the securities tendered were “restricted,” then the securities received would be “restricted.”  Conversely, the same is true for “unrestricted” securities.  In other cases, the refinancing may be structured as one or more private exchanges exempt from registration pursuant to Section 4(2) of the Securities Act.[3]  In that case, the securities received would be “restricted,” but, for purposes of resale under Rule 144, the recipients of new securities may be permitted to “tack” the holding period of their old securities to their new holdings.  If they are so permitted and the “tacked” holding period is at least six months, then non-affiliates of the debt issuer may be free to resell their new securities under Rule 144, thus making a private exchange more attractive and providing the issuer with greater flexibility in structuring such transactions.

As companies continue to struggle with limited liquidity in the current markets and the significant burdens associated with their debt obligations, they should begin to evaluate the need to restructure or refinance their debt obligations well in advance of maturity.  Companies should consult with their legal and financial advisors early on in the decision-making process in order to be fully advised on the range of available alternatives.  Any of the attorneys listed below are available to help analyze the pros and cons associated with the various alternatives to effect a restructuring or refinancing transaction.

  [1]   A put right is an option in which debt holders have the right, but not the obligation, to force the issuer to repay the debt at a specified price before the instrument’s maturity date, subject to certain conditions.

  [2]   While reliance on Section 3(a)(9) of the Securities Act should be considered, in many cases the assistance of a financial advisor to solicit exchanges in the transaction is critical.  Financial arrangements with such advisors, if not structured properly, can preclude reliance on this exemption.  Accordingly, care must be taken before finalizing any transaction that relies on Section 3(a)(9).

  [3]   Due to the inherent limitations associated with transactions done under Section 4(2), it may not be possible to effect a private exchange where the securities are widely-held and most or all of the holders must participate in order for the refinancing to be successful.  Companies should also consider their obligations under Regulation FD in connection with any privately negotiated repurchase of debt as Regulation FD prohibits selective disclosure of material non-public information.

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn attorney with whom you work, or any of the following:

Washington, D.C.
Howard Adler (202- 955-8589, [email protected])
Anne Lee Benedict (202-955-8654, [email protected])
Stephen I. Glover (202-955-8593, [email protected])
Brian J. Lane (202-887-3646, [email protected]
Stephanie Tsacoumis (202-955-8277, [email protected])

Dhiya El-Saden (213-229-7196, [email protected])
David M. Hernand (310-552-8559, [email protected])
Jonathan K. Layne (310-552-8641, [email protected])
James J. Moloney
(949-451-4343, [email protected]

New York
Steven P. Buffone (212-351-3936, [email protected])
Joerg Esdorn (212-351-3851, [email protected])
Steven Finley (212-351-3920, [email protected])
Glenn Pollner (212-351-2333, [email protected])

Richard M. Russo (303- 298-5715, [email protected])

Irwin F. Sentilles III (214-698-3119, [email protected])

© 2009 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.