Aleksieiev
V. S.
Oles
Honchar Dnipro National University (Ukraine)
Debt
Restructuring Tools in International Capital Market Transactions
Liability management is a term used to describe the
restructuring of liabilities typically under debt securities issued in
international capital markets. In particular, it is used to describe
transactions to better manage, modify, or eliminate liabilities of an issuer of
debt securities, including, (i) payment obligations and/or (ii) covenant
liabilities under the instrument governing such debt securities.
To put it simply, liability management is an essential
tool to keep an entity with debt on its balance sheet from issue of debt
securities running smoothly. The financial crisis and the ongoing debt turmoil
in the EU serve as good examples of importance of proper and timely debt
restructuring. Those who exercised prudence with their balance sheets were more
likely to weather the storm; others went bankrupt or had to be liquidated. However, liability management is not
something that comes in handy only during the times of crisis, it is an ongoing
process that can either help a company grow or, if ignored, can cause a
business to close its doors.
The objectives of liability management vary but in
many instances are similar, and include, among other things:
— Reduction of the principal amount of debt at a
reasonable price. For instance, by way of cash tender offer an issuer may
benefit from buying back debt securities at a significant discount to the
nominal value. If a cash tender offer transaction is coupled with the new issue
of debt securities, the repurchase may be structured so that the issuer would
use the proceeds generated from the new issue to repurchase the “old” debt
securities without the need to advance cash from own reserves for purposes of
such repurchase.
— Easing of interest expense and extension of maturity
of debt securities for purposes of having a cheaper debt with longer maturity
profile. For instance, as a result of new Eurobond offerings and cash tender
offer transactions in spring of 2013, DTEK and MHP could raise cheaper
financing with yield of 7.875% and 8.25%, respectively, and substitute more
expensive debt from the issue of Eurobonds in 2010 with a yield of 9.50% in the
case of DTEK and 10.25% in the case of MHP.
— Waiver of restrictive covenants. In the ordinary
course of business and changing economic environment companies may pursue new
investment opportunities, seek to raise new financing, grant security, improve
baskets for carve-outs for certain event of defaults in the instruments
governing the debt securities. Such changes are commonly subject to the consent
of the investors.
What are the different types of liability management
transactions?
So, what are the options to restructure liabilities
under the debt securities issued in international capital markets? An issuer of
debt securities in international capital markets may consider the following
options:
— Redemption. Redemption is a transaction for purchase
of outstanding debt securities for cash. While redemption has advantages in
timing, it requires cash from the issuer and may be expensive (debt securities
are redeemed usually with a premium as a compensation for yield to maturity).
— Repurchase. Repurchase transaction allows the issuer
to repurchase debt securities at a significant discount and save money on
continuing interest payments. Similar to redemption, repurchase requires cash
from the issuer and is not suitable if the issuer intends to repurchase a
substantial percentage of the outstanding debt securities. Repurchase is
typically made to a limited number of investors and for a limited amount of
notes due to the risk of application of tender offer rules and in this case the
need to structure the transaction as a cash tender offer.
— Cash tender offer. Cash tender offer is a
transaction for an offering to repurchase existing debt securities for cash,
which is made to all existing investors. The tender offer may be the most
appropriate tool to restructure indebtedness if the issuer (i) wishes to
repurchase all or a significant portion of outstanding debt securities, (ii)
debt securities are held widely by the investors, and (iii) simultaneously with
the repurchase of debt securities, the issuer considers obtaining consents from
the investors to waive or amend certain covenants in the indenture. US courts
provided a set of factors to determine if tender offer rules apply to the
liability management transaction, including: active and widespread
solicitation, solicitation is made for a substantial percentage of the issuer’s
securities, offer to purchase is made at a premium over the prevailing market
price, terms of the offer are firm rather than negotiable, offer is contingent
on the tender of a fixed number of securities, often subject to a fixed maximum
number to be purchased, and offer is open only for a limited period of time.
Issuers must carefully consider the characteristics of the tender offer when
structuring a liability management transaction. If the transaction satisfies
the conditions for the tender offer, its timing, documentation, and costs would
be significantly affected.
— Exchange offer. If an issuer does not have available
cash or does not want to use it, an alternative to redemption, repurchase and
tender offer may be an exchange offer, which permits the issuer restructuring
its indebtedness without the use of cash. In the exchange offer transaction,
the issuer offers to exchange newly issued securities for the outstanding “old”
ones. Similar to the cash liability management transactions, exchange offers
enable the issuer to reduce interest payments (by exchanging debt securities
with a higher interest rate for debt securities with a lower interest rate),
manage maturity dates (by exchanging for securities with an extended maturity),
reduce or eliminate onerous covenants in the indenture.
— Consent solicitation. Often restructuring of
liabilities under foreign debt securities involves the need for the issuer to
modify certain covenants in the indenture. For instance, the issuer may seek to
conform the covenants in the indenture for the “old” securities with the
covenants in the indenture for the new securities (if the restructuring is
coupled with the issue and offering of the new securities) or the issuer
improved the financials and seeks entering into new transactions to develop the
business, etc. In such cases, the issuer
must undertake a close review of the indenture for the existing securities to
determine the consent requirements for amendments or waivers.
There is an array of factors that must first be
explored to decide whether to restructure indebtedness under foreign debt
securities and which arrangement would be most appropriate, time and cost wise.
Some of these factors include market conditions, cash availability, tax and
legal implications. While taking advantage of declining interest rates might be
enticing, restructuring the indebtedness may have adverse legal and tax
implications for the issuer. To ensure that a decision to restructure would not
adversely affect the issuer and achieves its desired goal, all of the factors
need to be considered and weighted in their entirety in a structuring phase of
the transaction with the involvement of financial, tax, legal, and accounting
specialists for purposes of finding a solution, which would best satisfy the
business needs of the issuer and be appealing for the investors.