Overview
For additional guidance, please refer to Steptoe's COVID-19 Resource Center.
As markets react turbulently to global and local events, prices for company debt continue to decline and attractive rates are now available to borrowers from other capital sources. With the spread of COVID-19, companies are rightly focusing on the health and welfare of their employees and daily operational needs. At the same time, however, companies should be strategic and consider repurchasing outstanding debt to take advantage of this distressed pricing and support future growth. We discuss below topics a company may need to consider in repurchasing its debt.
The repurchases for cash highlighted below include:
- Redemptions – purchases of outstanding debt securities for cash in accordance with the terms of the security
- Repurchases – opportunistic repurchases of debt securities for cash, including privately negotiated and open market repurchases
- Tender Offers – offers made to all bondholders to repurchase outstanding debt securities for cash
Liquidity
As an initial matter, companies should only use cash to purchase outstanding debt if they have sufficient liquidity to continue to operate, including in the downward-trending and uncertain scenarios we are currently facing.
Provisions in Debt Documents
Note indentures typically do not restrict repurchases, although they may include restrictive covenants that limit retirement of certain priorities of debt and the incurrence of new debt. A company seeking to redeem an entire class of debt will typically follow the terms outlined within the governing debt documents, including those relating to redemption price and mechanics.
Avoiding the Tender Offer Rules
An issuer repurchasing its debt securities, either in privately negotiated transactions or in open market purchases, may inadvertently trigger the tender offer rules. These rules include onerous requirements governing offering periods and extensions thereof, terms of payment, and related disclosure obligations. Courts typically have followed the eight-factor test in Wellman v. Dickinson (475 F. Supp. 783, 823–24 (SDNY 1979), which held that the presence of any of the following factors in a repurchase is indicative of a tender offer:
- An active and widespread solicitation of public shareholders for the securities of an issuer
- A solicitation is made for a substantial percentage of the issuer's securities
- The offer to purchase is made at a premium over the prevailing market price
- The terms of the offer are firm rather than negotiable
- The offer is contingent on the tender of a fixed number of securities, often subject to a fixed maximum number to be purchased
- The offer is open only for a limited period of time
- The offeree is subjected to pressure to sell his or her security
- Public announcements of a purchasing program concerning the target issuer precede or accompany a rapid accumulation of large amounts of the target issuer's securities
To ensure that a debt repurchase does not trigger application of these rules, the debt repurchase should be made for a limited amount of securities and to a limited number of holders over an extended period of time. Holders should not be pressured to sell and prices should be privately and separately negotiated with each holder.
Applicable Securities Laws
Notes are securities, therefore US securities laws apply to their repurchase. Accordingly, repurchases of debt securities could be restricted while an issuer is in possession of material non-public information. Accordingly, any non-public information that could be deemed material should be disclosed by the issuer prior to initiating any debt repurchase and such repurchases should be conducted during open trading windows. Issuers should be particularly aware of the timing of earnings releases and other public disclosures as well. Of course, debt repurchase may also trigger disclosure via Form 8-K if the company reports under the US Exchange Act of 1934, as amended.
Seeking Help from Bankers
An investment bank may provide critical support if a company's debt is widely held and it needs assistance bringing debtholders to the table. If a banker is engaged, the banker may act as an agent on behalf of the issuer, or as a principal (by buying the debt from the debt holder and selling to the company). If a company's debt is closely held, the banker's roles may be more limited.
Tax
While the complete treatment of tax considerations in a debt buyback is not discussed in this alert, readers are encouraged to seek advice from tax counsel. Most fundamentally, debt repurchases may lead to recognition of cancellation of indebtedness income to the extent of loan forgiveness. This may create a cash tax liability or reduce the company’s tax attributes, such as net operating losses or "NOLs."
Conclusion
Liability management is key to steering a company through these uncertain times and preparing it for future success when the markets stabilize. Members of Steptoe's corporate team are available to assist you as you consider the options.