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An Introduction to Debt Tender and Exchange Offers

Companies seeking to restructure their existing indebtedness or make changes to their capital structure may consider undertaking a debt tender offer or a debt exchange offer. Market shifts or financial distress may motivate companies to consider such options. Companies can also use debt tender and exchange offers to facilitate an acquisition or to de-leverage.

Debt Tender Offer

A debt tender offer refers to an offer to purchase existing debt securities for cash or other consideration. Special rules promulgated by the Securities and Exchange Commission (SEC) govern tender offers. Tender offers for debt securities are governed by Regulation 14E under the Securities Exchange Act of 1934 (Exchange Act).

The determination of whether a transaction is subject to the tender offer rules depends on the particular facts and circumstances. The case Wellman v. Dickinson devised an eight-factor test to guide this determination. The factors are:

  • Active and widespread solicitation of security holders;
  • Solicitation is for a substantial percentage of the outstanding securities;
  • The offer price is a premium over the prevailing market price;
  • The terms of the offer are firm and not negotiable;
  • The offer is contingent on a minimum tender amount (and perhaps also a maximum tender);
  • The offer is only open for a limited timeframe;
  • Recipients are under pressure to respond; and
  • A public announcement precedes or accompanies the formal offer

However, not all eight factors must be satisfied in order to conclude the transaction is a tender offer. In particular, many transactions are considered tender offers despite the absence of a public announcement.

Debt Exchange Offer

A debt exchange offer refers to an offer to issue a new debt or equity security to holders of existing debt securities. Debt exchange offers can take a variety of legal forms. Such transactions can be unregistered or registered. Unregistered exchange offers are generally faster than registered exchange offers.

One common structure is a Section 3(a)(9) exchange offer. A Section 3(a)(9) exchange offer avoids registration with the SEC. However, a number of conditions must be met in order to undertake a Section 3(a)(9) exchange offer. These conditions include (i) no payment is made for the solicitation to exchange, such as payments of success-based fees to a solicitation agent, (ii) the old bonds and the new bonds must be offered by the same company, and (iii) the bondholders are not required to contribute additional cash or other consideration in order to exchange their old bonds for new bonds.

Another common structure is an exempt Section 4(a)(2) or Regulation D private exchange offer. Private exchanges are generally limited to qualified institutional buyers (QIBs), which are sophisticated institutional investors meeting specified criteria. The securities issued in a private exchange offer will be restricted securities. Such private exchange offers pursuant to Section 4(a)(2) or Regulation D may come with registration rights, requiring the company to register the securities after a certain period of time.

A more time-consuming option is to undertake a registered exchange offer using a Form S-4 registration statement. In a registered exchange offer, the SEC will review the Form S-4 registration statement filed by the company. In addition to being time-consuming, the Form S-4 requires extensive public disclosure about the company. However, bond issued pursuant to a registered exchange offer will be unrestricted and freely transferable. This provides greater liquidity to bondholders.

Rule 14e-1 under the Exchange Act

Rule 14e-1 under the Securities Exchange Act of 1934 (Exchange Act) applies to both debt tender and exchange offers. It requires any tender offer, including a debt tender or exchange offer, to remain open for at least 20 business days. In addition, Rule 14e-1 requires prompt payment of the consideration for the tendered securities after the expiration of the offer.

Practical Considerations with Debt Tender and Exchange Offers

Companies may try to purchase their securities on the open market without commencing a tender offer in order to avoid the potential negative consequences sometimes associated with tender offer. In particular, the announcement of a tender offer may cause the trading price of a company’s securities to increase. Furthermore, a tender offer may result in certain stockholders forming “hold out” groups in order to encourage the company to increase the amount of cash or other consideration offered.

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