An Overview of A/B Exchange Offers

An A/B exchange offer is a type of registered exchange offer in which the issuer issues new securities with terms that are identical to the old securities but for the fact that they will be free of restrictions on transfer. A core driver of an A/B exchange offer is the desire for holders of unregistered securities to ultimately hold registered securities. Unlike unregistered securities, which can only be sold to certain qualified institutional buyers (QIBs), registered securities are freely tradeable and can be sold to public investors more broadly.

An A/B exchange offer involves the exchange of unregistered, privately placed securities for SEC-registered securities. The original restricted securities, which are typically debt securities, would likely have been issued to holders in a private placement transaction. Participants in the A/B exchange offer will receive freely tradeable securities in exchange for their original restricted securities.

The Securities and Exchange Commission (SEC) has established through the Exxon Capital no-action letter that A/B exchange offers are permissible. An SEC no-action letter is a letter issued by the SEC staff to an issuer, in response to a request letter from the issuer, indicating that the SEC will not take legal action based on the facts and circumstances presented. As a result of the Exxon Capital no-action letter in 1988, A/B exchanges are sometimes referred to as Exxon Capital exchanges.

Registration Rights Agreement

It is customary market practice for an issuer that offers and sells investment grade debt securities in a private placement transaction to register the securities after a certain amount of time. A registration rights agreement that was entered into between the issuer and the initial purchasers of the privately placed securities will specify the company’s deadline for registering the securities. The private placement transaction is undertaken in reliance on SEC Rule 144A, Regulation S, or Regulation D. The initial purchasers in the private placement transaction are typically banks.

Key Documents in a Registered Exchange Offer

The process begins with the company’s filing of a Form S-4 registration statement with the SEC. Once the SEC completes its review of the Form S-4, the company will file a final prospectus and launch the exchange offer. The exchange offer prospectus will contain information about the exchange offer, such as a description of exchange offer mechanics, risk factors, and the tax consequences of participating in the exchange offer.

After launching the exchange offer, it will typically remain open for at least 20 business days before the offer expires. The operative document by which a holder of securities will tender its old securities is known as a letter of transmittal. The letter of transmittal provides instructions regarding the tender of old securities and exchange for new securities. It also functions as an agreement between the holder of securities and the company with respect to the A/B exchange offer.

Once the exchange offer expires, a press release is typically published to announce the results of the exchange offer. This is often followed by a Form 8-K filing with the SEC, which announces the closing of the exchange offer.

Implications of Registered Bonds

Bonds are considered registered if they are issued pursuant to a registration statement declared effective by the SEC or if the bonds are issued in Rule 144A offerings with registration rights. Bond offerings that are “private-for-life” never require registration with the SEC and are therefore free from the requirements of the Trust Indenture Act of 1939 (TIA) and Rule 3-16.

Corporate bonds issued in a registered bond offering are generally required to comply with the TIA and Rule 3-16 of Regulation S-X. Both of these regulations impose burdensome and costly obligations on the issuer. The indentures in most SEC registered bond offerings must be qualified under the TIA. The TIA has particularly strict requirements with respect to releasing collateral. When an affiliate of the issuer holds securities constituting a significant portion of the collateral, Rule 3-16 of Regulation S-X requires disclosure of separate financial statements for the affiliate.