Debt Exchange Offers by Public Companies: Overview

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Public companies occasionally adjust their capital structures. To manage their liabilities, companies sometimes restructure their existing indebtedness. They do this by issuing new debt securities in exchange for outstanding existing debt securities. Debt exchange offers can help companies reduce existing debt, modify the terms of existing debt, or reduce interest payments by exchanging higher rate debt for lower rate debt.

Companies may decide to exchange their existing debt securities for new debt securities in a debt-for-debt exchange offer. There are several types of debt-for-debt exchange offers a company can use depending on its goals.

Structuring Debt Exchange Offers

There are three primary ways to structure an exchange offer:

  • Section 3(a)(9) exchange offer
  • Private placement exchange offer
  • SEC-registered exchange offer

Section 3(a)(9) Exchange Offer

Section 3(a)(9) debt exchange offers facilitate the exchange of a company’s securities to its existing security holders under circumstances where no one receives a commission for soliciting the exchange. The exchange securities are exempt from registration or SEC review.

Debt Exchange Offers Public Companies
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A company must meet certain requirements under Section 3(a)(9) of the Securities Act of 1933 to conduct these types of debt exchange offers. First, both the security issued and the security surrendered must be from the same company. Second, offers must not include any payments to solicit security holders to exchange their securities. Finally, the company may make offers exclusively to existing security holders of the company.

Section 3(a)(9) exchange offers have become an increasingly popular way for companies to exchange higher rate debt for lower rate debt. They are advantageous because a company can complete one quickly and at a minimal cost.

Private Placement Exchange Offer

A second category of debt exchange offers involves a private placement. Section 4(a)(2) of the Securities Act of 1933 governs a private placement exchange offer. Section 4(a)(2) exempts from registration “transactions by an issuer not involving any public offering.” This exemption from registration means that the new securities will not be subject to review by the SEC.

Private debt exchange offers are typically available only to qualified institutional buyers, or QIBs. These QIB investors must meet certain financial sophistication requirements under U.S. federal securities laws in order to participate in a private placement debt exchange.

The exchange securities offered in reliance on Section 4(a)(2) are restricted securities. Restricted securities are subject to limitations on transferability. A company can often complete private placement debt exchanges faster than other types of debt exchange offers.

SEC-Registered Debt Exchange Offers

Finally, a company may conduct an SEC-registered exchange offer when the company may not rely on a Section 3(a)(9) exchange or a private placement exchange under Section 4(a)(2). SEC-registered debt exchange offers typically take longer because the company must register the new debt securities with the SEC. The SEC then must review the registration statement before culmination of the exchange offer.

Documents Involved in a Debt Exchange Offer

Despite the unique structures of different exchange offers, several standard documents and material agreements exist. These documents include:

  • Offer to Exchange and Consent Solicitation Statement
  • Letter of Transmittal
  • Notice of Guaranteed Delivery and Consent
  • Supplemental Indenture
  • Indenture
  • Exchange Agent Agreement
  • Information Agent Agreement

The Offer to Exchange and Consent Solicitation Statement is one of the core documents involved in a debt exchange offer. This is the basic disclosure document provided to registered holders of the company’s debt securities. It lays out the terms, conditions, and mechanics of the offer. It includes details about the new debt securities, including the interest rate, maturity, redemption provisions, and conversion features. The Consent Solicitation component of this document is necessary when the company wants to modify provisions in the existing debt agreements governing the debt securities.

The main documents that accompany the Offer to Exchange include the Letter of Transmittal and the Notice of Guaranteed Delivery. The letter of transmittal outlines the steps to participate in the exchange offer. The Notice of Guaranteed Delivery specifies the deadline for delivery of the securities following the expiration of the exchange offer.

The main agreement governing the terms of the debt securities is the indenture. This is an agreement between the debt securities issuer and the trustee for the security holders. If new debt securities are being issued in an exchange offer, a new indenture will need to be executed. Relatedly, a company implements any amendments to the indenture on a supplemental indenture.

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