High-Yield Bond Offerings and Rule 144A-for-Life

High-yield notes, or notes with below investment-grade corporate ratings, are most often sold in underwritten private offerings. Selling high-yield notes in “Rule 144A-for-life” offerings, or “private-for-life” offerings, can be a particularly attractive way for private companies to gain access to U.S. capital markets without being subject to the onerous disclosure requirements characteristic of public reporting companies. Bonds that are issued as “private-for-life” are never required to be registered with the Securities and Exchange Commission (SEC).


Section 4(a)(2)


Private placements of bonds occur pursuant to Section 4(a)(2) of the Securities Act of 1933, which exempts the issuer from registering transactions not involving a public offering. In other words, Section 4(a)(2) permits an issuer to sell securities in a private placement without registration under the Securities Act. Only the issuer may rely on the Section 4(a)(2) exemption.


The first step in a private bond offering involves the private placement of the bonds pursuant to Section 4(a)(2). This enables the issuer to sell the bonds to the initial purchasers, also known as the underwriters, in a non-public offering. The initial purchasers are typically banks. Following the sale of the bonds to the initial purchasers, the initial purchasers can resell the bonds to qualified institutional buyers (QIBs) under Rule 144A or non-U.S. persons under Regulation S.


Rule 144A


A holder of restricted securities obtained in a private placement may resell the securities using Rule 144A. Rule 144A under the Securities Act of 1933 provides a safe harbor for QIBs to resell their securities without restrictions. QIBs include certain sophisticated institutional investors such as hedge funds, large asset managers, pension funds, and insurance companies. They are generally large institutional investors with at least $100 million of assets under management.


Restricted securities that were issued in a private placement can be resold without restrictions in the public markets after a holding period. The holding period is generally a minimum of six months. However, noteholders can resell their bonds to other QIBs pursuant to Rule 144A prior to the end of the holding period. Since Rule 144A relates only to resales, an issuer cannot use Rule 144A.


Regulation S


Regulation S provides an exemption from the registration requirements of Section 5 of the Securities Act for certain resales of securities outside of the United States. Pursuant to Regulation S, noteholders can resell their bonds without restrictions to non-U.S. investors.


Rule 144A-For-Life Offerings


Private companies often choose to issue their bonds as “144A-for-life,” also referred to as “private-for-life.” This means that the bonds are issued without any registration requirements with the SEC. In addition, private-for-life notes do not require for the indenture to be qualified under the Trust Indenture Act of 1939 (TIA). The TIA imposes numerous requirements on the issuer and the trustee. In particular, the TIA requires certificates and opinions relating to the release of collateral, which can be burdensome to comply with.


Rule 144A for life notes typically do not contain financial maintenance covenants, such as covenants requiring satisfaction of fixed charge coverage ratio tests or leverage ratio tests. They also tend to have longer maturities, often between 7 to 10 years.