Public and private companies at all stages of growth may consider raising capital through a debt offering. In order to help a company effectively price and close a debt offering, the company’s in-house counsel should understand the overall process and the main deal documents involved.

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Regulatory Framework

Offerings of debt securities by companies are typically conducted under Rule 144A and Regulation S of the Securities Act of 1933. This is because Rule 144A and Regulation S provide an avenue of raising capital from investors without registering the offering with the Securities and Exchange Commission (SEC). Unregistered offerings are generally more efficient and subject to less stringent regulations as compared with registered offerings. However, the company’s counsel should still keep in mind that unregistered offerings are still subject to federal securities laws.

Offerings of debt securities under Rule 144A can only be targeted to qualified institutional buyers (QIBs). Regulation S offerings can only be targeted to non-U.S. persons offshore.

Main Deal Documents

The main deal documents involved in an unregistered debt offering include:

• Offering Memorandum
• Purchase Agreement
• Registration Rights Agreement
• Legal Opinion
• Negative Assurance Letter
• Auditors Comfort Letter
• Indenture

Throughout the debt offering process, the company’s counsel will be closely coordinating and negotiating with initial purchasers’ counsel. The initial purchasers are entities, usually banks or broker-dealers, that purchase the debt securities directly from the company, often as a discounted price. These initial purchasers will then resell the debt securities to suitable investors—either QIBs under Rule 144A or non-U.S. persons under Regulation S.

Offering Memorandum

The offering memorandum, which outlines the terms of the debt offerings and provides information about the company, is one of the most important documents in a debt offering transaction. The company’s recent financial statements are an essential part of the offering memorandum.

The company’s counsel typically holds the pen on the offering memorandum. Throughout the drafting process, the company’s legal counsel will have to work closely with the company’s accountants. Once a working draft of the offering memorandum is ready to share with initial purchasers’ counsel, the company’s counsel will lead drafting sessions to go over various sections of the document. Lawyers will also actively help the company negotiate key provisions.

The complexity of the description of securities in the offering memorandum will depend on whether the debt is investment grade or high-yield. For a high-yield debt offering, the initial purchasers will demand more extensive covenants in order to protect investors.

Prior to being finalized, the document is referred to as a preliminary offering memorandum. The red herring language on the cover page, which alerts the reader to the fact that the document remains subject to completion, is a defining feature of a preliminary offering memorandum.

Due Diligence Process

Due diligence of the company’s business operations and financial condition forms a key part of the debt offering process. The due diligence process is typically lead by initial purchasers’ counsel. They will request board minutes, material contracts, accounting records, and other information that can be informative to investors.

Initial purchasers’ counsel will send the company with a due diligence request list. The company’s counsel will then provide documents and data responsive to this request list.

Purchase Agreement

The securities are sold to the initial purchasers pursuant to the terms set forth in a Purchase Agreement. The purchase agreement typically contains:

• A description of the purchase and sale mechanics for the debt securities
• Representations and warranties that confirm the accuracy of the information being disclosed by the company and the manner in which the securities offering will be conducted
• Closing conditions for the securities offering
• Indemnification and contribution provisions
• Termination provisions

Registration Rights Agreement

Some debt offerings conducted under Rule 144A or Regulation S involve the initial purchasers entering into a registration rights agreement with the company. This registration rights agreement obligates the company to register the securities being offered within a specified time period.

Indenture

The indenture is drafted after the description of the securities in the offering memorandum is near finalized. The indenture is the contractual agreement between the company and the trustee that governs the terms and conditions of the debt securities being offered. The provisions in the indenture include:

• Procedural steps involved in issuing the debt securities
• Interest rate payment schedule
• Rights and duties of the trustee
• Affirmative and negative covenants of the company
• Remedies available to the trustee
• What happens in an event of default

Pricing Day

The day on which the initial purchasers and the company agree on a price for the securities is known as the pricing day. On the pricing day, a number of events occur including:

• The price for the securities is determined
• The pricing term sheet is finalized
• Accountants deliver initial comfort letter

Closing Mechanics

Lawyers generally led the closing day procedures via a conference call including representatives from the company, the initial purchasers, and the trustee. On the closing day, the lawyers deliver the executed closing documents. The trustee will then authorize the Depository Trust Company (DTC) to release the securities to the initial purchasers.