Latham & Watkins on "Testing the Waters" for a Distressed Debt Exchange Offer
An interesting article from law firm Latham & Watkins' Capital Markets Practice Group about "testing the waters" prior to making a distressed debt exchange offer to bondholders.
Credit Bubble Stocks has had great success in distressed debt exchange situations over the past year, specifically with Georgia Gulf, Callon Petroleum, and Yellow Roadways (and even the incipient U.S. Concrete exchange).
As an investor, it's important to be aware of the regulatory and legal context in which these distressed debt offers take place. Here's how L&W describes the dilemma firms have:
Companies seeking to restructure their debt by means of a registered exchange offer face a difficult challenge. How do they know what terms to offer to their securityholders before commencing the exchange offer? No company facing financial difficulties wants to launch an exchange offer that will be “dead on arrival.” But the US federal securities laws prohibit making offers to sell new securities (including by way of an exchange offer) unless an exemption is available or a registration statement has been filed. What is a poor issuer to do?According to L&W, the SEC has said that they are OK with agreements to tender debt securities in an exchange offer entered into prior to the filing of a registration statement with respect to that exchange offer if the following conditions are met:
• The lock-up agreements are signed only by accredited investorsL&W also notes that
• The persons signing the lock-up agreements collectively own less than 100 percent of the outstanding principal amount of the particular series of debt securities
• A tender offer will be made to all holders of the particular series of debt securities
• All debtholders eligible to participate in the exchange offer will receive the same amount and form of consideration
during the time period prior to the announcement of a registered exchange offer and prior to filing a registration statement on Form S-4, Rule 166 permits issuers and dealer-managers to discuss the terms of a potential exchange offer with existing securityholders. Indeed, even written materials (such as term sheets) could be used in these discussions, subject to the requirement to take reasonable steps to prevent further distribution.This matches what I have experienced in practice. Recall that Callon Petroleum came right out of the gate with the public announcement of the exchange offer with 73.5% of notes already tendered.
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