In late January, the SEC’s Division of Corporation Finance issued a no-action letter that significantly expedites non-investment grade debt security tender and exchange offers and eases certain other restrictions. With so many companies now refinancing debt to access favorable interest rates and extend maturities, this is welcome news.
The No-Action Letter…
The letter was submitted by a group of eighteen law firms and was supported by a separate letter from The Credit Roundtable, an association of institutional fixed income investors and money managers. The staff agreed with the group’s proposals as set forth in the letter.
Essentially, the letter extends to non-investment grade debt securities the abbreviated processes that have been available since the 1980s in connection with investment grade debt. In that regard, the staff noted that this new no-action letter supersedes the several old no-action letters that defined the investment grade offer exception.
The letter noted that it is important for issuers to be able to quickly effect refinancings of this nature to lessen market exposure and avoid “negative carry”—interest on both newly issued debt and the old debt while the offer is in process. The shorter period also helps debt holders who want to “roll over” funds received in the tender offer into the new debt use. The letter further noted that, in contrast to equity holders, debt holders do not need extra time to consider potential equity upside in exchange for the offered premium. In this era of instantaneous electronic communication, there were no concerns about note holders being able to respond within the new five business day time frame.
Summary of the changes…
At the risk of oversimplifying a detailed and complex process, here is a summary of the new no-action letter:
- SEC rules typically require tender and exchange offers to remain open for at least twenty business days. The staff has for many years, however, permitted certain offers for investment grade debt to remain open for an abbreviated period (seven to ten calendar days). The letter now extends that relief to non-investment grade debt by allowing both investment grade and non-investment grade debt tender and exchange offers to remain open only five business days so long as the letter’s other criteria are satisfied.
- The offer must be to “any and all” holders of non-convertible debt in exchange for all cash or essentially identical debt securities.
- The offer cannot be made in connection with a consent solicitation.
- There must be “immediate widespread dissemination” of the offer materials via a press release through normal channels, as well as by email to all investors who subscribe to corporate action emails or similar lists. The press release must contain an active hyperlink to, or Internet address at which a debt holder can obtain copies of, all offer materials.
- Reporting companies must furnish the press release on a Form 8-K by noon on the first business day of the offer.
There are numerous other conditions that must be met to use this expedited offer process. The bottom line, however, is that:
- routine tender or exchange offers for non-investment grade debt securities just got quicker and more efficient, and
- the staff-created exception for investment grade offers has changed slightly.