United States: Five Business Day Exchange Offers And The ‘Identical In All Material Respects' Requirement

Market participants involved in distressed exchange offers have become accustomed to grappling with the implications of Trust Indenture Act Section 316(b) in the context of potential exit consents, i.e., are the contemplated amendments to the indenture governing the securities subject to the exchange significant enough to impair or affect the right of a holder to receive payment of principal and interest on or after the due dates of the relevant note?

However, similar questions can arise in the context of accelerated exchange offers governed by the SEC's no-action letter regarding "Five Business Day Tender Offers" (the "No-Action Letter")1 for nonconvertible debt securities.

In general, the No-Action Letter addresses proposed exchange offers that meet specified guidelines, the purpose of which is to ensure that a debtholder is able to quickly evaluate the terms of the new securities and make an investment decision with respect to the proposed exchange. If the guidelines are satisfied, the issuer need hold the exchange offer open for only five business days rather than the 20 business days otherwise required. The shortened time period can be beneficial to both the issuer and bondholders because it mitigates market risk associated with offers held open for a longer time period.

The classic distressed exchange involves an offer to exchange either new debt with a higher lien priority or greater credit support for existing debt with a lower priority. These types of exchange offers will not qualify for the shortened offer period. However, on occasion an issuer will make an offer, which may be negotiated with key bondholders, of new debt that is on parity with the existing debt. It is those situations in which the parties may determine whether to utilize a Five Business Day Tender Offer.2

Most of the requirements contained in the No-Action Letter are readily determinable. The requirements regarding the terms of the new securities to be issued in the exchange, referred to as "Qualified Debt Securities," are not necessarily clear-cut, however. The No-Action Letter provides that Qualified Debt Securities must be

"identical in all material respects (including but not limited to the issuer(s), guarantor(s), collateral, lien priority, covenants and other terms) to the debt securities that are the subject of the tender offer except for the maturity date, interest payment and record dates, redemption provisions and interest rate; provided that Qualified Debt Securities must have (i) all interest payable only in cash and (ii) a weighted average life to maturity that is longer than the debt securities that are the subject of the offer."

The phrase "identical in all material respects" contemplates that the new securities are permitted to have different terms from the securities subject to the exchange, so long as the differences are not material. The parties involved will need to be attentive to changes in terms that may not be obvious and then consider those changes' materiality.

For example, especially for issuers with more elaborate capital structures, indentures for the new securities may effectively permit more debt than was allowed under the securities subject to the exchange, by reason of what is commonly referred to as the "existing debt basket." Under the new indentures, this basket would incorporate additional debt issued during the intervening period. Thus, even though the new and old indentures both use identical terms, their effect is different because references to "existing on the date hereof" (or something similar) mean different things at different points in time. The same issue can arise for covenants regarding existing liens, investments or other items that may be detrimental to a bondholder. In these regards, the holders of the exchange debt would be disadvantaged as compared to the holders of the existing debt.

However, the "identical in all material respects" requirement could allow for benefits to the holders of the exchange debt as well. Specifically, parties could revise provisions in the new indentures to clarify the original intent of terms governing the existing debt securities, perhaps in light of intervening court decisions in which similar language was at issue. One such example would be revising an optional redemption provision to reflect what was then "state of the art" language intended to protect the enforceability of a make-whole in an issuer bankruptcy event. In such a situation, the parties are not changing the economic terms of the redemption provision, but bondholders may perceive the quality of the security to be improved and thus be more likely to participate in the exchange being conducted by the issuer — a classic win-win. Such a change should not be problematic from the perspective of the No-Action Letter because the guidance is intended to protect bondholders, and this type of change is beneficial to holders.

In summary, while accelerated exchange offers will not ordinarily give rise to investment decisions of the same magnitude that a classic distressed exchange presents, issuers, bondholders and counsel are well-advised to give careful thought to any changes, including by operation of the identical language, in covenant baskets and other terms when analyzing Five Business Day Exchange Offers.


1.The letter can be found at http://www.sec.gov/divisions/corpfin/cf-noaction/2015/abbreviated-offers-debt-securities012315-sec14.pdf.

2.The No-Action Letter specifically covers exchanges for distressed debt, i.e., the distinction contained in prior relief between investment-grade and non-investment-grade debt has been eliminated.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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