United States: SDNY Rules That An Exchange Offer Is Not A "Financing" For Purpose Of Indenture Debt Covenant

A recent case out of the Southern District of New York calls into question a view widely held among leveraged finance professionals regarding the interpretation of the terms "financing" and "refinancing" used in credit agreements and high-yield bond indentures. It has been generally understood that the term "refinancing" is a subset of the term "financing" – more specifically, a refinancing being a financing in which the debt issued or the proceeds of the debt issued are used to retire or repay outstanding debt. However, in Citibank, N.A. v. Norske Skogindustrier ASA, the U.S. District Court for the Southern District of New York held that to be a "financing," new funds had to be raised and concluded that an exchange offer, while a "refinancing" is not a "financing."

The case involved Norske, a Norwegian-headquartered paper company that sought to refinance two of its outstanding unsecured notes issues which were not guaranteed by its subsidiaries by way of an exchange offer (the "Exchange Offer") for a package of securities which included notes guaranteed by certain subsidiaries of Norske and secured by certain assets of those subsidiaries (the "Exchange Notes"). The trustee under the indenture for a third series of outstanding notes (the "2019 Notes") of Norske sought to enjoin the Exchange Offer, claiming the issuance of the Exchange Notes violated the limitation on additional indebtedness covenant in that indenture. The defendants argued that the Exchange Notes qualified as a "qualified securitization financing" under the 2019 Notes indenture, which was defined as follows:

[A]ny financing [emphasis added] pursuant to which the Issuer or any Guarantor may sell, convey or otherwise transfer to any other Person or grant a security interest in, any Securitization Assets (and related assets) in any aggregate principal amount equivalent to the Fair Market Value of such Securitization Assets (and related assets) of the Issuer or any of its Restricted Subsidiaries ....

The 2019 Notes trustee contended that the exception applies only to "financings," not a "refinancing" such as the Exchange Offer. The defendants, by contrast, argued that the "qualified securitization financing" provision's use of the term "any financing" should be broadly construed to include the refinancing undertaken by the Exchange Offer. The court adopted the plaintiffs' position.

"The Court is skeptical of Defendant's proposed interpretation of the term "financing" to include the very type of refinancing that is explicitly prohibited by Section 4.09(b)(5). Throughout the Indenture the terms "financing" and "refinancing" are used to mean different things. For example, the definition of "permitted refinancing indebtedness" includes a number of scenarios in which indebtedness is "renewed, refunded, refinanced, replaced, exchanged, defeased or discharged." (Indenture § 1.01.) In contrast, the definition of "qualified securitization financing" makes no mention of refinancing and instead refers only to "any financing." (Id.) While Defendants suggest that refinancing is merely a "subset" of financing (Opp'n at 13), this definition does not accord with the Black's Law Dictionary definition of "financing" as "[t]he act or process of raising or providing funds," FINANCING, Black's Law Dictionary (10th ed. 2014). Put simply, the Exchange Offer does not raise new funds for Defendants, but rather allows them to delay payment on unsecured notes that would otherwise be due in 2016 and 2017 – thus increasing their short-term liquidity – in exchange for secured notes collateralized by assets of a subsidiary. This is a quintessential refinancing. See REFINANCING, Black's Law Dictionary (10th ed. 2014) (defining "refinancing" as an "exchange of an old debt for a new debt").

The court went on to note that the defendants' interpretation of a "qualified securitization financing" would permit an end run around the 2019 Notes indenture's definition of "permitted refinancing indebtedness" (which explicitly excluded indebtedness guaranteed by Norske subsidiaries that refinanced Norske indebtedness, not so guaranteed) and that accepting the defendants' position – which implicitly construed "any financing" to mean "any financing or refinancing" – would effectively render the definition of "permitted refinancing indebtedness" meaningless, since it would allow any refinancing through the back door of the "qualified securitization financing" provision. The court stated that it would not be inclined to read additional language into the indenture when a reading of both provisions – the definitions of "permitted refinancing indebtedness" and "qualified securitization financing" – using the plain meaning of the terms "financing" and "refinancing" can allow the two provisions to coexist without directly contradicting each other.

While the court sided with the plaintiff and adopted the textual distinction between a "financing" and a "refinancing," thereby establishing a likelihood of success on the merits, it declined to issue the requested injunction finding no irreparable harm if the Exchange Offer were to be consummated.1

The full text of the opinion can be found here.


1 The court rejected the 2019 Notes trustee's contentions on a number of grounds. First, the court said, the trustee had not demonstrated that a default on the 2019 Notes was imminent, and indeed there was testimony that should the Exchange Offer go forward, Norske would continue to make payments on the 2019 Notes. The court observed, moreover, that if the Exchange Offer were not allowed to proceed, Norske would be in a worse financial position. Furthermore, the court accepted apparently uncontested testimony that the collateral currently securing the 2019 Notes would be adequate to repay the notes in full in bankruptcy. Finally, the court rejected the 2019 Notes trustee's claim that the "insolvency exception" to the irreparable harm test should be applied. Under that exception, courts have held that in the face of an issuer's impending insolvency, irreparable harm will be deemed to exist. The court declined to apply the exception, because insolvency of the issuer was more likely to occur were the court to issue the requested injunction.

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