United States: Exchange Offer Developments: Delaware Court Declares Debt Exchange Offer In Violation Of Bond Indenture

The Court of Chancery of the State of Delaware recently held in The Bank of New York Mellon v. Realogy Corporation1 that a company's proposed debt exchange offer was impermissible under the terms of the documents governing its debt. Because debt exchange offers and tender offers are likely to continue to play a significant role in addressing financing needs and opportunities in today's market, this Commentary summarizes the Delaware court's opinion and considers its possible impact on future debt exchange offers.

The Delaware Court's Opinion in Realogy

Realogy Corporation had the following debt outstanding: (i) a senior secured term loan facility and a senior secured revolving credit facility (the "Credit Facility"); (ii) senior notes (the "Senior Fixed Notes"); (iii) senior toggle notes (the "Senior Toggle Notes"); and (iv) senior subordinated notes (the "Senior Subordinated Notes"). Realogy sought to refinance its outstanding notes by offering to exchange a portion of them for term loans under a new $500 million term loan facility. The new term loans were to be issued under an "accordion" feature of the Credit Facility and were to be secured by a second lien on substantially all of Realogy's assets.

Because the Senior Toggle Notes could be paid in kind (and thus were the cheapest debt element of the capital structure on a cash basis), Realogy structured the offer to allow holders of the Senior Toggle Notes to participate only after all interested holders of the other two tranches had participated. In light of the relatively small size of the offer and the expected degree of interest from the other two tranches, it was unlikely that any holders of the Senior Toggle Notes would be able to exchange their notes for new term loans. As a result, because the new term loans were to be secured by second liens under the Credit Facility, the proposed exchange offer would have allowed the Senior Fixed Notes to effectively become senior to the Senior Toggle Notes and the Senior Subordinated Notes to "leapfrog" in priority over the Senior Toggle Notes.

The trustee under the indenture sued Realogy on behalf of holders of the Senior Toggle Notes, alleging that the exchange offer breached the indenture. Because certain terms of the indenture relied upon terms of the Credit Facility, the question before the court was whether the exchange offer was permissible under the Credit Facility.2 The trustee maintained that the exchange offer was impermissible under the Credit Facility because (i) the exchange offer allowed holders of notes to fund their commitments for new term loans with exchanged notes, even though the Credit Facility required "loans" to be funded in cash, and (ii) the new term loans were not "Permitted Refinancing Indebtedness" as defined in the Credit Facility.

The Delaware Court of Chancery rejected the trustee's first argument as "hyper-technical."3 The court concluded that the use of the word "loan" in the Credit Facility was not necessarily limited to loans made for cash, observing that "[t]here are many commercial examples of loans which are not funded in cash."4 The court was also unconvinced by the trustee's narrower contention that the word "loan," in the context of the Credit Facility's other terms, implied funding only in cash.5

The court, however, agreed with the trustee's second argument. As is typical of such facilities, the Credit Facility prohibited prepayment of the notes except, among other exceptions, with "Permitted Refinancing Indebtedness," that is, indebtedness the proceeds of which are used to refinance the indebtedness in question. The definition of "Permitted Refinancing Indebtedness" had an exclusion, however, for any new debt with "greater . . . security" than the refinanced debt. The proposed exchange offer, which contemplated replacing unsecured notes with second lien term loans, would result in new debt with greater security than the refinanced debt and therefore be impermissible under the exclusion. But the exclusion itself had a carveout that allowed new security to be added to the refinancing indebtedness to the extent permitted under the Credit Facility's negative covenants. While those covenants generally prohibited liens on Realogy's property, they permitted liens created under the Credit Facility itself. Since the new term loans were to be issued under the "accordion" feature of the Credit Facility, Realogy contended that the liens were to be created under the Credit Facility and thus came within the carveout for additional security permitted by the definition of "Permitted Refinancing Indebtedness." The trustee responded that Realogy's interpretation would make the carveout so broad that the exclusion that it modified would itself be rendered meaningless.

The court observed that an interpretation of the exclusion to the definition of "Permitted Refinancing Indebtedness" that required nothing more than compliance with the covenants would add no substance to the definition. The exclusion would then be "mere surplusage."6 Because courts generally try to give meaning to every term of an agreement, the court reasoned that Realogy's interpretation should be disfavored. The court preferred the trustee's interpretation, which permitted the refinancing indebtedness to be secured only if the debt being refinanced could itself have been secured pursuant to the terms of the Credit Facility.7

Realogy's Impact on Debt Exchange Offers

Although the Delaware court did not allow Realogy to pursue its proposed refinancing structure and there is always a risk of litigation where one group of creditors may be adversely affected by a proposed transaction, the court's reasoning may actually facilitate debt exchange offers by companies in certain circumstances. The court's decision with respect to the trustee's second argument is likely to have little precedential impact because it was so fact-specific. But the court's decision on the first issue—allowing loans to be exchanged for debt securities under a credit facility—may have a wider impact. In today's climate, where liquidity is so hard to find, courts may be more willing to follow the Delaware Chancery Court's lead in rejecting "hyper-technical" arguments that would limit refinancing to new debt funded in cash.

However, no transaction should be undertaken until all documents governing outstanding debt are carefully reviewed, as the current market climate may also lead to more disputes over proposed refinancings as creditors attempt to obtain positions closer to a debtor's diminished capital. Because the alternative to refinancing can be bankruptcy, room for compromise is limited, and many of these disputes may proceed to litigation.8 The success of any debt exchange or tender offer, therefore, will depend on the terms of a debtor's debt instruments, and even slight differences in terminology can affect the outcomes of these transactions. For companies considering debt exchange offers or other refinancing transactions, careful review of those instruments is critical.


1.C.A. No. 4200-VCL, 2008 Del. Ch. LEXIS 186 (Del. Ct. Ch. Dec. 18, 2008) (unreported opinion).

2.One of the holders of Senior Toggle Notes also party to the complaint against Realogy contended that the exchange offer amounted to a fraudulent transfer. The court did not address that claim.

3.2008 Del. Ch. LEXIS 186, at *23.


5.See id. at *24-*33.

6.Id. at *40.

7.See id. at *41-*42.

8.Two other examples of exchange offers that have led to litigation may be found in Murchison v. Harrah's Entertainment Inc., No. 09cv00020 (D. Del. filed Jan. 9, 2009) and Springfield Assocs. v. Neff Corp., No. 08-603668 (N.Y. Sup. Ct. filed Dec. 15, 2008).

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions