This practice note discusses reopenings of debt securities issuances. Companies frequently raise capital by issuing additional debt securities of the same series as debt securities outstanding under an existing indenture, often referred to as "reopening the indenture" or "reopening the series."
In reopenings, the newly issued additional debt securities will have the same terms, and for all purposes under the indenture will be treated as part of the same series, as the outstanding debt securities of such series. The additional debt securities will also be fungible with the outstanding debt securities of such series for secondary market trading. This practice note discusses the reasons why companies raise capital through reopenings, as well as the processes, mechanics, tax considerations, and disclosure issues specific to reopenings.
For information on debt securities generally, see Corporate Debt Securities in U.S. Capital Markets, Debt Finance: Capitalization Options and Parties, and Rule 144A /Regulation S Offerings Resource Kit. For information about specific types of debt securities, see Convertible Debt Securities, Top 10 Practice Tips: Convertible Note Offerings, Top 10 Practice Tips: High Yield Debt Offerings, Top 10 Practice Tips: Investment Grade Debt Offerings, and Medium-Term Note (MTN) Programs.
The Reasons for Reopenings
Reopening an existing debt issue is often more cost-effective than raising capital by issuing a new series of debt securities, particularly if the issuer is raising a relatively small amount of capital.
An important element affecting the pricing of any debt security is the security's liquidity (i.e., the degree to which the security can be quickly bought or sold in the open market). All other variables being equal, debt securities with greater liquidity will tend to command higher market prices. One of the many factors that can affect a debt security's liquidity is the size of the series or the aggregate outstanding principal amount of the series outstanding. Again, all else being equal, the larger the aggregate principal amount outstanding the more liquid the security will be because it will typically be held by more investors resulting in more trading and market interest in the security.
Series sizes of less than $100 million are generally viewed as having an adverse impact on both liquidity and pricing, with the adverse impact increasing as the size of the series decreases. As a result, companies that have a series of debt securities outstanding and want to issue a relatively small amount of debt in the capital markets (e.g., $25-$50 million), will very often "reopen the series" to receive better pricing (because of the increased liquidity in the existing series) than they would otherwise receive from issuing a completely new and separate series of debt securities.
Decreased Time and Expense
Reopenings are also cost-effective because the time and expense involved in a reopening are less than for an offering of a new series of debt securities. Because the terms of the additional securities being offered have already been established there is no need to negotiate a covenant package or any other terms of the securities. The indenture and the form of debt securities have previously been drafted and finalized, which obviates the time and expense associated with preparing those documents. Even the marketing efforts for a reopening are reduced because the market is familiar with the securities being offered and the underwriters (for a registered offering) or initial purchasers (for a Rule 144A (17 CFR 230.144A) offering) often market the additional debt securities primarily to existing holders of the outstanding debt securities of the same series.
It is also not unusual for a reopening to occur as a result of a reverse inquiry, which is when existing holders or investors familiar with and seeking to acquire the outstanding debt securities contact the issuer or a financial intermediary. If the inquiry is made directly to the issuer (rather than to a financial intermediary) and after the expiration of any issuer lock-up period set forth in the underwriting or purchase agreement for the initial offering, the issuer can sell the additional debt securities directly to the investors and avoid paying any underwriting or initial purchaser discount.
Processes and Mechanics Specific to Reopenings
Initial issuances and reopenings of outstanding series of debt securities both constitute offers and sales of securities by the issuer. Therefore, whether the offering is made publicly pursuant to a registration statement filed under the Securities Act of 1933, as amended (Securities Act), with the Securities and Exchange Commission (SEC) or pursuant to a transaction exempt from registration under the Securities Act, the process to effectuate a reopening, albeit often streamlined, will be very similar to that involved in the initial offering. This will include, but not be limited to, diligence efforts, disclosure obligations, document preparation, and compliance with the rules and regulations of federal and state securities laws. The following is a discussion of the processes, mechanisms, and practical considerations that are specific to effectuating a reopening.
Does the Indenture Permit Issuance of Additional Debt Securities?
The first step in any reopening is to check if the indenture permits issuing additional debt securities after the initial issuance of debt securities of the same series. In this respect there are three types of indentures: (1) indentures that provide for the issuance of an unlimited amount of debt securities of the same series to be issued, (2) indentures that only provide for the issuance of the debt securities in the initial offering, and (3) indentures that provide for the issuance of additional debt securities up to a specified principal amount. The provisions addressing the ability to issue additional debt securities of the same series are typically found in Article II of most indentures.
You must also check to make sure that the incurrence of indebtedness represented by the additional debt securities to be issued in the reopening will not violate any other indenture covenants (as well as any other material contracts of the issuer), including the Limitation on Indebtedness covenant and, for debt securities that are secured, the Limitation on Liens covenant. If the debt securities are secured, the issuance of additional debt securities of the same series will dilute the collateral pool securing the outstanding debt securities, which may be permitted up to a specified dollar amount or a specified financial ratio, such as a secured leverage ratio. Alternatively, the issuer may be required to "top-up" the collateral pool by pledging additional assets to support the incurrence of the additional debt securities. In either case, counsel for the issuer should flag any covenant compliance issues early on in the process to ensure they are addressed promptly.
The Additional Debt Securities Must Be Fungible with the Outstanding Debt Securities
The most important aspect of a reopening is to issue the additional debt securities in such a manner so that they will be (1) treated as part of the same series as the outstanding debt securities from a contractual standpoint under the indenture and (2) fungible with the outstanding debt securities for trading purposes.
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Originally published by Lexis Practical Guidance (30 August 2021)
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