Introduction

On January 23 2015, the Securities and Exchange Commission (the ‘SEC’) issued a no action letter which permits issuers to conduct debt tender offers for investment grade or non-investment grade non-convertible debt securities that may be held open for only five business days, subject to a series of conditions. The offer can be an all-cash tender offer, an exchange offer for debt securities which are identical other than for pricing terms, or a combination thereof. Prior SEC guidance required non-investment grade debt tender offers to remain open for 20 business days and allowed investment grade debt tender offers to remain open for as little as 7 calendar days. The SEC’s new position is effective for tender offers commencing after January 23, 2015.

Five business day tender offers

The SEC’s position regarding five business day tender offers is subject to the following conditions (to the extent a company does not want to or cannot comply with these conditions, it can still elect to keep its tender offer open for the full 20 business days, in which case substantially all of these conditions would not apply):

  • Investment grade or non-investment grade. The offer must be made for a class or series of non-convertible debt securities, regardless of any particular rating assigned thereto. 
  • Issuer, subsidiary or parent. The offer must be made by the issuer of the subject debt securities, a direct or indirect wholly owned subsidiary of such issuer or a parent company that directly or indirectly owns 100% of the capital stock (other than directors’ qualifying shares) of such issuer. 
  • Offer for any and all debt securities. The offer must be made for any and all of the subject debt securities. 
  • Cash or qualified debt securities. The offer must be either an all cash tender offer, an exchange offer for ‘Qualified Debt Securities,’ or a combination thereof. ‘Qualified Debt Securities’ are non-convertible debt securities that are 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 Qualifying 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 tender offer. 
  • Consideration fixed or tied to a benchmark. The consideration offered may be a fixed amount of cash (and/or Qualified Debt Securities) or an amount of cash (and/or Qualified Debt Securities) based on a fixed spread to a benchmark and, in the case of Qualified Debt Securities, the coupon may be based on a spread to a benchmark. A benchmark may include U.S. Treasury Rates, LIBOR, swap rates and, in the case of securities denominated in currencies other than U.S. dollars, sovereign currencies or swap rates denominated in the same currency as the securities subject to the offer, in each case that are readily available on a Bloomberg or similar trading screen. The spread used must be announced at the commencement of the tender offer. In the case of an exchange offer for Qualified Debt Securities, if the interest rate or spread used to determine such interest rate is not fixed, it must be announced at the commencement of the offer as a range of not more than 50 basis points, with the final interest rate or spread announced by 9:00 a.m., Eastern time, on the business day prior to the expiration of the offer. The exact amount of consideration and the interest rate on any Qualified Debt Securities must be fixed no later than 2:00 p.m., Eastern time, on the last business day of the offer. 
  • All record and beneficial holders. The offer must be open to all record and beneficial holders of such debt securities. However, exchange offers in which Qualified Debt Securities are offered must be restricted to Qualified Institutional Buyers (as defined in Rule 144A under the Securities Act of 1933, as amended (the ‘Securities Act’) and/or non-U.S. persons (within the meaning of Regulation S under the Securities Act) (collectively referred to as ‘Eligible Exchange Offer Participants’) in a transaction exempt from the registration requirements of the Securities Act; provided that holders who are not Eligible Exchange Offer Participants (or an affiliate thereof) must be given an option concurrent with such offer (which can be part of the same offer to purchase document) to receive cash (from either the offeror or a dealer manager)for such holder’s debt securities in a fixed amount determined by the offeror, in its reasonable judgment, to approximate the value of the Qualified Debt Securities being offered and such amount must be set forth at the commencement of the offer. 
  • No exit consents. The offer cannot be made in connection with a consent solicitation to amend the indenture, form of security or note or other agreement governing the subject debt securities. (Many current non-investment grade debt tender offers are accompanied by a consent solicitation in order to encourage holders of notes to participate in the tender offer.) 
  • No defaults. The offer cannot be made if a default or event of default exists under the indenture governing the debt securities or any other indenture or material credit agreement to which the issuer is a party. 
  • No bankruptcy proceedings. The offer cannot be made a time when the issuer is the subject of bankruptcy or insolvency proceedings or has commenced a solicitation of consents for a ‘pre-packaged’ bankruptcy proceeding or if the board of directors of the issuer has authorized discussions with creditors of the issuer to effect a consensual restructuring of the issuer’s outstanding indebtedness. 
  • Cannot be financed with senior debt. The offer cannot be financed with the proceeds of any senior indebtedness, which includes any debt with obligors, guarantors or collateral (or a higher priority with respect to collateral) that the subject debt securities do not have, any indebtedness that has a weighted average life to maturity that is shorter than that of the subject debt securities, or any debt that is otherwise senior in right of payment to the subject debt securities. However, the offer can be financed with the proceeds of pari passu (equal) indebtedness or with the proceeds of any pre-existing senior indebtedness (e.g., a revolving credit facility). 
  • No concurrent change of control, other tender offers or material acquisitions or dispositions. The offer cannot be:
    1. made in connection with a change of control or other extraordinary transaction involving the issuer; 
    2. made in anticipation of or in respect to other tender offers for the issuer’s securities; 
    3. made concurrently with a tender offer for any other series of the issuer’s securities made by the issuer (or any subsidiary or parent company) if the effect of such offer would be to add obligors, guarantors or collateral (or increase the prior of liens securing other series) or shorten the weighted average life to maturity of such other series); or 
    4. commenced within ten business days after the first public announcement or the consummation of the purchase, sale or transfer by the issuer or any of its subsidiaries of a material business or amount of assets that would require Article 11 of Regulation S-X (whether or not the issuer is an Exchange Act registrant) pro form financials. 

Procedures for conducting a five business day tender offer

The five business day tender offer must comply with the following procedures (most of these procedures would not apply to a standard 20-business-day tender offer):

  • Immediate widespread dissemination. The five business day tender offer must be announced via a press release through a widely disseminated news or wire service issued at or prior to 10:00 AM Eastern Time on the first business day of the five business day period (‘Immediate Widespread Dissemination’). The press release must disclose the basic terms of the offer (including the identity of the offeror, the class of securities to be purchased, the type and amount of consideration being offered and the expiration date of the tender offer). In addition, the press release must contain an active hyperlink to, or an internet address at which a record or beneficial holder could obtain, copies of the offer to purchase and letter of transmittal and other instructions or documents (including a form of guaranteed delivery instructions) relating to the tender offer. 
  • Form 8-K. If the issuer or offeror is an Exchange Act reporting company, including debt-only and voluntary filers, it must furnish the press release announcing the offer on a Form 8-K, filed with the SEC prior to noon, Eastern Time, on the first business day of the offer. This is not an onerous requirement but it has not historically been typical for issuers to report their debt tender offers on a Form 8-K. 
  • Change in consideration. If there is any change in the consideration being offered, the issuer must communicate this by Immediate Widespread Dissemination at least five business days prior to the expiration of the offer. This means that if there is a change in the consideration offered, the tender offer would have to be held open for an additional five business days following the change in offer price. The Immediate Widespread Dissemination of the change in consideration must be made at or prior to 10:00 AM Eastern Time on the first day of such subsequent five business day period. If the issuer or offeror is an Exchange Act reporting company, including debt-only and voluntary filers, it must furnish the press release announcing the change in the offer price on a Form 8-K, filed with the SEC prior to noon, Eastern Time, on the first business day of the new five business day period. 
  • Other material changes. If there is any other material change to the offer (other than the consideration being offered), the issuer must communicate this by Immediate Widespread Dissemination at least three business days prior to the expiration of the offer. The Immediate Widespread Dissemination of the change must be made at or prior to 10:00 AM Eastern Time on the first day of such subsequent three business day period. No Form 8-K filing is required for a material change to the offer (other than a change in the consideration being offered). 
  • Withdrawal rights. The offer must provide withdrawal rights to holders of debt securities. 
  • Guaranteed delivery procedures. The offer must permit tenders prior to the expiration of the offer through a guaranteed delivery procedure by means of a certification by or on behalf of a holder that such holder is tendering securities beneficially owned by it and that the delivery of such securities will be made no later than the close of business on the second business day after the expiration of the offer. Guaranteed delivery has not previously been a mandatory procedure in debt tender offers. 
  • No early payments. The offeror may not pay the consideration in the offer until promptly after expiration of the offer pursuant to Rule 14e-1(c). As a result, early settlement – which is a standard part of many non-investment grade debt tender offers – would not be permitted.

Conclusion

The SEC’s no-action position is important because investment grade tender offers will no longer be able to rely on the SEC’s previous no action letters to undertake shortened tender offers. Consequently, all investment grade tender offers which are kept open for less than 20 business days must be made in accordance with the SEC’s new no-action position, including among other things the requirements to issue a press release upon commencement of the tender offer, disclose the offer in a Form 8-K, include mandatory withdrawal procedures, allow payment only upon expiration of the offer, and allow guaranteed delivery procedures. Investment grade issuers who do not wish to abide by these requirements will no longer be able to rely on the SEC’s prior no-action guidance but may, alternatively, avoid most of these procedures by keeping their tender offers open for 20 business days.

In addition, and most significantly, the SEC’s no-action position provides non-investment grade issuers with the ability to conduct a previously unavailable shortened tender offer (or exchange offer) for their non-convertible high-yield debt. However, because many non-investment grade debt offers are currently conducted together with a consent solicitation to remove covenants and events of default from the indenture governing the debt securities, and the SEC’s no-action position does not allow the 5-business-day tender offer to include a consent solicitation, it remains to be seen how widespread the 5-business-day tender offer will become for non-investment grade issuers. While it is of course too early to tell, the new 5-business-day tender offer procedure certainly offers non-investment grade issuers additional flexibility and optionality, and a new regulatory avenue for refinancing their debt, and also adds a degree of certainty into what was previously a murky area of law with little official guidance.