Frequent issuers of debt securities often want the option of “re-opening” a series of debt securities. After the original issuance date of a series of debt securities, the issuer and underwriter may choose to offer additional notes having exactly the same terms and conditions, including the same CUSIP number. Through a re-opening, the issuer can raise additional proceeds. Presumably, a larger class of debt securities will be more liquid. There are a number of important differences between both market practice and applicable regulations relating to “tapping” or “re-opening” a series of debt securities in the U.S. and Europe, which we discuss below. We also discuss below the U.S. tax implications of re-openings.
Is a re-opening possible? First, the issuer should ensure that the applicable indenture or fiscal and paying agency agreement permits the issuance of additional notes without noteholder consent or other preconditions. Most continuous offering programs, like MTNs or bank note programs, do permit re-openings. The offering documents for the program or the specific takedown (pricing supplement or prospectus supplement) should disclose the issuer’s ability to issue additional notes of the same class.
In the U.S., registered note offerings do not typically include an over-allotment option or option permitting the underwriter to purchase additional notes within a specified period of time. Additional investor interest may be satisfied through a re-opening. The pricing supplement or prospectus supplement for the re-opening should clearly set out the amount of offered notes that have been priced and sold. For a public offering, an issuer must indicate whether a significant portion of the offered securities have been sold to an affiliate of the issuer or to the underwriter or its affiliates. If a significant percentage of the offered securities have been placed with an affiliate or the underwriter, it may signal an unsuccessful offering, that there has not been a broad public distribution, or that there will be limited secondary market liquidity.
Offered securities purchased by the underwriter or its affiliates and subsequently re-offered or re-sold should not be confused with a re-opening. The securities purchased by the underwriter or its affiliates would have to be purchased and held in a proprietary account for some period of time prior to their re-offer and may upon their reoffer, after the passage of time, be considered secondary securities. In addition, properly seasoned debt securities are treated differently for U.S. tax purposes from securities that are re-opened. Such securities generally would not be subject to tax restrictions on re-openings because they would be treated as having been issued at original issuance and the re-offer would be considered to be made in the secondary market.
If orders for the offered securities have not been received, and the issuer intends to continue to offer the securities over some period of time, the offering will not be deemed completed and the offering would be considered a continuous, or ongoing, offering. If the offering is not completed, this has Regulation M, trade reporting, and other consequences.
Aside from these disclosure and compliance issues, a reopening may raise a number of tax issues for the holders of the securities. Re-opening a debt issue can have a significant tax impact, particularly where, due to market movements, the additional notes are issued at a discount. To be fungible from a tax standpoint, a re-opening of securities treated as debt for U.S. tax purposes must satisfy one of three tests: the original notes and the additional notes must be part of the same “issue” (under the 13-day rule, discussed below), or the additional notes must be part of a “qualified re-opening” of the original notes (under one of two alternative tests, also discussed below). In the case of “structured notes,” the tax consequences of a re-opening will depend on the tax characterization of the structured notes themselves: are the notes “debt” for tax purposes and, if so, are the notes “contingent payment debt instruments?” If the notes are contingent payment debt instruments, issuers will typically re-open only if the 13-day rule discussed below is satisfied because the qualified reopening rules are not available for contingent payment debt securities. For structured notes not treated as debt, the tax implications of a reopening will depend on the specific terms of the notes: if the notes are treated for tax purposes as a single instrument, re-openings may be liberally available and, if not, there may be significant restrictions on re-openings intended to be fungible with the original issuance.
Under applicable regulations, an “issue” of debt instruments includes all debt instruments with the same credit and payment terms that: (1) are issued either pursuant to a common plan or as part of a single transaction or a series of related transactions, and (2) are issued within a period of 13 days beginning with the date on which the first debt instrument that would be part of the issue is sold to a person other than a bond house, broker, or similar person or organization acting in the capacity of an underwriter, placement agent, or wholesaler.
The regulations provide rules for two types of qualified re-openings. Under the first rule, a re-opening of debt instruments is treated as a qualified re-opening if:
- the original notes are “publicly traded,”
- the issue date of the new notes (treated as a separate issue) is not more than six months after the issue date of the original notes, and
- on the pricing date of the re-opening (or, if earlier, the announcement date), the yield of the original notes (based on their fair market value) is not more than 110% percent of the yield of the original notes on their issue date (or, as is often the case, if the original securities were issued with no more than a de minimis amount of original issue discount (“OID”) their coupon rate).
Alternatively, a re-opening of debt instruments (regardless of whether the re-opening occurs within six months or not) is treated as a qualified re-opening if:
- the original notes are “publicly traded,” and
- the additional notes (treated as a separate issue) are issued with no more than a de minimis amount of OID.
Publicly Traded Test
Applicable regulations provide detailed rules that define when notes are treated as “publicly traded.” The intention of this test is to define a set of circumstances where one may reasonably conclude that the fair market value of the notes is accurately reflected in their trading price.
See more on qualified re-openings of debt securities in MoFo Tax Talk Volume 2, Issue 1: http://www.mofo.com/files/Publication/2c744b4e-7c3a-4e86-9a3eb804836bd492/ Presentation/PublicationAttachment/dd1fa47f-9688-4cff-aa5b-fec23f137e20/090310TaxTalk.pdf.