On April 25, 2016, an Opinion White Paper was issued by a group of 28 law firms to provide guidance to practitioners in rendering legal opinions regarding Section 316(b) of the Trust Indenture Act.
As discussed in the white paper, the ability to give an unqualified legal opinion with respect to a transaction that implicates Section 316(b) under the general principles discussed in the White Paper will often depend upon the factual issue of whether the issuer of the affected debt securities is solvent after giving effect to the subject transaction or series of related transactions. The white paper proposes three alternative methods of dealing with the solvency issue: first, an express assumption that the issuer is solvent; second, reliance on a customary solvency certificate from a responsible officer of the issuer; or third, reliance on a third-party solvency opinion.
Based on discussions with practitioners active in representing indenture trustees, there will likely be many circumstances where a “debt restructuring” as defined in the white paper is being consummated and the indenture trustee will not accept a Section 316(b) opinion that either expressly assumes solvency of the issuer or relies on a solvency certificate of an officer of the issuer. Given the probability that a third-party solvency opinion will be required in those circumstances — with the further likelihood that trustees will insist on the express ability to rely on the third-party solvency opinion — practitioners will be well-served to identify a highly qualified firm to render the solvency opinion early in the transaction process to allow the firm adequate time to perform the requisite due diligence and financial analyses and to submit the opinion and underlying analyses to the evaluation of the indenture trustee and its counsel.
In addition, unless the firm providing the solvency opinion is appropriate to render the particular opinion requested, its compensation is structured appropriately and the projections the firm relies on are subject to proper due diligence, it may not be appropriate to rely on the third-party solvency opinion for these purposes. See Official Committee of Unsecured Creditors of TOUSA Inc. (In re Tousa, Inc.), 2009 WL 3261963 (Bankr. S.D. Fla. Oct. 13, 2009).
To avoid the possible application of Section 316(b) to a new indenture, issuers are advised to avail themselves of “144A-for-Life” distribution, which has become the norm in the high-yield market, not requiring subsequent registration of the privately placed bonds. It is also recommended that the indenture itself not contain language that mirrors or replicates the Section 316(b) language. For debt securities that must be registered with the Securities and Exchange Commission under the Securities Act of 1933, it might be possible nonetheless to avoid the application of Section 316(b). Under Section 304(d) of the Trust Indenture Act, the SEC has the authority, on its own or at the request of any interested party, to exempt, conditionally or unconditionally, any indenture or classes of indentures from Section 316(b) if the SEC determines it is appropriate in the public interest and consistent with the protection of investors. For example, the SEC could upon application exempt an indenture from Section 316(b) so long as the indenture provides that the applicable transaction is approved by holders of a super-majority of the principal amount of subject securities (excluding “insiders” within the meaning of Section 101(30) of the Bankruptcy Code) and each holder of subject securities (other than insiders) is given the opportunity to participate in the transaction on terms not materially less favorable than the terms offered to any other holder.