In a recent decision in the Southern District of New York, the court addressed a challenge to a secured-for-unsecured debt exchange offer that raised and answered a host of questions on the potential vulnerability of offers of this type. In Waxman v. Cliffs Natural Resources (SDNY December 6, 2016), the court dealt with standing to pursue a challenge; TIA §316(b) after Marblegate and MeehanCombs/Caesars; the no-action clause and allegations of conflict of interest of the trustee; the remedies clause; and discrimination against non-QIBs. Ruling in favor of the issuer on all counts, the decision is a useful reminder of the continuing viability of debt exchange offers, notwithstanding the uncertainties sown by the recent TIA §316(b) cases and the pending Second Circuit appeal in Marblegate.


Cliff Natural Resources is a publicly traded mining and natural resources company. At the end of 2015, it had $2.898 billion in funded debt, including unsecured notes, first lien notes and second lien notes. The plaintiffs were holders of an unspecified number of notes in two unsecured classes. The court pointedly noted that each of the classes of notes held by the plaintiffs was issued in a registered public offering, whose prospectus supplement contained risk factors to the effect that the issuer was permitted to incur secured debt and that the unsecured notes would effectively be junior to any secured notes to the extent of the value of the relevant collateral.

In January 2016, Cliffs commenced an exchange offer for its unsecured notes, including the classes of notes held by the plaintiffs, that would substantially deleverage its balance sheet. In the exchange offer, which was open only to qualified institutional buyers (QIBs), the unsecured notes were exchanged for so-called secured 1.5L debt. The catch was the substantial reduction of the principal amount of the debt received in the exchange, which, depending on the issue, ranged from 35% to 61%. The plaintiffs, who evidently were not QIBs and therefore could not participate in the offer, challenged the exchange offer post-closing on a host of grounds. S


At the outset, the court ruled that the plaintiffs did not even have standing to pursue their claims in federal court. Under the standards recited by the court, to have standing a plaintiff must show that it has suffered an injury that is actual or imminent and not conjectural or theoretical. The plaintiffs alleged that they were injured because, if the company were to enter bankruptcy in the future, their potential recovery may be less than if the 1.5L debt did not exist. Because there was no allegation that bankruptcy was imminent, the court held that the plaintiffs could not demonstrate an injury-in-fact. Moreover, the plaintiffs did not even allege that they would have accepted the offer had they been able to participate. (It also did not help the plaintiffs’ cause that the value of their notes had appreciated between 500% and 600% in the six months or so since the closing of the exchange offer.) Notwithstanding its finding that the plaintiffs lacked standing, however, the court proceeded to dispose of each of the plaintiffs’ claims on the merits as well.

TIA §316(b)

The court distinguished the recent TIA §316(b) case law, which, as is widely known, held that §316(b) prohibits transactions that in fact, if not legally, deprive nonparticipating holders of their ability to receive payment of principal and interest on their debt. Here, the court said, “none of the indicia of an involuntary, out-of-court pseudo-bankruptcy” were present. The exchange offer did not dispose of any assets. It did not amend the terms of any indenture. And it did not modify or remove any guaranty. Because the plaintiffs “were not left holding a ‘worthless right to collect principal and interest,’” §316(b) was not implicated.

The No-Action Clause and Conflict of Interest

The plaintiffs did not comply with the no-action clause of their indentures, but instead asserted that compliance was excused. First, they argued that they could not comply with the no-action clause, with its typical 60-day demand period, because the exchange offer expired in 30 days. The court gave short shrift to this argument, as the lawsuit that the plaintiffs did bring was itself evidence that post-closing remedies could, in theory, be available to the trustee.

Second, the plaintiffs argued that the trustee was conflicted, because the trustee for their notes was also the trustee and collateral agent for the new 1.5L notes. As such, the plaintiffs argued, the trustee would not sue Cliffs because to do so would jeopardize its compensation. The court dismissed this claim as well, as there was no particularized allegation of how the trustee would financially benefit from a decision not to sue Cliffs or that the compensation was material to the trustee, such that it would be unable to effectively function as trustee for the notes held by the plaintiffs. Finally, the court said, even if the plaintiffs’ demand on the trustee were excused, there was no excuse for failing to comply with the requirement of the no-action clause that claims must in the first instance be brought on behalf of 25% of the notes (and the plaintiffs apparently did not hold 25% of the outstanding notes of their respective issues).

Remedies Clause

As is typical, the indentures governing the notes held by the plaintiffs recited, “Notwithstanding Follow us any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of and interest, if any, on such Security on the Stated Maturity or Stated Maturities ... such rights shall not be impaired without the consent of such Holder.” The language mimics TIA §316(b), with the addition of the words “which is absolute and unconditional.” This additional phrase, the court reasoned based on New York case law and the American Bar Foundation’s Commentaries on Indentures, is intended to assure negotiability of indenture debt and prevents parties from raising affirmative defenses in collection actions. It does not provide any greater protection against an exchange transaction than §316(b) itself.

Discrimination Against Non-QIBs

The plaintiffs also claimed that the exchange offer violated the principle of good faith and fair dealing, essentially asking the court to read into the indenture provisions on change of control and partial redemption restrictions on the conduct of an exchange offer. The court would have nothing of it. In a pithy summary of the case law on strict construction of indentures, the court said, “In dealing with a company’s bondholders, that which is not prohibited is permitted.”

Of greater interest in this regard was the plaintiffs’ contention that the exchange offer violated the implied good faith covenant because non-QIBs could not participate. Once again, the court was unpersuaded. While the plaintiffs pointed to other provisions of the indentures that mandated equal treatment in certain circumstances, the court drew a contrary inference from these provisions. The existence of these provisions, it said, showed that the potential for nonpro rata treatment was foreseen, and bondholders, if they had wanted, could have negotiated for protection in the circumstance of exchange offers as well. The QIB-only exchange offer appears to have offended neither the indentures nor the court.


With the uncertainty over out-of-court debt restructurings in the wake of the §316(b) cases, it is instructive that at least one federal district court has rebuffed an attempt to paint all debt restructurings, even where they partake of coercive and discriminatory elements, with the brush of Marblegate. Cliffs is apparently also the first case to hold expressly that exchange offers may be open only to QIBs, or presumably other limited classes of debt holders, absent an express provision to the contrary in the indenture. It remains to be seen how the Second Circuit will rule in Marblegate, but even after the ruling, certain questions on out-of-court debt restructurings are bound to persist. The Cliffs case should remain instructive on how courts will continue to deal with challenges to debt exchanges, particularly where issuers seek to delever at some distance from the zone of insolvency.