This practice note deals with reopening of debt securities issues. Companies frequently raise capital by issuing additional debt securities of the same series as outstanding debt securities under an existing trust deed, often referred to as a “reopening of the trust deed” or “reopening of the trust deed”. series “.
On re-openings, 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 that 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, mechanisms, tax considerations, and disclosure issues specific to reopenings.
For more information on debt securities in general, see Corporate Debt Securities in US Capital Markets, Debt Financing: Funding Options and Parties, and Rule 144A / Regulatory Offerings Resource Kit S. For more information on specific types of debt securities, see Convertible Debt Securities, Top 10 Practical Tips: Convertible Note Offerings, Top 10 Practical Tips: High Yield Debt Offerings, Top 10 Practical Tips: Offerings investment grade debt securities and medium term notes (MTN) Programs.
The reasons for reopening
Reopening an existing debt issue is often more profitable than raising capital by issuing a new round of debt securities, especially if the issuer is raising a relatively small amount of capital.
An important element affecting the price of any debt security is the liquidity of the security (that is, 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 charge higher market prices. One of the many factors that can affect the liquidity of a debt security is the size of the series or the total amount of outstanding principal of the series. Again, all things being equal, the higher the total amount of outstanding principal, the more liquid the security will be, as it will generally be held by a greater number of investors, which will increase trade and interest. market for the title.
Series sizes less than $ 100 million are generally considered to have a negative impact on both liquidity and prices, with the negative impact increasing as the series size decreases. Therefore, companies that have a series of debt securities outstanding and wish to issue a relatively small amount of debt in the capital markets (for example, $ 25 to $ 50 million) will “reopen the series very often.” to benefit from better pricing (because of the increased liquidity of the existing series) than they would otherwise receive from the issuance of an entirely new and separate series of debt securities.
Reduced time and expense
Reopenings are also profitable because the time and expense involved in a reopening is less than with an offering of a new series of debt securities. Since the terms of the additional securities offered have already been established, it is not necessary to negotiate a set of covenants or other terms of the securities. The deed and form of the debt securities have been previously drafted and finalized, which saves the time and expense associated with the preparation of these documents. Even marketing efforts for a reopening are reduced as the market knows about the securities being offered and the underwriters (for a registered offer) or initial buyers (for a Rule 144A (17 CFR 230.144A) offer) often market the debt securities. primarily to existing holders of outstanding debt securities of the same series.
It is also not unusual for a reopening to occur as a result of a reverse investigation, i.e. when existing holders or investors with knowledge of and seeking to acquire the outstanding debt securities contact the issuer or a financial intermediary. If the request is addressed directly to the issuer (rather than to a financial intermediary) and after the expiration of any issuer blocking period provided for in the underwriting or purchase agreement for the initial offer, the issuer can sell the additional debt securities directly to investors and avoid paying any initial subscription or purchase discounts.
Processes and mechanisms specific to reopening
Initial issues and reopenings of series of outstanding debt securities constitute both offers and sales of the securities by the issuer. Therefore, whether the offer is made publicly under a registration statement filed under the Securities Act of 1933, as amended (Securities Act), with the Securities and Exchange Commission (SEC) or under As a transaction exempt from registration under the Securities Act, the process for effecting a reopening, while often simplified, will be very similar to that involved in the initial offering. This will include, but not be limited to, due 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 performing a reopening.
Does the deed allow the issuance of additional debt securities?
The first step in any reopening is to check whether the deed allows for the issuance of additional debt securities after the initial issuance of debt securities of the same series. In this regard, there are three types of acts: (1) contracts which provide for the issuance of an unlimited number of debt securities of the same series to be issued, (2) contracts which provide only for the issuance of debt securities in the initial offering, and (3) contracts which provide for the issuance of additional debt securities up to a specified principal amount. The provisions relating to the ability to issue additional debt securities of the same series are usually found in Article II of most contracts.
You should also verify that the indebtedness represented by the additional debt securities to be issued upon reopening does not violate any other contractual clause (as well as any other material contract of the issuer), including the limitation clause. indebtedness. and, for secured debt securities, the limitation of privileges clause. 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 allowed up to a specified dollar amount or financial ratio. specified, such as a guaranteed leverage ratio. . Alternatively, the issuer may be required to “top up” the collateral pool by pledging additional assets to support the acquisition of the additional debt securities. In either case, the issuer’s attorney should report any covenants compliance issues early in the process to ensure that they are dealt with expeditiously.
Additional debt securities must be fungible with outstanding debt securities
The most important aspect of a reopening is to issue the additional debt securities so that they are (1) treated as part of the same series as the outstanding debt securities by a point. contractual view under the deed and (2) fungible with outstanding debt securities for trading.
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Originally posted by Lexis Practical Guidance (Aug 30, 2021)
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