Managing Debt Maturities and Potential Covenant Violations in Today’s Challenging Credit Environment SPEAKERS:

Tracy Kimmel Keith Townsend Thursday, July 31, 2008 12:30 – 1:30 p.m. Eastern Time

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Speaker Biographies Tracy Kimmel is a partner in King & Spalding’s New York office and a member of the firm’s Corporate Practice Group.

Tracy Kimmel [email protected] (212) 556-2294

Ms. Kimmel’s practice includes a broad range of corporate finance transactions, securities matters and liability management transactions. Ms. Kimmel has represented issuers and underwriters in a broad range of securities transactions, including initial and secondary public offerings, Rule 144A and Regulation S offerings, shelf offerings, exchange offers, tender offers and consent solicitations. Her representations cover a large variety of products, including high yield debt, convertible debt, investment grade debt, American depositary shares, trust preferred securities and medium term note programs, as well as equity securities. Ms. Kimmel’s experience spans many industries, including consumer products, insurance, power, engineering and construction, medical devices and telecommunications. In addition, she advises public companies regarding corporate governance matters and SEC reporting and compliance matters. Ms. Kimmel joined King & Spalding in 2002. She received a B.A. in philosophy from the College of William and Mary in 1987. In 1992, Ms. Kimmel received her J.D., summa cum laude, from Tulane Law School, where she served on the Tulane Law Review and was a member of the Order of the Coif. After graduation, Ms. Kimmel served as a judicial law clerk to the Honorable John Minor Wisdom on the U.S. Court of Appeals for the Fifth Circuit in New Orleans, Louisiana. Prior to joining the firm, Ms. Kimmel was an associate in the New York office of Davis Polk & Wardwell. She is admitted to practice law in the State of New York.

Speaker Biographies

Keith Townsend

Keith Townsend is a partner in King & Spalding’s Corporate Practice Group. Mr. Townsend has significant experience in advising public company clients on SEC reporting and disclosure requirements, corporate governance issues and other corporate/securities matters. Mr. Townsend also has significant experience working on more than 40 corporate finance transactions raising proceeds in excess of $7 billion. He has represented both issuers and underwriters in connection with initial and secondary public offerings, “shelf” offerings, Rule 144A offerings and other private placement transactions, tender offers, consent solicitations and other liability management transactions. Mr. Townsend’s clients and transactions have spanned a number of industries, including the real estate, life sciences, technology, consumer products, manufacturing and banking industries.

[email protected] (404) 572-3517

Finally, Mr. Townsend has experience representing both acquirors and sellers in public and private merger and acquisition transactions. Most recently, Mr. Townsend represented Novelis, Inc. in its $6 billion acquisition by Hindalco Industries Ltd. Mr. Townsend received his Bachelor of Arts degree, summa cum laude, from the University of Tennessee in 1996 where he was a member of Phi Beta Kappa. Mr. Townsend received his J.D. from the University of Virginia School of Law in 1999 where he graduated Order of the Coif. He is a member of the State Bar of Georgia, the Atlanta Bar Association and the American Bar Association.

Managing Debt Maturities and Potential Covenant Violations in Today’s Challenging Credit Environment SPEAKERS:

Tracy Kimmel Keith Townsend Thursday, July 31, 2008 12:30 – 1:30 p.m. Eastern Time

Table of Contents I.

The Credit Environment

II.

Deleveraging Transaction Alternatives

III. Managing Potential Defaults IV. Refinancing Alternatives V.

Questions

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I. The Credit Environment ¾ Lenders with available capital are looking selectively at bank lending opportunities • Underwriting standards are more stringent • Pricing terms are higher • Covenant packages are less issuer friendly • Terms are shortening to 1 - 3 years

¾ Investment grade debt offerings have been strong with almost $500 billion raised through the first half of 2008 vs. $545 billion through the same period in 2007 • 2008 characterized by sporadic bursts of deal flow • Credit Roundtable Covenant protections are gaining some traction (e.g., change of control puts and step-up coupons) • Issuances dominated by financial issuers with capital needs • Maturities of less than 3 years are virtually unavailable

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I. The Credit Environment (Continued) ¾ The high yield market has been less robust with less than 100 deals in the first half of 2008 raising under $48 billion compared to 272 deals raising $105 billion during the same period in 2007 • Approximately 18% of outstanding high yield debt was trading at distressed levels through the first half of this year compared to 1% at mid-year in 2007 • Approximately $85 billion of high yield debt coming due between 2008 and 2010 • 2008 activity has focused significantly on energy and other high performing sectors

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I. The Credit Environment (Continued) ¾ Equity capital raising alternatives have been limited and may continue to be challenging over the medium term •

IPOs (excluding VISA) are down almost 90% year over year

•

Follow on offerings are down almost 20%

•

Converts are down 40%

•

PIPE transactions are down almost 20%

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I. The Credit Environment (Continued) ¾

Takeaways •

BB and above credits with strong balance sheets and stable cash flows still have access to the debt capital markets, albeit at higher rates and with tighter structures than enjoyed in recent years

•

BB- and below credits face a more challenging credit environment

•

Some of the stronger historical bank lenders and the regionals are capital constrained; life insurance companies and other non-bank lenders are competing for business

•

Bank financing with “friends and family” banks is easier than large syndicated deals

•

Substantial increase in high yield defaults expected in coming months

•

Jumbo LBOs are virtually nonexistent, but middle market LBOs are still doable with more market flex

•

Equity prices across most industries are at depressed levels and many equity investors are keeping money on the sidelines for now

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I. The Credit Environment (Continued) ¾ Takeaways (Continued) • Issuers should evaluate refinancing maturities much earlier than they did historically • Even with higher spreads, lower treasuries and LIBOR make fixed rate refinancing in the near term attractive for some issuers • Some issuers should evaluate prepayable covenant light ABL facilities or secured notes in lieu of traditional financings • Many issuers will want to evaluate other deleveraging alternatives 7

I. The Credit Environment (Continued) ¾ Liability Management Trends •

• • • • •

Public tender offers have seen tremendous volume growth as issuers have taken advantage of low refinancing rates and tendered for notes prior to call or maturity dates. However, given primary market disruptions, YTD 2008 tender offers have mostly been financed with either cash or credit facility borrowings High grade issuers are opportunistically buying discount debt in the open market There have been some high yield open market repurchases, but new offering activity has been limited and the market could be challenging in the near term YTD 2008, high yield exchange offers have increased dramatically as distressed issuers seek to extend near-term maturities Distressed debt issuers have attempted a number of exchange offers (debt for debt; equity for debt; a mix of cash, debt and equity for debt) in 2008, although many have been unsuccessful Consent solicitation activity, in 2008 has been driven primarily by issuers’ struggles with SOX reporting requirements, and has not been as active as bank amendments 8

II. Deleveraging Transaction Alternatives A.

Privately Negotiated or Open-Market Repurchases for cash

B.

Tender Offers

C.

Exchange Offers

D.

Redemptions

E.

Prepacks

F.

Other Considerations

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A. Privately Negotiated or Open-Market Repurchases for Cash ¾ No SEC filing ¾ No disclosure documentation required, however, Rule 10b-5 anti-fraud rules apply and “material” programs may trigger 34 Act disclosure • Restrict purchases to normal window under Issuer’s insider trading policy and times when all material information is in the public domain or sign CA with lock-up ¾ Can often obtain a good discount to face

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A. Privately Negotiated or Open-Market Repurchases (Continued) ¾ Issuers have also begun to explore repurchasing their own syndicated bank debt • Novel concept in the marketplace • Review of specific credit agreement required—many will not allow or will require administrative agent consent • Securities law issues applicable to open market purchases of notes, tender offers and exchange offers are not applicable

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A. Privately Negotiated or Open-Market Repurchases for Cash (Continued) ¾ Critical to differentiate open market purchase of notes from a tender offer •

Creeping tender offer rules: The SEC has not defined “tender offer.” Thus case law governs this analysis. There is no bright line » No widespread solicitation » Not a substantial percentage of outstanding securities (with some exceptions) » No single deadline » No set consideration

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B. Tender Offers ¾ Subject to Regulation 14E of the Exchange Act and the rules thereunder •

Offer must be open for 20 business days (shorter for investment grade debt)

•

Offer must be extended for 10 business days after a change in (1) percentage of securities sought, (2) the consideration offered or (3) the fee paid to the dealer-manager

•

Offer must be extended for 5 business days for any other material changes in terms (e.g. minimum thresholds)

•

Subject to general anti-fraud provisions: Typically an Offer to Purchase will describe the terms of the offer and will incorporate the issuer’s SEC filings

•

No offers outside the tender offer are permitted

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B. Tender Offers (Continued) ¾ No SEC filing required for debt tender offers or consent solicitations (for cash) ¾ Schedule TO would need to be filed for convertible notes and other equity-linked securities and Regulation 14D will apply •

File the Offer to Purchase on Schedule TO, additional information beyond that otherwise included in a debt Offer to Purchase will be required

•

No full SEC review period, much faster paced working through the SEC’s Mergers & Acquisitions department (but note, if the SEC decides to review an issuer’s SEC filings, a full review period could ensue). Typically no pre-clearance is required, the Schedule TO is filed when the offer is first launched

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B. Tender Offers (Continued) ¾ Holdout Problem •

The Achilles heal of tender and exchange offers is that the issuer cannot force all holders to tender or exchange—Capital may be required to repurchase from holdouts at par

¾ Carrots and Sticks •

Debt holders will want something in return for tendering, exchanging or amending outstanding notes (e.g., premium to par, notes with better terms, consent fees, etc.)

•

Structure of liability management transaction may also include disincentives to not tendering or exchanging, such as a covenant strip or a prepack

¾ Debt tender offers have various pricing alternatives under relevant SEC no action letters—fixed price, fixed spread price and modified dutch auction; structures should be reviewed by counsel

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C. Exchange Offers ¾ Subject to Regulation 14E (see “II.B.Tender Offers” above) ¾ SEC Filing Requirements/Exemptions •

Registered exchange offers must be filed with the SEC and are subject to the standard review period

•

Section 3(a)(9) exempted exchange offers are not required to be filed with the SEC. But note that a Schedule TO must be filed with the SEC for all exchange offers for convertible notes and other equity-linked securities

•

Section 4(2) private placement exemption is available for “QIBs” and “accredited investors”

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C. Exchange Offers (Continued) ¾ Overview of Section 3(a)(9) Exemption •

•

•

•

Offer made only to existing security holders » The Section 3(a)(9) exemption is not available if the issuer offers the same class of securities to persons other than the holders of the old securities Issuer must be the same » Parent and subsidiary are not the same issuer » Parent can issue common stock in exchange for securities of its subsidiaries where parent has provided a guarantee of such securities Primary purpose must be a security for security exchange » Very limited cash consideration paid by debt holders is permitted; note that the issuer is permitted to make cash payment to holders No compensation paid for solicitation » Multiple exemptions to this general rule exist under a long line of SEC no-action letters. Any arrangements with financial advisors would be structured accordingly 17

C. Exchange Offers (Continued) ¾ Overview of Section 3(a)(9) Exemption (Continued) •

Consequences of using exemption: » The securities issued in the exchange will have the same character with respect to ability to trade as the old securities (e.g. If the old securities were freely tradable, the new securities will be freely tradable)

•

Typically an offering circular is distributed, although there are no specific disclosure requirements. Anti-fraud provisions of the securities laws apply

•

Note also: Section 3(a)(9) is also available to “one-off” exchanges that do not constitute an “exchange offer” and are not subject to the tender offer rules and are not as heavily documented

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C. Exchange Offers (Continued) ¾ Overview of Section 4(2) Private Placement Exemption •

No public offering or solicitation

•

Available where all offerees and tendering holders are “QIBs” or “accredited investors”

•

No general solicitation is permitted, therefore, probably not available for exchange offer that is also a tender offer for “equity” securities because of public filing of Schedule TO

•

New securities issued will be “restricted securities” subject to transfer restrictions (Registration rights are sometimes also provided to address liquidity issues)

•

Rule 144A is not available to issuers in an exchange offer; however, a Section 4(2) debt exchange offer may be made to QIBs only and the resulting new debt may be held through DTC’s 144A system. Similarly an exchange offer may be made under Regulation S to non-U.S. persons

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D. Redemptions ¾ The process and terms for the redemption of debt securities (whether mandatory or optional) are determined by the governing documents (indenture, trust deed, etc.) for such security ¾ Usually multi-tiered redemption at premiums to par ¾ Typically this is an unattractive or unavailable alternative for issuers in a restructuring posture— debt is often trading at a substantial discount to par and redemption prices are typically set at a premium to par

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E. Prepacks ¾ Bankruptcy Code allows a plan of reorganization to be approved before a Chapter 11 filing by: • 2/3 in amount of each class of claims, and • more than 50% in number each class of claims ¾ Court would then approve plan after the bankruptcy filing ¾ Overrides contractual provisions and Trust Indenture Act requirements for each holder to consent to amendments impacting payment terms ¾ Also allows for “cram down” on junior creditors

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E. Prepacks (Continued) ¾ Prepack can be combined with exchange offers ¾ The “biggest stick” you can swing short of a simple bankruptcy filing (i.e., without pre-approval of a plan) ¾ In a combined offer a vote for the exchange offer would also be a vote for the prepack ¾ Example:

• Facts: Exchange offer conditioned on 95% acceptance » Result: If < 95% acceptance, but at least 2/3 in amount and > 50% in number of claims voting, the prepack is approved, or » If > 95% acceptance, exchange offer is completed 22

F. Other Considerations ¾ Contractual restrictions contained in existing debt agreements and other material contracts ¾ Restrictions on transactions in securities while in possession of material non-public information apply to almost all liability management transactions ¾ Regulation FD • Confidentiality agreements • Registered offering exemption

¾ Exchange Act Reporting—advance planning for MD&A is suggested ¾ Stock exchange rules, including 20% rule, if applicable ¾ Tax Consequences 23

F. Other Considerations (Continued) ¾ Local law considerations, as well as Charter and Bylaws ¾ Blue Sky laws •

States generally have exemptions comparable to Section 3(a)(9)

•

Dealers may be needed in some states

•

Higher scrutiny for unlisted/delisted issuers

¾ NASD rules for public transactions ¾ Regulation M – General prohibition on purchasing securities during a distribution of the same class ¾ Communications Rules of Regulation M-A during exchange offers

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F. Other Considerations (Continued) Privately Negotiated Cash Purchases

Cash Tender Offer

Registered Exchange Offer1

3(a)(9) Exchanges1

4(2) Exchanges

Prepack2

No

Yes

Yes

Yes

No3

Yes

4

4

4

No

Available to all debt holders Capital required

Yes

Yes

No

No

Bankers may actively solicit

Yes5

Yes

Yes

No

Yes

Yes

Securities of affiliated company available for exchange

N/A

N/A

Yes

No6

Yes

Yes

Holdout risk

Yes

Yes7

Yes7

Yes7

Status of any new securities Timing Transaction costs 1

2 3 4

N/A

N/A

Freely Tradable

Quick

1 month +

2-4 months

Low

Moderate

High

Includes exchange offers completed as tender offers or privately negotiated purposes, but note that “creeping tender” issues will limit how many holders the issuer can contact in a 3(a)(9) exchange Most issuers would only use as a last resort to avoid bankruptcy Unless all holders are QIBs However, cash or equity securities may be used as part of exchange considerations and would be needed to repay holdouts at maturity

5 6

No

Yes7

No

8

Restricted

Depends9

Quick 1 month + Moderate

Quick 1 month + Moderate

Depends

Varies High

However, only a limited number of holders may be contacted Except in certain circumstances (e.g. where guarantee is provided by such affiliate)

7

Holdout risks can be moderated by coupling with a consent solicitation 8 New s securities will have the same status of the securities being replaced 9

Bankruptcy exemption not available for prepacks; analysis of availability of other exemptions required

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III. Managing Potential Defaults ¾ Amendments to debt securities are obtained through consent solicitations ¾ Consent solicitations can be coupled with tender offers and exchange offers or can be done on a stand alone basis ¾ Governed by relevant indenture provisions: •

Approval requirements

•

Documentation/dissemination requirements

•

Consent fee payment requirements

¾ Indentures and the Trust Indenture Act will prohibit amendments to the maturity date, payment of principal and interest or other payment terms ¾ Significant changes can also call into question the SEC’s “New Security Doctrine” 26

III. Managing Potential Defaults (Continued) ¾ The weakened economy is putting pressure on financial covenants in many bank facilities ¾ Amendment requirements are governed by relevant credit facility—requirements typically range from: • • •

Administrative agent consent > 50% of lenders All lenders

¾ Lenders are requiring much more today than they did in recent years for amendments: • Higher consent fees • Shortening facility term • Reducing available borrowing capacity • Higher interest rates ¾ Issuers should be actively monitoring financial covenant compliance and working early with financial and legal advisors to evaluate alternatives 27

IV. Refinancing Alternatives ¾ Cash from operations: No securities law impact ¾ Proceeds from concurrent sale of debt or equity •

Registered offerings: Subject to potential full SEC review. Note that the Issuer can put up a shelf rather than file a one-off Registration Statement. Once cleared, the shelf would be available on an as-needed basis for additional transactions

•

SEC Registration Process » “WKSI” will be able to file a generic shelf registration statement that goes effective automatically upon filing » New or additional securities can be added to the automatic shelf by post-effective amendment » New S-3 availability rules took effect in January 2008

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IV. Refinancing Alternatives (Continued) » Automatic shelf has a 3-year life-span » Immediate take-downs now permitted » A one-off Form S-1 registration statement now significantly easier to prepare and file because incorporation by reference of previously filed Exchange Act reports now permitted » Prospectus delivery requirements will now be satisfied by filing the prospectus on EDGAR

•

Private debt offerings » Disclosure similar to SEC registered offerings » Can be completed as a “144A for life” transaction for private issuers, but most investors prefer SEC filing covenant » Amendments to Rule 144 have generally eliminated the need for A/B exchange offer for already public companies

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IV. Refinancing Alternatives (Continued) •

Private placements/PIPES: Issuers can get to market more quickly if equity is privately placed » Typically this would be done with a PIPE transaction where shares are privately placed under a Section 4(2) exemption with investors and investors are granted back-end registration rights » Generally does not avoid registration—it just delays it » Other considerations in private placements: More and more PIPES investors and placement agents are insisting on comfort letters from auditors and 10b-5 opinions from counsel. This leads to the need for complete offering materials and full due diligence and can eliminate some of the timing benefit of a private transaction

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V. Questions Self Study Code: 345254

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