Top 10 Practice Tips: Liability Management Transactions

• Published date: 18 April 2022
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Debt Capital Markets, Financial Services, Commodities/Derivatives/Stock Exchanges, Corporate and Company Law, Securities
• Law Firm: Mayer Brown
• Author: Ms Anna T. Pinedo and Brian D. Hirshberg

This Top 10 Practice Tips provides key practice tips for advising a client considering a liability management transaction. Given recurring periods of market volatility, issuers in a wide range of industry sectors from time to time evaluate potential liability management transactions, including debt repurchases, tender or exchange offers, and consent solicitations. Liability management transactions allow an issuer to refinance or restructure its outstanding obligations and may, under certain circumstances, allow an issuer to achieve certain accounting, regulatory, or tax objectives.

Issuers may derive significant benefits from a liability management transaction including, but not limited to, evidencing a positive outlook for the issuer in an uncertain market environment, extending debt maturities, recording an accounting gain, deleveraging, obtaining potential regulatory capital benefits, increasing financing flexibility and potentially avoiding a more fundamental restructuring or bankruptcy. Choosing the most appropriate liability management transaction is critical and requires that the issuer and counsel consider a number of factors, as discussed below.

• Consider whether the transaction is an opportunistic or a distressed transaction. Choosing the right liability management alternative to restructure or retire outstanding debt securities or to manage risk and reduce funding costs depends on a number of factors. Understanding an issuer's business objectives and financial health is critical when evaluating the feasibility of a given liability management transaction. Often market participants assume that only issuers facing financial distress or that are highly leveraged will engage in a liability management transaction. Of course, this is not the case, but the type of transaction and the terms will depend on the issuer's business objectives, whether the issuer has sufficient cash on hand, and on market conditions. The transaction may be motivated by an accounting, regulatory, or tax objective or may simply allow the issuer to refinance its outstanding indebtedness at attractive rates, extend its debt maturities, address its exposure to LIBOR-based indebtedness, or repurchase outstanding securities trading at a discount. Prior to considering any option, counsel must understand whether the transaction is opportunistic or whether the issuer faces financial challenges that need to be addressed as part of the transaction.
  
  
• Evaluate whether the issuer's contractual agreements prohibit repurchases, tenders, or exchanges of its outstanding securities. An issuer's existing commitments may prevent the repurchase, tender, or exchange of an outstanding security or trigger repayment obligations or requirements to use proceeds from a new issuance for other purposes. Therefore, the issuer's existing financing arrangements and other material agreements must be carefully reviewed. For example, an existing credit facility may prohibit prepayment or redemption of the issuer's outstanding debt securities or the debt security itself may have call protection features (preventing or limiting a redemption) that should be analyzed. Moreover, debt securities may be redeemable by the issuer only after a certain period has elapsed or a certain market return has been achieved.
  
  Additionally, an indenture may contain financial covenants that restrict the issuer's ability to use available cash to pay down or retire other classes of outstanding debt securities. The indenture governing the securities to be redeemed will specify the redemption price and mechanics and typically requires notice of not less than 30 days nor more than 60 days be provided to holders Often, the redemption price equals the face amount plus the present value of future interest payments. In certain situations, to permit a desired liability management transaction, an issuer may need to first or concurrently conduct a consent solicitation to amend or waive restrictive financial covenants or event of default provisions under an existing indenture that otherwise would limit its ability to engage in the liability management transaction Because consent solicitations can increase flexibility under existing restrictive covenants they may serve as a useful tool when responding to challenges stemming from the COVID-19 pandemic.
  
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