2010 Edition: Summary of "Exchange Offers" Chapter
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Contributed by Carl Lane of AlixPartners LLP,
Josef Athanas of Latham & Watkins LLP,
and David Hoffman, Deloitte Tax LLP
When a distressed company has public debt, such as corporate bonds, an exchange offer is the most likely, if not only, option to complete an out-of-court restructuring. An exchange offer consists of the issuing of new securities and an offer to existing security holders to exchange them for securities currently outstanding. As with any financial restructuring, the primary goals are to reduce corporate leverage, minimize near-term debt service and extend debt maturities. Where corporate bonds are being exchanged, the new securities typically are comprised of securities with a lower priority such as equity. Exchange offers for distressed debt represent about 10 percent of all defaults historically. Recent examples of distressed debt exchange offers include: Residential Capital, Ford Motor Co., Harrah’s Entertainment Inc., Hawker Beechcraft Inc., Pier 1 Imports Inc., Unisys Corp., and Clear Channel Communications Inc. Exchanges of public securities are governed by various regulations under the Securities Act of 1933, the Securities Exchange Act of 1934 and the Trust Indenture Act of 1939. Most significant, the Trust Indenture Act requires that all holders consent to any change in timing or amount of interest and principal payments. However, exchange offers of private debt are also common, and the form of such exchange offers does not differ dramatically.
The primary benefit of an exchange offer is the ability to reduce leverage without the need to file for Chapter 11, thereby shortening the restructuring period and minimizing the associated costs. The Securities Act also provides a number of exemptions that allow a company to perform an exchange offer without filing a registration statement with the Securities and Exchange Commission, allowing for an exchange offer to be completed on a fairly expedited basis. However, the success of an exchange offer depends heavily on achieving a high acceptance rate among the security holders, with the acceptance rate being driven by the complexity and diversity of the capital structure. Furthermore, an exchange offer obviously does not come with some of the legal benefits the Bankruptcy Code provides and, therefore, would not be the right choice for a company with broader restructuring issues.
This chapter describes common structures for exchange offers and the typical process. While the process and structure depends on the securities to be restructured and other company-specific issues, out-of-court exchange offers typically follow a common course of action. The chapter also discusses the regulations that govern the form of an exchange offer and touches upon the key tax considerations. Financial and legal analysis is necessary at each step given the complex web of laws and regulations. Lastly, the chapter outlines the keys to a successful exchange offer and notes where an exchange offer likely will not be the best course of action.
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Presented with permission of West/Thompson Reuters