02. Monetary Terms
A. Interest Rate and Maturity in Indentures
Material: Problem Set 1
UCC Section 8-202
Freeport-McMoran Indenture, 2.12, 4.01, 11.08, Exhibit A, Section 1 and 2
BMS Indenture, Section 2.14, Exhibit A, Section 1
Lennar Indenture, Section 2.12
Petrohawk Indenture, Section 11.07, 4.01, Exhibit A, Section 1
BMS Indenture, Section 2.14, 15.13, Note, Section 1 and 4
UCC 8-202 “the terms of a security include … those stated on the security ... and those made part of the security by reference ... to another instrument, indenture or document … to the extent that the terms referred to do not conflict with the terms stated on the certificated security”
Problem Set #1
1) On what days does Freeport-McMoran have to pay interest? How much interest is due?
Exhibit A [Front side of initial security]
Semiannually on Feb 1 and August 1 of each year
Interest accrue from most recent date to which interest has been paid, or duly provided for or, if no interest has been paid/ duly provided for, from Jan 29, 2003 to principal is due
Exhibit A [Reverse side of initial security]
s.1(a) Interest: “company shall pay interest semiannually on Feb 1 and August 1 of each year”
How much interest rate? 10(1/8)% per year on Feb 1 and Aug 1
Option 1: 10(1/8)% divided by 2 = 10/16%
Option 2: 181 and 184 days multiply no. of days/ 365 (or 366)
Here, s.1(a) “Interest shall be computed on the basis of a 360-day year of twelve 30-day months” 180 days in each period so both options would get the same amount (easier to administrate, simpler)
What if an interest payment date falls on a Sunday? What does the Indenture provide? What does the Security provide? Are the provisions identical? If not, do they conflict?
Indenture: section 11.08 Legal Holiday - if payment date is a legal holiday (Sat/ Sun/ Public holiday), payments shall be made on the next succeeding day that is not a Legal Holiday, and no interest shall accrue.
Security: Feb 1 and Aug 1
UCC 8-202: terms of security (debenture/ note) include those stated on the security (section 1 on Interest) and those made part of the security by reference to another instrument, indenture or document (an indenture in this case) to the extent that the terms referred to do not conflict [terms of indenture cannot conflict terms of security]
Is there a conflict between Indenture and Security?
Minor conflict (1-2days) between indenture and security, and indenture makes more sense (but security prevails) not good drafting
But here, the Security s.4 “The Securities are subject to all terms and provisions of the Indenture” if conflict, indenture prevails Kahan: don’t think you can do that, UCC reflects the notion that the bondholders (owners) are given the certificates – and there should not be any conflicting terms on that. Nowadays, people pay insufficient attention to security, without realizing that Security may trumps Indenture
How is the case of a payment date falling on a Sunday handled in the Petrohawk indenture? What does the Security provide? Are the provisions identical? If not, do they conflict?
Security s.1: if any such day is not a Business Day, on the next succeeding Business Day
Indenture s.11.07: Legal Holiday is a day that is not a Business Day. If payment date is a Legal Holiday, payment shall be made on the next succeeding day that is not a Legal Holiday and no interest shall accrue for the intervening period.
s.1.1: Business Day means any day other than a Saturday, Sunday or other day on which commercial banks in New York…
No conflict between indenture and security here
If payment is not made on the regular interest payment date because it falls on a Sunday, are interest payments on date or other payment dates adjusted?
What about amount of payment - more interest or same interest?
Same interest: to have twelve 30 days a year is to simply the calculation of interest and adjusting interest payment would complicate the calculation.
Same amount whether both/none is adjusted for the purpose of simplicity, shouldn’t adjust
Assuming you can more interest on Feb 3 on Aug 1, you would get a lower interest rate payment provision on both days have to correspond to each other: either make no adjustment to both, or adjustment to both
Compare the report Freeport-McMoran and the Petrohawk indentures.
Freeport: s.11.08 No interest shall accrue for the intervening period
i.e. If interest paid on Feb 3, no interest accrue between Feb 1 and Feb 3
On Aug 1: you get 6 months (and not 6 months minus 2 days)
Security s.1(a) “Interest on the Securities shall accrue from the most recent date to which interest has been paid”
“To” = period up to which interest has been paid; vs. “on” = Feb 1
Don’t adjust Feb 1 nor Aug 1 payment
Petrohawk: s.11.07, Security s.1
same structure interest amount would not change/ no adjusting
“interest accrue from the most recent date to which interest has been paid”
“no interest accrue for the intervening period”
How is the issue if adjustment to the interest payment because the payment date falls on a Sunday handled in the BMS indenture?
Under Security section 1, the “interest has been paid… subject to Section 15.13… interest on this Security shall be calculated on the basis of a 360-day year and the actual number of days elapsed during the related Interest Period.”
c.f. “360-day year and twelve 30 day months” need not count the no. of days
interest payment date is always the same day of the month
if you do not make an adjustment because the interest payment date is delayed, benefit of simplicity (twelve 30 day month + no adjustment)
“360-day year and actual number of days elapsed = If interest rate is 5%: get 5 days extra of interest (needs adjustment) no simplicity”
no. of days in interest period 360/4 = 90 days (c.f. actual days: 92 days)
no. of days 360 (c.f. actual days: 365 days)
Indenture section 15.13 Legal Holiday and Security section 4 “if any Interest Payment Date falls on a day that is not a Business Day, such Interest Payment Date will be postponed to the next succeeding Business day… No interest on such payment will accrue for the period…”
This is only for interest on “Stated Maternity Date, Redemption D&, Fundamental Change Purchase Date or Purchase Date”
“Principal payment is due, required payment of interest, if any” principal would definitely be due + interest may be due
But not applicable to when only interest is due (and not the principal as well)
“no interest on such payment” payment of principal = losing right to interest completely
E.g. Oct 1, 2010 is on Saturday – no 2 extra days of interest on principal
Interest on principal, here, principal payment is postponed, it is not due, no interest on the principal
c.f. Freeport s.11.08 Legal Holiday “If a payment date is a Legal Holiday, payment shall be made on the next succeeding day that is not a Legal Holiday… No interest shall accrue for the intervening period”
underlying principal amount of securities
payment that was supposed to be made on non-business day
Principal amount + interest on principal (not adjusted)
c.f. interest on the payment that was postponed (adjusted, interest on interest)
What happens to the interest payment and what is the amount?
“Interest payable on this Security on any Interest Payment Date will include interest for the immediately preceding Interest Period”
“Interest Period” is defined under the debenture section 1.01(a) as the
“period from and including the most recent Interest Payment Date to which interest has been paid or duly made available for payment (or October 1, 2003 if no interest has been paid or been duly made available for payment) to, but excluding, the next succeeding Interest Payment Date, or any earlier Fundamental Change Purchase Date, Redemption Date or Purchase Date.”
‘Interest Payment Date’ defined 1.01(a) means
“March 15, June 15, September 15 and December 15 of each year commencing December 15, 2003, in each case subject to Section 15.13.”
Security Section 4: If any Interest Payment Date … falls on a day that is not a Business Day, such Interest Payment Date will be postponed to the next succeeding Business Day.
Interest payment date – distinguish 2 dates:
date where the interest actually being paid (postponed date) period between 15th to the actual payment date (16th or 17th if 15th falls on Sunday or Saturday)
defined ‘Interest Payment Date’ period between 15th of the month = no adjustment if one of these dates falls on a weekend
the 2 dates can be same: can define ‘Interest Payment Date’ as the date where the interest is actually paid
Here, definition of ‘Interest Payment Date’ incorporates 15.13, since it is ‘subject to Section 15.13’ (i.e. the postponement: ‘Interest Payment Date will be postponed to the next succeeding Business day’)
First scenario: period between 15th and the actual payment date [without this, would be more ambiguous]
Security s.1 Interest
“Interest Payment Date” defined as “March 15, June 15, September 15 and December 15,” ‘subject to Section 15.13 – modifying only the actual day of payment, and not the defined term (ambiguous whether interest would accrue in period between 15th and postponed dates)
To remove this ambiguity, takes “(each, an “Interest Payment Date”)” and move it after the phrase “subject to Section 15.13 of the Indenture”, to include 15.13 in the definition would include the period between 15th and the postponed date need adjustment if the interest payment is postponed
Interest Payment...