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LLM Law Outlines Corporate Bonds and Credit Agreement Outlines

Covenants Transactions With Affiliates Negative Pledge. Outline

Updated Covenants Transactions With Affiliates Negative Pledge. Notes

Corporate Bonds and Credit Agreement Outlines

Corporate Bonds and Credit Agreement

Approximately 204 pages

Corporate Bonds and Credit Agreement with Kahan Spring 2019...

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D. Transactions with Affiliates

Petrohawk Indenture, Section 4.8

Northwest Note Agreement, Section 10.7, 10.8

Newpage Credit Agreement, Section 6.12

Problem Set #12
Assume that XYZ owns 100% of the stock of Company and 100% of the stock of ABC. Can Company enter into the following transactions (and if yes, subject to what conditions, if any)? (Answer each question with respect to the companies indicated.)

1. Beta leases office space from Alpha. The lease payments are $1 million a year. Alpha and Beta are both wholly-owned subsidiaries of the company. Beta is a Restricted Subsidiary. Compare the conditions with which this transaction must comply with (under this or any other covenant) if

(i) Alpha is and remains an Unrestricted Subsidiary and

(ii) Alpha is an Unrestricted Subsidiary, is redesignated Restricted immediately prior to the transaction, and is redesignated Unrestricted immediately after the transaction. [Petrohawk, Northwest]

  • Kahan: Petrohawk 4.8(b)(2) exempts transactions among Restricted Subs. If Alpa is unrestricted, the lease must comply with 4.8 as a transaction between Beta (a Restricted Sub) and Alpha (an Affiliate). If Alpah is restricted, the lease is not subject to 4.8. Instead, when Alpha is designated unrestricted after the lease, the conditions in the definition of Unrestricted Sub apply.

  • Affiliated Transactions Covenant

  • Concern: removal of value to parent or sister entity through transactions at disadvantageous terms

  • Structure

    • Definition of covered transactions

    • Conditions: Substantive + Procedural

    • Special Rules

  • Petrohawk 4.8

    • “Affiliate” of any specified Person means any other Person that is controlled or controlled by such specified Person

    • (a)(1) substantive restriction

      • Company will not transfer to any of its Restricted Subs

      • Cannot be unfair to the company or the RS, though can be unfair to affiliate

    • (a)(2) operative restriction:

      • If more than 10M need disinterested board of director’s approval

      • More than 24M need written opinion from Investment Bank

  • Conditions of making transfers “Unless…”

    • (b) special rules that followings are not subjected to the restriction

      • (2) transactions between or among the Company and/or its RS

        • Cover transaction between and among: RS of co. and another co. in the family

          • Between = co. and RS

          • Among = RS and RS

          • CS

            • C

              • RS

              • RS

            • C

              • S

              • S

      • (3) RP that, in each case, are permitted by s4.4

        • Already have a test that works well

      • (4) ordinary course of business

      • (7) in the case of any contract, agreement or understanding (or amendment thereto) entered into with one or more…

  • Here: transaction between un-RS and a RS

    • Un-RS is an affiliate requirements: 4.8(a)

      • (1) fair to the RS; AND

      • (2) if series of transaction involve aggregate consideration in excess of $10M

        • Threshold of $10M? de minimis threshold

          • Don’t want impose burden on disinterested directors to vote on every transaction

          • Rules of aggregation: cannot split up related transaction to avoid the threshold

    • Can Co. funnel $ to temp. un-RS?

      • Alpha changed to un-RS to RS B enter into transaction with A both RS fall under exception (b)(2) “Transactions between or among the Company and/or its RS” after transaction change A back to un-RS?

      • Conditions of changing RS to un-RS

        • “Unrestricted Subsidiary" means any Subsidiary of the Company that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution, but only to the extent that such Subsidiary

          • (1) has no Indebtedness other than Non-Recourse Debt;

            • co. is not going to be liable to the debt of that sub

          • (2) not party to any agreement, contract, arrangement or understanding with the Co/ any RS of the Co. unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; similar language as (a)(1), but not the same

            • Missed “arms-length dealing”

            • Prof: should track exactly of (a)(1)

            • Conditions: (a)(1) has to be satisfied

          • (3) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any obligation

            • (a) to subscribe for additional Equity Interests or

            • (b) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; and

          • (4) has not Guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries.

            • Conditions that are designed to ensure Co. and RS won’t be liable to the un-RS

            • Incorporates Requirement of fairness

        • The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if that designation is in compliance with the next succeeding sentence and would not otherwise cause a Default.

          • If RS is designated as un-RS such designation shall be deemed an Investment in the sub

          • Effects of not satisfying the condition is not a violation of covenant co. “may” not big deal for the co., only invalid and no breach

        • so designated and all outstanding Investments owned by the Co. and its RS in the Sub so designated, shall be valued at their Fair Market Value at the time of such designation for purposes of determining compliance with Section 4.4 hereof, if there is any money in the RS…”

      • Conditions of changing from un-RS to RS requirements:

        • The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any outstanding Indebtedness of such un-RS and such designation shall only be permitted if (I) such Indebtedness is permitted under Section 4.3 hereof, calculated on a pro forma basis as if such designation had occurred at the beginning of the four-quarter reference period; and (2) no...

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