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LLM Law Outlines Corporate Bonds and Credit Agreement Outlines

Covenants Asset Sales Outline

Updated Covenants Asset Sales Notes

Corporate Bonds and Credit Agreement Outlines

Corporate Bonds and Credit Agreement

Approximately 204 pages

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

The following is a more accessible plain text extract of the PDF sample above, taken from our Corporate Bonds and Credit Agreement Outlines. Due to the challenges of extracting text from PDFs, it will have odd formatting:

G. Asset Sales

Freeport-McMoran Indenture, Section 4.06
Northwest Note Agreement, Section 10.4
Newpage Credit Agreement, Section 6.9 lead-in and (b), (c)
Energy Corp. of America v. MacKay Shields LLC, 2003 U.S. App. Lexis 25230 (P. #1)

Definition of Asset Sale [17/04 13:33]

  • 2 conditions under s.4.7:

  1. Requirements as to consideration: cash, term

    • receive at least fair amount of value + have to be in cash

  2. Requirements as to use of proceeds: Reinvestments, Repayments

    • reinvest in the same line of business, repay other debts, and excess proceeds must make offer to buy back bonds for par

Purpose of Covenant

  • Perhaps purpose is asset continuity

    • Similar to Merger and Sale of Substantially All Assets

  • Perhaps purpose is to regulate speculation

    • Similar to Investment restriction in RP covenant

    • Query: What uses of proceeds are NOT permitted?

  • Definition often excludes sale of “substantially all” assets, see Petrohawk definition

    1. “Substantially all assets” governed by 5.1 not cumbersome to comply

      • [c.f. Lennar: substantially all assets is governed by 5.1]

    2. Less than substantially all asset 4.7 “Sale of asset, except for sale of all substantially all of the assets of the Company”

      • [c.f. Lennar: less than substantially all asset not governed]

    • 4.7 often more burdensome than 5.1 company would want to argue an asset sale is substantially all asset to avoid 4.7 conditions

      • Depends on whether provision like 4.7 provides bondholder with rights and co. obligations on sale of assets (interest shift)

      • Also, “substantially all” is a vague term

  • Company has to use cash for certain purposes (e.g. reinvest, pay debt, make an Offer) subject to restrictions:

    • Restricted Payment Covenants: which restrict Company to pay dividend to shareholders, share repurchase, investments

    • Business Activities 4.10 “Company will not engage in business other than Oil and Gas Business, unless immaterial”

    • Restrict co. from re-borrowing under ratio test after repayment

  • Why require fair terms on transaction with non-affiliate?

    • Atypical for 4.7(a)(1) to require “at least equal to the Fair Market Value”

Functions of quantitative threshold incorporated in this covenant (rules of integration, whether we need to worry about excess or entire amount when exceed threshold)

  • Petrohawk 4.7(c) $20M; Definition of “Asset Sale” (1)(a) $2M

  • Freeport: 1M disposition of asset with Fair Market Value; 4.06(a) $50M, (b) $10M

Asset Sale Covenant

  1. Thresholds

  2. Relation to Debt Covenant

Freeport 4.06

  • Consideration: fair market value, 85% of consideration in cash,

  • Use of Proceeds (a):

    1. applied to pay debt under credit facilities,

    2. reinvest additional assets,

      • Additional Assets, Permitted Business

    3. make an Offer,

      • i.e. send notice to bondholder holder on their exit right (to sell bonds to company for par)

    4. any general corporate purpose permitted: can include anything

  • Thresholds for what constitutes an Asset Sale: Proviso [PS 15, Q3]

    • Have to specify what happens if you exceed the threshold - whether apply to the excess, or the entire amount:

      • Rationale of the exception: “de minimis” too small to bother (c.f. “freebies” co. permitted to play around certain amount of money)

      • Since it is de minimis wants to impose requirement on the entire amount (or would defeat purpose of the exception)

      • Should use phrases like “to the extent that” “in the excess of”

    1. $50M (a) co. can do whatever it wants

      • Rationale: “freebie” exception

      • Rule of aggregation: “…to the extent that the aggregate Net Available Cash from all Asset Deposition that is not applied in accordance with s. 4.06(a) exceeds $50M”

      • What if threshold exceeded: Only apply to the excess of $50M

    2. $10M (b) no need to make offer if amount available is less than 10M

      • Rationale of the threshold: “freebie” exception

      • Rule of aggregation: “Any amount would be carried forward” aggregate

      • What if threshold exceeded: Only apply to the excess

    3. $1M under definition of “Asset Disposition” = (series of related sales, leases, transfers or dispositions), dispositions, restricted payment permitted in 4.04, less than $1M (aggregate if related intercompany, not aggregate if related)

    • 4.06 “For the purpose of this Section 4.06, the following are deemed to be cash” Prof: bad drafting, should put in definition: reduction of debt = cash, permitted use

Relation to Debt Covenant: Repaying and repaying debt

  • First repay Credit Facilities or Rest. Sub. Debt 4.03(b)(i) – basket reduced, but does first require payment of 4.06(b)(i) debt: 4.03(a); 4.03(b)(vii) Sequential repay and reborrow:

  • 4.06(a)(iii)

    • (1) first/ (2) second, to the extent the Company elects co. can pay, but doesn’t have to

    • (3) third/(4) fourth… to the extent of the balance of Net Available Cash

    • Under (4):

      • “any general corporate purpose” permit the co. to do anything if no other debt outstanding/ company didn’t choose to do so under 1 and 2 3rd to make an Offer (but if bondholders may not accept it) not everything is used up at 3 and company can use the money under 4th any general corporate purposes

    • Under (3):

      • bondholder would not accept an Offer if the offer is about the market price

      1. Look at unaffected market price before the offer

      2. Asset disposition doesn’t apply to all bonds (e.g. 200M outstanding, offering 100M bond at par, the other bonds’ value would be affected by market value)

      3. Approximate market price of the bond after the offer (ask investment bank/ look at the credit rating of other similar companies)

    • Under (2): “reinvest in Additional Assets within 180 days”

      • “Additional Assets” means

      • (a) any property/ asset to be used by the Co. in a Permitted Business (which means “any business engaged by co. on closing day”);

      • (b) “Capital Stock of a RS as a result of the acquisition of such Capital Stock by the Co” Buy stock in sub that engage in permitted business (oil and gas)

        • C.f. Petrohawk 4.7(b)(2) “acquire all/ substantially all of the assets of, or a majority of the Voting Stock of, a Company...

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