#16517 - Changing The Terms Consent Solicitation - Corporate Bonds and Credit Agreement

A. General

Freeport-McMoran Indenture, Section 9.01-9.02
Petrohawk Indenture, Section 9.1-9.2
Northwest Note Agreement, Section 17.01

[29/04 - 1:20:00]

Amendments

• 3 Approval Requirement

  1. No holder approval: to cure any ambiguity or defect???

  2. Approval by each affected holder: compare with 6.07, sometimes beyond

  3. Approval by requisite majority

• Approval Requirements, Waiver Requirements, and No Action Clause

Art 9 Freeport

• 9.01 Without Consent of Holder

  • (a) The Company and the Trustee may amend this Indenture or the Securities without notice to or consent of any Holder to:

[Harmless]:

1. (ii) Comply with Art 5 (mergers)

2. (iii) Provide for uncertificated Securities

3. (iv) Add Guarantees

4. (v) Add to the covenants

5. (vi) Comply with SEC requirements

6. (vii) Make any change that does not adversely affect the rights of any Holder

• [But harmful]: (i) Cure ambiguity, omission, defect or inconsistency

  1. Drafting error “ambiguity” company may abuse this clause, too broad

  2. But still, trustee’s consent required for amendments trustee may be reluctant to do that (bondholder may sue vs. company may not hire him) trustee may ask outside counsel

• 9.02 With Consent of Holders

  • The company and trustee may amend without notice to holder but with written consent of the Holders of at least a majority in principal amount of the Securities then outstanding.

  • However, without consent of each Holder, an amendment may not:

    • (i) Reduce amount of securities

    • (ii)Reduce interest rate or extend time for repayment of interest

    • (iii)Reduce principal of or extend stated maturity

    • (iv) Reduce premium payable upon redemption or change the time of redemption

    • (v) Make any Security payable in Money

    • (vi) Make changes in 6.04, 6.07, 9.02 (constitutional changes)

    • (vii) Impair right of any Holder to receive payment of principal/ interest on/ after due dates

  • C.f. 9.2 With Consent of Holders in Petrohawk indenture: more extensive list (e.g. modify subsidiary Guarantee, Change in ranking of Securities) [1:29:00]

• Amendments and waivers are closely related to each other

  • Amendments (bondholder’s rights)

  • waivers (breach of right generating event of default)

  • many things that can be amended, may be waived instead

  • 6.04 Waiver of Past defaults “cannot be waived without consent of each Holder”

  • If cannot amend a covenant should also not be able to waive that covenant

  • Note: Bonds hold by company are considered outstanding securities - Petrohawk

    • 2.8 Outstanding Securities “Security does not cease to be outstanding because the Company or an Affiliate of the Company holds the Security”

    • 11.6 When Securities Disregarded “In determining whether Holders of the required principal amount of Securities have concurred in any waiver, Securities owed by the Company shall be disregarded and deemed not to be outstanding”

    • Cross reference table: Trust and Indenture Act ref. to provisions in indenture

      • E.g. 11.6 in indenture required by 316(a) of Trust Indenture Act

      • Mostly under art 7 on trustee (since they are lazy but not evil)

• Ability to pursue remedy upon Event of Default also related to Amendment [1:36:00]

  • E.g. If breach covenant, cannot accelerate/ comply with civil action requirement

  • Minority protection provisions cannot be taken away by majority (requires unanimous consent to take away)

    • But ability to effectively enforce a right may be taken away co. may amend in a way to make it difficult to enforce a violation

    • Freeport 9.01

  • E.g. Lennar 9.02 With Consent of Holders

    • (a)(b)(c) require unanimous consent

    • Majority cannot approve a conversion right that would (f) adversely affect the repurchase option of a holder or the conversion right of any note conversion rights under the notes cannot be changed by the majority

    • E.g. If bondholder only get 100 shares instead of the 120 share he originally entitled to Default under Events of Default (e) after 10 days sue for breach of contract Company 6.7 Limitations on Suits “holder may not pursue any remedy with respect to this indenture unless holders of at least 25% to request the trustee” but this undermine minority protection element

    • Prof: minority protection shouldn’t be subject to 6.7, should, as in Lennar 6.7, integrated it and allow brining a suit without complying 6.7

“…right of any Holder to receive payment or delivery of… (z) consideration due upon conversion of such Note, institute suit for the enforcement of any such payment or deliver against the Company shall not be impaired or affected without the consent of such Holder”

Problem Set 23
1. What approval is required to make the following amendments:
(a) reduce the interest rate;
(b) correct a typographical error;
(c) relax a restrictive covenant;
(d) delete clause (b) of the proviso in the definition of Consolidated Net Income?

B. Consent Solicitations

Freeport-McMoran Indenture, Section 9.07
Northwest Note Agreement, Section 17.02
Katz v. Oak, 506 A.2d 873 (1986) (P. #1)

Holdout Problem

• Can arise for changes that require approval by all affected holders, e.g. to avoid bankruptcy

• When unanimous consent required to make a change

  • Holders can act collectively to agree to a change

  • But for individual holder, it is better for others to make concessions

• Example:

• These amendments will fail even though collectively the bondholder would be better off because they are individually better to reject

  • If vote passes bondholder better off if holder rejects

  • If vote failed same for the bondholder

  • For small holders, likelihood of being pivotal relatively small

  • May reject offers that are in aggregate interest of the holders and lead offers to fail

  • If amendment passes, other bondholders would change their payment terms, while you will keep your payment terms

• No holdout problem for amendments where majority binds minority

  • Chapter 11 as alternative to amendments file petition for bankruptcy:

    • Company can change payment term without consent of individual holders in bankruptcy (i.e. need not follow 9.02)

  • But still issue if the entity cannot file for bankruptcy

    • e.g. States or Countries cannot file for bankruptcy

• Holdout problem can be reduced when

  • Holdings more concentrated

  • High passage threshold

Coercion problem

• Can arise for changes that require majority approval

• For small holders, likelihood of being pivotal relatively small

• May accept offers that are against aggregate interest of holders and lead offers to pass

• No coercion problem for amendments where discrimination not permitted

• Coercion problem can reduced when

  • Holdings more concentrated

  • Holders can coordinate

• Holder coordination less subject to defection

Problem Set 24

1. XYZ is in financial trouble. It has assets with a going-concern value of $80 million and debentures issued under an indenture in the amount of $100 million. XYZ is proposing the...