Presentation on theme: "Bond Quotations 6-1 Explanatory Notes For New York and American Bonds Yield is Current Yield cv - Convertible bond. cf-Certificates. cld - Called. dc -"— Presentation transcript:
Bond Quotations 6-1 Explanatory Notes For New York and American Bonds Yield is Current Yield cv - Convertible bond. cf-Certificates. cld - Called. dc - Deep discount. f - Dealt in flat. Il - Italian lire. kd - Danish kroner. m - Matured bonds, negotiability impaired by maturity. na - No accrual. r - Registered. rp - Reduced principal. st - Stamped. t - floating rate. wd - When distributed. ww - With warrants. x - Ex interest. xw - Without warrants. zr - Zero coupon. vj - In bankruptcy or receivership or being reorganized under the Bankruptcy Act, or securities assumed by such companies. NEW YORK BONDS Corporation Bonds –CURNET –BONDSYLDVOLCLOSECHG –AES Cp 4½ 05cv2233.63-0.38 –AES Cp 8s 817.24346.50-0.50 –AMR 9s 1618.035050-0.63 –ANR 7s 258.0488 4.00
Appendix 6A – S&P’s Ratings 6-2 AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor’s. Capacity to pay interest and repay principal is extremely strong. AA Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree. A Debt rated "A" has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse affects of changes in circumstances and economic conditions than debt in higher rated categories. BBB Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. BB, B, CCC, CC, C Debt rated "BB", "B", "CCC", "CC" and "C" is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. "BB" indicates the lowest degree of speculation and "C" the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions.
Current Yield of AES Bond 6-3 CUR NET BONDSYLDVOLCLOSECHG AES Cp 4½ 05cv2233.63-0.38 AES Cp 8s 817.24346.50-0.50 Current Yield Calculation: Price_ = $465 = 17.2% Interest $80
Yield to Maturity – ANR Bond for 20 Years 6-4 CURNET BONDSYLDVOLCLOSECHG ANR 7s 258.0 4 88 4.00 Calculate Yield to Maturity based on assumed 8% discount rate for 20 years: Table 3-5, 20-year annuity $70 x. 9.8181 =$687.27 Table 3-4, present value: $1,000 x 0.2145 =$214.50 $901.77 Calculate Yield to Maturity based on 8.1%, based on THORNDIKE ENCYCLOPEDIA OF BANKING & FINANCIAL TABLES: 20-year annuity $70 x. 9.7527 = $682.69 Discounted present value: $1,000 x 0.2108 = $210.80 $893.49
Stockholder-Bondholder Conflict 6-6 Strategy I – Low Risk: Firm’s ExpectedExpected Firm Expected To Value to ToValue to Earnings Prob. ValueBondholders Bondholders StockholdersStockholders $6,000 0.1 $600 $6,000 $600 0 0 $10,000 0.8 $8,000 $8,000 $6,400$2,000$1,600 $14,000 0.1 $1,400 $8,000 $800$6,000 $600 1.0 $10,000 $7,800$2,200 Strategy II – High Risk: Firm’s Expected Expected Firm Expected To Value to To Value to Earnings Prob. ValueBondholders Bondholders StockholdersStockholders $2,000 0.4 $800 $2,000 $800 0 0 $10,000 0.2 $2,000 $8,000 $1,600 $2,000 $400 $18,000 0.4 $7,200 $8,000 $3,200$10,000 $4,000 1.0 $10,000 $5,600 $4,400
Stockholder-Bondholder Conflict 6-7 Choosing Risky Projects (“Asset Substitution”) Incurring More Debt (“Claim Dilution”) Withdrawal of Shareholder Capital (“Dividend Payment”) Underinvestment
UV’s Lines of Business, 1977-78 6-8 Federal Pacific Electric Co.: –60% of sales –81% of profits –44% of book value of total assets –53% of book value of operating assets Oil & Gas Properties: –2% of sales –6% of operating profits –5% of book value of total assets –6% of book value of operating assets Mueller Brass & Mining Properties: –38% of sales –13% of profits –34% of book value of total assets –41% of book value of operating assets
UV’s Actions 6-9 Dec. 19, 1978, Board announced plan to sell Federal. Jan. 20, 1979, Board announced intent to liquidate UV. Mar. 26, 1979, Shareholders approve board plan for a 12-month liquidation. Mar. 29, 1979, UV sold Federal Pacific to Reliance Electric for $345 million cash. April 9, 1979, UV announced an $18 per share initial liquidating distribution for April 30. Trustees objected that liquidating distributions couldn’t occur until pay-off of all liabilities. UV set aside $155 million to cover debentures until a plan of satisfaction and discharge was reached within 90 days. July 23, 1979, UV announced sale of oil & gas properties for $135 million cash to Tenneco, which closed Oct. 2, 1979. Nov. 26, 1979, UV agreed to sell Mueller Brass, mining properties, and $322 million cash to Sharon Steel for $107 million cash plus $353 million worth of debentures & debt assumption.
Sec. 13.01, First Chase Indenture 6-10 Nothing in this Indenture or any of the Debentures contained shall prevent any merger or consolidation of any other corporation or corporations into or with the Company, or any merger or consolidation of the Company (either singly or with one or more corporations), into or with any other corporation, or any sale, lease, transfer or other disposition of all or substantially all of its property to any corporation lawfully entitled to acquire the same or prevent successive similar consolidations, mergers, sales, leases, transfers or other dispositions to which the Company or its successors or assigns or any subsequent successors or assigns shall be a party; provided, however, and the Company covenants and agrees, that any such consolidation or merger of the Company or any such sale, lease, transfer or other disposition of all or substantially all of its property, shall be upon the condition that the due and punctual payment of the principal of, interest and premium, if any, on, all of the Debentures, according to their tenor, and the due and punctual performance and observance of all the terms, covenants and conditions of this Indenture to be kept or performed by the Company shall, by an indenture supplemental hereto, executed and delivered to the Trustee, be assumed by any corporation formed by or resulting from any such consolidation or merger, or to which all or substantially all of the property of the Company shall have been sold, leased, transferred or otherwise disposed of (such corporation being herein called the "successor corporation"),....
Why Uniformity Trumps Correctness 6-16 “Whereas participants in the capital market can adjust their affairs according to a uniform interpretation, whether it be correct or not as an initial proposition, the creation of enduring uncertainties as to the meaning of boiler plate provisions would decrease the value of all debenture issues and greatly impair the efficient working of capital markets. Such uncertainties would vastly increase the risks and, therefore, the costs of borrowing with no offsetting benefits either in the capital market or in the administration of justice. Just such uncertainties would be created if interpretation of boiler plate provisions were submitted to juries sitting in every judicial district in the nation.”
Basic Property Rights of Creditors in Indentures 6-17 “The second fundamental characteristic of long term debt financing is that the rights of holders of the debt securities are largely a matter of contract. There is no governing body of statutory or common law that protects the holder of unsecured debt securities against harmful acts by the debtor except in the most extreme situations... The debt securityholder can do nothing to protect himself against actions of the borrower which jeopardize its ability to pay the debt unless he... establishes his rights through contractual provisions set forth in the... indenture.”
The Virtues of Uniformity 6-18 A large degree of uniformity in the language of debenture indentures is essential to the effective functioning of the financial markets: uniformity of the indentures that govern competing debenture issues is what makes it possible meaningfully to compare one debenture issue with another, focusing only on the business provisions of the issue (such as the interest rate, the maturity date, the redemption and sinking fund provisions in the conversion rate) and the economic conditions of the issuer, without being misled by peculiarities in the underlying instruments.
The Virtues of Uniformity 6-19 Should strict interpretation apply to negotiated clauses? Should parole evidence of discussions between underwriters’ and issuer’s counsel be admissible? Should statements made by underwriters about the covenant in the roadshow?
Covenants 6-20 Affirmative Covenants: –pay the debt as scheduled –Pay taxes –Maintain assets –Provide the Indenture Trustee with required information (as if a reporting company). Negative covenants:Designed to prevent opportunistic behavior by a debtor that increases bondholders’ risks.
Restricted Subsidiaries 6-21 Choice between escape from covenants and benefit of inclusion. Company (Issuer) Restricted Subsidiaries Unrestricted Subsidiaries Subject to the Covenants Financials included Guarantee the debt (except foreign) Not subject to covenants Financials not included Treated as third party for transactions
Indebtedness 6-22 Ongoing test Quarterly or Annual (usually in bank debt Incurrence test Limit all debt or Senior pari passu or Sub debt Limit Security for debt
A Variation on ABF Model Covenants, §10-11 6-35 (a) The Company will not... incur any Debt... that is subordinate in right of payment to the Notes, if, immediately after giving effect to the incurrence of such Debt and the application of the proceeds thereof, the aggregate principal amount of all outstanding Debt of the Company... determined in accordance with GAAP is greater than 60% of the sum of (i) the Company's Adjusted Total Assets... (b) The Company will not... incur any Debt if the ratio of Consolidated Income Available for Debt Service to the Annual Service Charge on the date on which such additional Debt is to be incurred, on a pro forma basis, after giving effect to the incurrence of such Debt and to the application of the proceeds thereof would have been less than 1.5 to 1. (c) The Company will not... incur any Debt secured by any mortgage, lien, charge, pledge, encumbrance or security interest of any kind... ("Secured Debt"),... if, immediately after giving effect to the incurrence of such Secured Debt and the application of the proceeds thereof, the aggregate principal amount of all outstanding Secured Debt of the Company... is greater than 40% of the sum of (i) the Company's Adjusted Total Assets... (d) The Company will at all time maintain an Unencumbered Total Asset Value in an amount not less than 150% of the aggregate principal amount of all outstanding unsecured Debt of the Company....
Variation on Model Covenants, §10-10: Negative Pledge. 6-36 Neither the Company nor any Subsidiary will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) Liens in favor of the Banks securing the Loans hereunder; (b) Liens for taxes or assessments or other government charges or levies if not yet due and payable or if due and payable... they are being contested... ; (c) Liens imposed by law, such as mechanic's, materialmen's,... Liens, and other similar Liens, securing obligations incurred in the ordinary course of business which are... being contested in good faith by appropriate proceedings and for which appropriate reserves have been established; (d) Liens under workmen's compensation, unemployment insurance, social security or similar legislation; (e) Liens, deposits or pledges to secure the performance of bids, tenders, contracts... or other similar obligations arising in the ordinary course of business; (f) judgment and other similar Liens arising in connection with court proceedings; provided that... the claims secured thereby are being actively contested in good faith and by appropriate proceedings;.... (j) Liens not otherwise permitted by the foregoing clauses of this Section securing indebtedness in an aggregate principal amount at any one time outstanding not to exceed 30% of Consolidated Tangible Net Worth.
Tangible Net Worth Defined 6-37 “‘TANGIBLE NET WORTH’ means, as of any date, the difference of (i) Net Worth, minus (ii) to the extent included in determining the amount under the foregoing clause (i), the net book value of goodwill, cost in excess of fair value of net assets acquired, patents, trademarks, tradenames and copyrights, treasury stock and all other assets which are deemed intangible assets under Agreement Accounting Principles.”
LBO Structures 6-38 Target Shareholders Bidder Lenders 100% Owned $ 100% Owned Secured LoanTarget Corp. $ Cash Merger Acquisition Sub Target Creditors (1)Lenders commit to loans at merger closing, on secured and unsecured basis. (2)Acquisition Sub merges with Target Corp. (3)Target shareholders receive proceeds of loan, plus whatever cash bidder has contributed to Acquisition Sub as equity (4)Bidder remains sole shareholder of Acquisition Sub. (5)Surviving Corp. owes all bidder financing to Lenders (6)Target creditors are subordinated to secured lenders, and equal to unsecured lenders.
Grades of Credit 6-39 Investment Grade: Very few covenants; sometimes no debt incurrence. Sub Investment Grade High Yield or Junk Bond: Large covenant package. Cross over Credit: On the border: Springing or Disappearing Covenants.
MetLife’s Recognition of Claim Dilution Risk in LBOs 6-40 “Because almost any industrial company is apt to engineer a takeover or be taken over itself, Business Week says that investors are beginning to view debt securities of high grade industrial corporations as Wall Street's riskiest investments. In addition, because public bondholders do not enjoy the protection of any restrictive covenants, owners of high grade corporates face substantial losses from takeover situations, if not immediately, then when the bond market finally adjusts.... There have been 10-15 merger/takeover/LBO situations where, due to the lack of covenant protection, [MetLife] has had no choice but to remain a lender to a less creditworthy obligor.... The fact that the quality of our investment portfolio is greater than the other large insurance companies... may indicate that we have negotiated better covenant protection than other institutions, thus generally being able to require prepayment when situations become too risky... [However,] a problem exists. And because the current merger craze is not likely to decelerate and because there exist vehicles to circumvent traditional covenants, the problem will probably continue. Therefore, perhaps it is time to institute appropriate language designed to protect Metropolitan from the negative implications of mergers and takeovers.”
MetLife Memos on Dilution Risk Covenants 6-41 “A method of closing this apparent "loophole," thereby forcing a payout of [MetLife's] holdings, would be through a covenant dealing with a change in ownership. Such a covenant is fairly standard in financings with privately-held companies... It provides the lender with an option to end a particular borrowing relationship via some type of special redemption.” “Covenants are incorporated into loan documents to ensure that after a lender makes a loan, the creditworthiness of the borrower and the lender's ability to reach the borrower's assets do not deteriorate substantially. Restrictions on the incurrence of debt, sale of assets, mergers, dividends, restricted payments and loans and advances to affiliates are some of the traditional negative covenants that can help protect lenders in the event their obligors become involved in undesirable merger/takeover situations.”
MetLife and the Law 6-42 Boilerplate terms are “strictly construed” and no parole evidence. (May be different for a bespoke provision) The issuer can do anything not expressly forbidden by the indenture. Quoting Purcell v. Flying Tiger Line, Inc.: “The Indenture does not contain any such limitation [as the one proposed by plaintiff].... In light of our holding that the indenture unambiguously permits the transaction at issue in this case....” - page 374
MetLife and the Law 6-43 Outside the “zone of insolvency” directors owe no fiduciary duties to creditors only contractual duties.
MetLife and the Law 6-44 P tries two contract theories good faith and Frustration of Purpose Frustration isn’t available where the event frustrating the purpose was clearly foreseeable. - page 380 Critique: LBOs were a financial innovation that radically changed the leverage in many corporations. For bonds issued before 1980, this may have been inconceivable.
Change of Control “Put” Provision 6-45 In the event that a Change in Control shall occur, each Holder shall have the right (each, a "CHANGE OF CONTROL REPURCHASE RIGHT" and, together with the Optional Repurchase Right, each a "REPURCHASE RIGHT"), at the Holder's option,... to require the Company to repurchase, and upon the exercise of such right the Company shall repurchase, all of such Holder's CODES not theretofore called for redemption,... on the date (the "CHANGE OF CONTROL REPURCHASE DATE" and, together with the Optional Repurchase Date, each a "REPURCHASE DATE") that is a Business Day no earlier than 30 days nor later than 60 days after the date of the Company Notice at a purchase price in cash equal to 100% of the principal amount of the CODES to be repurchased (the "CHANGE OF CONTROL REPURCHASE PRICE" and, together with the Optional Repurchase Price, each a "REPURCHASE PRICE"), plus accrued and unpaid Interest (including Contingent Interest) to, but excluding, the Change of Control Repurchase Date; provided, however, that installments of Interest (including Contingent Interest) on CODES whose Stated Maturity is prior to or on the Change of Control Repurchase Date shall be payable to the Holders of such CODES, or one or more Predecessor Securities, registered as such on the relevant Regular Record Date according to terms and the provisions of Section 2.1 hereof.
Change of Control “Put” Provision Travelex Definition 6-46
Change of Control “Reset” Provision 6-47 "Adjusted Interest Rate" means, with respect to any Reset Transaction, the rate per annum that is the arithmetic average of the rates quoted by two Reference Dealers selected by the Company or its successor as the rate at which interest on the Securities should accrue so that the Fair Market Value, expressed in Dollars, of a Security immediately after the later of: (1) the public announcement of such Reset Transaction; or (2) the public announcement of a change in dividend policy in connection with such Reset Transaction; will most closely equal the average Trading Price of a Security for the 20 Trading Days preceding the date of public announcement of such Reset Transaction; provided that the Adjusted Interest Rate shall not be less than 4.00% per annum. * * * "Reset Transaction" means: (i) a merger, consolidation or statutory share exchange to which the entity that is the issuer of the Common Stock into which the Securities are then convertible is a party, (ii) a sale of all or substantially all the assets of that entity, (iii) a recapitalization of that Common Stock or (iv) a distribution described in Section 12.4(d)....
Quick Check Question 6.1 6-48 If you represented a lender considering a large loan to Scientific Atlanta (see the financial statements in Chapter Two), what types of restrictions on new debt would you want to see? Do any of the financial ratios in Appendix 2-B seem promising measures of the limits you might want to impose?
Variation on Model Covenant §10-11 Limitations on Additional Funded Debt. 6-49 The Company shall not, and shall not permit any Subsidiary to, create, incur, assume or issue, directly or indirectly, or guarantee or in any manner become, directly or indirectly, liable for or with respect to the payment of any Indebtedness, except for: (1) Indebtedness under the Debentures and this Indenture; (2) Indebtedness of the Company and any Subsidiary not otherwise referred to in this Section ____ outstanding on the Date of Issue (specifically including the full amount available to the Company or its Subsidiary pursuant to the loan agreements referred to in clauses (i) and (ii) of the definition of "Senior Indebtedness" contained in Section __ hereof); (3) Indebtedness (plus interest, premium, fees and other obligations associated therewith), that, immediately [subsequent] to the incurrence thereof, does not cause the ratio of Funded Debt to Consolidated Tangible Net Worth plus Shareholder Subordinated Debt to exceed 7:1;
“Funded Debt” Defined 6-50 “‘Funded Debt’ means any obligation payable more than one year from the date of determination thereof, which under GAAP is shown on the balance sheet as a liability, including obligations under capital leases, but excluding items customarily reflected below current liabilities, such as deferred federal taxes on income and other reserves.”
Scientific Atlanta Debt/Worth Ratio 6-51 (Total Liabilities/Tangible Net Worth) Total Debt (Liabilities) = $493,889 Tangible Net Worth (Net worth - intangibles) ($1,508,939 - $81,491) = $1,427,448 Thus: $493,889 $1,427,448 = 0.345 MANUFACTURING RADIO & TELEVISION BROADCASTING & COMMUNICATIONS EQUIPMENT SIC# 3663 (NAICS 33422) Comparative Historical Data Current Data Sorted By Sales * * * 4/1/98- 4/1/99- 4/1/00- 15 (4/1- 9/30/00) 57 (10/1/00 –3/31/01) 3/31/99 3/31/00 3/31/01 ALL ALL ALL 0-1M 1-3M 3-5M 5-10MM 10-25MM 25MM & OVER 90 74 72 NUMBER OF STATEMENTS 3 5 5 20 17 22_________ % % % % % % % % % RATIOS * * *.5.5.4 ³ 188.8.131.52 ³ 1.3 1.5 1.0 DEBT/WORTH 2.1 1.0.7 3.1 3.0 2.2 4.9 2.1 1.2_______ Thus S-A’s tangible net worth is an infinite number of times its funded debt before borrowing. If it borrowed $200 million, its funded debt would be approximately 1/7th of its tangible net worth. Added to its short-term debt, this would mean approximately $700 million debt. Which would raise its ratio to.5, still well below the median for companies in its business. The median for large companies is.7, which would mean S-A could carry total debt of $1 billion, or funded debt of slightly over $500 million and still be at the median.
Variation on Model Covenant 10-11 6-52 (a) Debt can’t exceed 60% of Adjusted Total Assets (a defined term). One indenture defines this as follows: "Adjusted Total Assets" of a Person as of any date means the total of all assets of such Person which would be shown as assets on a balance sheet of such Person as of such time prepared in accordance with GAAP plus accumulated depreciation.”
Variation on Model Covenant 10-11 6-53 From S-A’s balance sheet (pages 14-15): Total Liabilities, S-A:$493,889 = 0.246 Total Assets:$2,002,828 Thus S-A could increase its debt to as much as $1.2 billion before violating such a covenant.
Variation on Model Covenant 10-11 6-54 (b)Ratio of Income available for debt service (EBITDA) to Debt Service can’t drop below 1.5 to 1. From S-A’s balance sheet: Net Earnings for 2001:$333,674 Add back interest expense: 411 Add back dep. and amort.: 66,342 Add back provision for income taxes: 176,728 EBITDA:$577,155 S-A’s income statement shows no amortization expense as a separate entry. Thus:$577,155 = 1404 411 With EBITDA of over $575 million, S-A could support $385 million debt service.
Variation on Model Covenant 10-11 6-55 (c) Negative covenant that secured debt won’t exceed 40% of adjusted total assets. This would allow $800 million on a $2 billion asset base. If your client is taking unsecured debt, that’s a lot of senior debt. Since total debt is limited to 60% of total assets, this is high unless the company has lots of assets that can be used for such security, such as real estate.
Variation on Model Covenant 10-11 6-56 (d) Debtor will maintain unencumbered total asset value not less than 150% of all outstanding unsecured debt. With $2 billion assets, this would allow $1.3 billion in unsecured debt. RMA Annual Statement Studies don’t contain this ratio. But this ratio allows debt to expand to 66.7% of total assets. One would want to calculate debt service and interest cost to determine whether this ratio makes sense.
Model Covenants, §10-16, Investments 6-62 The Company will not make... any loan or advance to any Person or purchase or otherwise acquire, or permit any such Subsidiary to purchase or otherwise acquire, any capital stock, assets, obligations or other securities of, make any capital contribution to, or otherwise invest in, or acquire any interest in, any Person (all such transactions being herein called "Investments"), except : (a) Investments in Liquid Assets; (b) Investments in the Company or any or its Consolidated Subsidiaries; (c) Investments in accounts, contract rights and general intangibles (as defined in the Uniform Commercial Code) or notes or other instruments receivable, arising from the sale, lease or other furnishings of goods or services by the Company or any Subsidiary in the ordinary course of its business; (d) Investments in equity interests (including stocks and convertible debt securities) of corporations which do not become Consolidated Subsidiaries made with the proceeds of the issuance of stock by the Company; (e) Acquisitions permitted by Section ___; (f) Investments (including stocks, equity interests and convertible debt securities) of corporations that do not become Consolidated Subsidiaries made with the proceeds of the sale or other disposition of any capitalized Investment permitted by clause (d), providing the Company gives the Banks notice of such Investment under this clause; and (g) additional Investments not exceeding in the aggregate at any one time outstanding $20,000,000
Prohibiting Substantial Asset Sales 6-63 “The Company shall not, otherwise than in the ordinary course of business. sell, lease, transfer, or otherwise dispose of any substantial part of its properties and assets, including... any manufacturing plant or substantially all properties and assets constituting the business of a division, branch, or other unit operation.”
Restrictions on Asset Sales 6-64 “If the Company in any calendar year and in one or more sales sells (other than in a sale and leaseback) any fixed assets acquired prior to [the date of a financial statement preceding the date of the Indenture] and receives therefore proceeds in cash or its equivalent amounting in the aggregate to $1,000,000 or more after deducting taxes and expenses applicable to the sale, such cash or its equivalent shall, within 12 months after the close of such calendar year, be applied either (a) to the acquisition by the Company of other property or assets which are necessary or useful in its business, or (b) to the prepayment of an equivalent principal amount of Funded Debt of the Company, in which event such payment shall be prorated among all Funded Debt of the company at the time outstanding, including the Debentures.”
ABF Model Covenants, §10- Waiver of Certain Covenants 6-67 Without limiting the rights of the Holders and the Company with respect to waivers and amendments set forth in Sections _and, the Company may fail, in any particular instance, to comply with any covenant or condition set forth in Sections to, which otherwise does not have a specific waiver provision, if before or after the time for such compliance the Holders of at least 66-2/3% in principal amounts of the Debentures Outstanding shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such covenant or condition shall remain in full force and effect.
ABF Model Covenants, §10- Waiver of Certain Covenants 6-68 §316(a)(1)(B) of the Trust Indenture Act permits indentures to authorize waivers of past defaults on the vote of the holders of not less than a majority in interest of the indentures. Section 5-13 of the Model Covenants provides for waivers of past defaults on covenants. A survey of indentures at the time of the Commentaries (in 1971) showed the most common percentage was 66b%. The Trust Indenture Act provides specific voting rules for some items: The indenture can’t be amended to change rights to payment of interest, unless holders of 75% of debt consent, and interest can’t be delayed for more than 3 years. Any other limits on payment obligations require the consent of the holder (unanimous consent). Because bonds are frequently held in very large blocks by a few institutional investors, waivers may be feasible in some if not all cases.
Variation on Model Covenants, §8-1 Company May Consolidate or Merge Only on Certain Terms 6-69 The Company shall not consolidate with or merge into any other corporation or convey, transfer or lease its properties and assets substantially as an entirety to any Person, and the Company shall not permit any Person to consolidate with or merge into the Company, unless: (a) in case the Company shall consolidate with or merge into another corporation or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the corporation... or into which the Company is merged or the Person which... substantially as an entirety shall be a corporation organized and existing under the laws of the United States of America, any State thereof... and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form reasonably satisfactory to the Trustee, the due and punctual payment of the principal of (and premium, if any) and interest, if any, on all the Outstanding Securities of all series and the performance of every covenant of this Indenture on the part of the Company to be performed or observed; (b) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing; * * *
ABF Model Covenants, §10-12 Restrictions on Dividends, Redemptions, etc. – Slide 1 6-70 (a) The Company will not: (1) declare or pay any dividend or make any other distribution on any Equity Securities of the Company, except dividends or distributions payable in Equity Securities of the Company, or (2) purchase, redeem or otherwise acquire or retire for value any Equity Securities of the Company,... or (3) permit a Subsidiary to purchase, redeem or otherwise acquire or retire for value any Equity Securities of the Company, if, upon giving effect to such dividend, purchase, redemption or the acquisition, the aggregate amount expended for all such purposes subsequent to December 31, 1995 would exceed the sum of (1) 50% of the Consolidated Net Income accumulated subsequent to December 31, 1995; (2) the aggregate of the net proceeds received by the Company... from the sale or issuance after December 31, 1995... of Equity Securities of the Company,...; and (3) the net proceeds (as above defined) received by the Company or a Wholly-Owned Subsidiary from the issuance or sale (other than to the Company or a Subsidiary) of any convertible Indebtedness of the Company which Indebtedness has been converted into Equity Securities of the Company after December 31, 1995.
ABF Model Covenants, §10-12 Restrictions on Dividends, Redemptions, etc. – Slide 2 6-71 (b) The Company will not (1) declare or pay any dividend or make any other distribution, other than a Regular Dividend, on any Equity Securities of the Company,... or (2) purchase, redeem or otherwise acquire or retire for value any Equity Securities of the Company,... if, upon giving effect to such dividend, distribution, purchase, redemption or other acquisition, the Consolidated Tangible Net Worth of the Company would be reduced to less than an amount equal to 150% of the aggregate principal amount of Debentures and all Parity Indebtedness then outstanding. (c) The provisions of this Section shall not prevent (1) the payment of annual year-end bonuses to key employees, executive officers and shareholder employees of the Company pursuant to the bonus plan described in and consistent with the restrictions in Section hereof, (2) the payment of any dividend within 60 days after the date of declaration thereof, if at such date such declaration complied with the foregoing provisions, although the dividends so paid shall be considered in determining subsequent restrictions under this Section or (3) the acquisition or retirement of any Equity Securities of the Company by exchange for, or upon conversion of, or out of the proceeds of the substantially concurrent sale (other than to a Subsidiary) of, other Equity Securities of the Company, and no effect shall be given to any such acquisition or retirement or the proceeds of any sale, conversion or exchange in any computation made under this Section. A certificate of a firm of independent certified public accountants shall be conclusive evidence of the amount of accumulated Consolidated Net Income and the amount of Consolidated Tangible Net Worth.
ABF Model Covenants, §10-5 Maintenance of Properties 6-72 The Company will cause all its properties used or useful in the conduct of its business to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section shall prevent the Company from discontinuing the operation and maintenance of any of its properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business and not disadvantageous in any material respect to the Debentureholders.
ABF Model Covenants, §10-6 Statement as to Compliance 6-73 The Company will deliver to the Trustee, within 90 days after the end of each fiscal year, a written statement signed by the President or a Vice President of the Company, stating, as to each signer thereof, that: (1) a review of the activities of the Company during such year and of performance under this Indenture has been made under his supervision; and (2) to the best of his knowledge, based on such review, the Company has fulfilled all its obligations under this Indenture throughout such year, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to him and the nature and status thereof.
ABF Model Covenants, §10-7 Corporate Existence 6-74 Subject to Article 8, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights (charter and statutory) and franchises; provided, however, that the Company shall not be required to preserve any right or franchise or any minor business activity if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the Debentureholders.
ABF Model Covenants, §10-9 Insurance 6-75 The Company will at all times cause all buildings, plants, equipment and other insurable properties owned or operated by it or any Subsidiary to be properly insured and kept insured with responsible insurance carriers, against loss or damage by fire and other hazards, to the extent that such properties are usually insured by corporations owning or operation plants and properties or a similar character in the same localities; provided, however, that nothing in this Section shall prevent the Company or any Subsidiary from maintaining any self- insurance program covering minor risks if adequate reserves are maintained in connection with such program.
Other Protections 6-76 Convertible Feature (details later) Helps overcome conflict with an option on equity No Call Provision Call Redemption Premium Sinking Fund
Sinking Funds 6-79 Sinking Funds require the debtor to repurchase bonds. The greater the leverage of the debtor corporation, the more likely sinking funds become. Brealey & Myers point out several features of sinking funds: –Typically debtors can satisfy sinking fund obligations either by redeeming bonds at par or by purchasing them in the market. –When interest rates have fallen the bonds will trade above par and the corporation will call them for redemption. –When interest rates have risen the bonds will trade below par and the corporation will repurchase them in the market.
The ADM Financings 6-81 May, 1981: $125 million of 16% debentures May, 1982: $50.5 million raised with zeroes < 16% Jan., 1983: $131 million stock offering Mar., 1983: $86 million secured trust receipts (STARS) < 16% June, 1983: $$15 million stock offering June, 1983: 16% Debentures called.
The ADM Financings 6-82 Indenture prevents calls “from the proceeds, or in anticipation of, the issuance of any indebtedness... if... the interest cost or interest factor... is less than 16.08% per annum.”
ADM Questions 6-83 1.Why were the ADM debentures trading at $1,252.50 when Morgan Stanley bought them on May 5, 1983? Interest rates had dropped, so investors would settle for a lower yield, and pay a premium for these bonds. 2.Can you calculate the current yield on the bonds at this price?.
Current Yield on ADM 16s 6-84 Interest Payment $160. = 0.1278 Bond Price $1,252.50
ADM Questions 6-85 3.What is the call price on these bonds?
ADM Questions 6-86 3.$1,139.50 - above the face value, but below the current market value.
ADM Quesitons 6-87 4. Why do you suppose Morgan Stanley bought these bonds at such a premium? Morgan is a speculator, and must have been betting interest rates would go lower than 12.78%. Suppose rates fall to 8%. These were 30 year bonds.
Value of ADM Bonds if Interest Rates = 8% 6-88 Table 3-5 – 30 yr. annuity @ 8%: $160 (11.2578) = $1,801.25 Table 3-4 - Discounted for 30 yrs @ 8%: $1,000 (.0994) = 99.40 Total: $1,900.65
ADM Quesitons 6-89 5.What’s the purpose of prohibiting redemption from the proceeds of a lower-interest bond issue? To preserve some of the benefits of the bargain of a fixed-rate financing for the bondholders.
ADM Quesitons 6-90 6.This debenture indenture allowed redemption on 60 days’ notice beginning in 1981, with call premiums starting at 115% of par, and declining to nearly par in 2000. How can this be consistent with the prohibition at issue in this case?
ADM Questions 6-91 6.You can redeem at any time from other sources of funds, either stock sales, or perhaps sale of some assets. This preserves some flexibility for the issuer, in case it has surplus funds.
ADM Quesitons 6-92 7.Does the market price for the debentures support Morgan’s argument that there was a common understanding that this language didn’t allow redemption where a debtor had sold large amounts of new debt at lower interest rates?
ADM Quesitons 6-93 7.It’s pretty good evidence. Paying $1200 - $1252 for bonds redeemable at $1,139 is evidence that most investors don’t expect redemption soon. There are two possible explanations for this belief: –First, investors really did read the language the way Morgan claims. –Second, even if ADM could redeem, it might not. Typically issuers don’t redeem at the slightest drop in interest rates, but allow bondholders to get some benefit from their bargain. But ADM wasn’t just anyone – apparently it was more aggressive in its financing techniques than some issuers.
ADM Quesitons 6-94 8.How can you tell if the debentures were being redeemed “from the proceeds” of any lower cost debt? ADM had raised $86 million from the Stars just 90 days before, and $50 million from the zeroes in May 1982? The court accepts ADM’s argument, that if it can show a non-debt source of funds, then the new borrowings aren’t the direct or indirect source.
ADM Quesitons 6-95 9.What’s unclear about the redemption language? Not much. Here it is:
ADM Quesitons 6-96 Indenture prevents calls “from the proceeds, or in anticipation of, the issuance of any indebtedness... if... the interest cost or interest factor... is less than 16.08% per annum.”
ADM Quesitons 6-97 In granting summary judgment to ADM later on, the court described how hard it would be to find the “plain meaning” of the indenture language: “First, there is simply no "plain meaning" suggested by the redemption language that would imbue all the contract terms with a significant meaning. Either party's interpretation of the redemption language would dilute the meaning of at least some of the words-- either the "indirectly or directly," "in anticipation of" language, were we to adopt defendant's "source" rule, or the "from the proceeds," "as part of a refunding operation" language, were we to adopt the plaintiff's interpretation.” 570 F. Supp. at 1540-41.
ADM Quesitons 6-98 10.How can you tell if a redemption is from the proceeds of a particular financing? All money is fungible. In this case, the court simply requires that there be some possible alternative sources, such as the stock sales.
ADM Questions 6-99 11.The court points to Commentaries for support for this position. Do they really support it?
The Commentaries 6-100 “Instead of an absolute restriction [on redemption], the parties may agree that the borrower may not redeem with funds borrowed at an interest rate lower than the interest rate in the debentures. Such an arrangement recognizes that funds for redemption may become available from other than borrowing, but correspondingly recognizes that the debenture holder is entitled to be protected for a while against redemption if interest rates fall and the borrower can borrow funds at a lower rate to pay off the debentures.”
ADM Questions 6-101 12.How does the court find help in the structure of the redemption provision? From the general to the specific: The general language permits redemption. The specific prohibition only refers to redemption “from the proceeds” of lower cost debt.
ADM Questions 6-102 13.Morgan claims it’s not arguing that a debtor can never redeem when its new borrowings are at lower rates. What, exactly, is its argument? That the court should look at (1) the size of the equity financing, apparently compared to new low-cost debt financing, and (2) the proximity of these financings to the redemption.
ADM Questions 6-103 14.Why does the court reject Morgan’s suggested reading of this clause? Because of the uncertainty it would create. And uncertainty is worse for bondholders than ADM’s reading.
ADM Questions 6-104 15.ADM was borrowing at 16% and investing in risk-free government securities at lower rates. How could such a strategy make sense? There are two possible answers: (1) The court says that perhaps ADM just invested in Governments “as an interim holding until such time as ADM decided to employ such funds for other corporate purposes.” (2)Or ADM could have been involved in interest rate speculation:
ADM Questions 6-105 Buy long-term Treasuries & lock in high rates for 20 - 30 years. When interest rates drop, refinance the 16% debentures at rates below the yield on the Treasuries. Morgan argues that it’s just a speculation by ADM. If ADM buys treasuries with high interest rates and interest rates drop, it profits from the appreciation. And notice that ADM doesn’t have to pay the higher market price to redeem its debentures - just the call premium. The alternative is that ADM was just parking the money short term while it located investments. Given historically high interest rates, this was a terrible time to be borrowing long term unless you had a wonderful project right away. Parking the money suggests ADM didn’t have such a project.
ADM Questions 6-106 16.How badly did Morgan Stanley do with its investment? Morgan did pretty badly. It bought debentures at $1252.50 on May 3, 1983, and they were called at $1,139.50 on June 1. On the other hand, long-term investors who bought the bonds at the original issue price ($1,000 or close to it) got their promised interest for two years at 16%, and were then able to get a call premium of almost 14%. That’s nearly an extra year’s interest. “Instead of an absolute restriction [on redemption], the parties may agree that the borrower may not redeem with funds borrowed at an interest rate lower than the interest rate in the debentures. Such an arrangement recognizes that funds for redemption may become available from other than borrowing, but correspondingly recognizes that the debenture holder is entitled to be protected for a while against redemption if interest rates fall and the borrower can borrow funds at a lower rate to pay off the debentures.”
ADM Questions 6-107 16.How badly did Morgan Stanley do with its investment? Morgan did pretty badly. It bought debentures at $1252.50 on May 3, 1983, and they were called at $1,139.50 on June 1. On the other hand, long-term investors who bought the bonds at the original issue price ($1,000 or close to it) got their promised interest for two years at 16%, and were then able to get a call premium of almost 14%. That’s nearly an extra year’s interest.
ADM Questions 6-108 “Instead of an absolute restriction [on redemption], the parties may agree that the borrower may not redeem with funds borrowed at an interest rate lower than the interest rate in the debentures. Such an arrangement recognizes that funds for redemption may become available from other than borrowing, but correspondingly recognizes that the debenture holder is entitled to be protected for a while against redemption if interest rates fall and the borrower can borrow funds at a lower rate to pay off the debentures.”
What is a Covenant Strip 6-109 Company makes a tender offer for bonds. Condition of tender ist hat immediately before you tender you consent to an amendment of the indenture that deletes some or all of the covenants. Thus if you don’t tneder and enough to amend provision do you are left with a gutted indenture.
Katz v. Oak Industries 6-110 Oak had operating losses of $335 million 1982-85, leaving negative net worth of $62 million. Two Agreements with Allied-Signal: –To sell its Materials Segment for $160 million cash. –Allied will purchase $15 million in Oak common stock if at least 85% of all debt is tendered to exchange offers. Two classes of Exchange Offers: –Holders of 9% convertible notes offered 407 shares of stock for each $1,000 note. (Stock is trading at $2 - see n. 2) –All other classes were offered Cash Payment Certificates, payable out of proceeds of sale of Materials Segment. –All payments below face value but above market value - $655 to $918.
Katz v. Oak Industries 6-111 Barriers to Exchange Offers: –Covenants prohibit Oak from issuing any debt obligation in exchange for debentures. –§4.07 of 13.50% Indenture provides that Oak can’t acquire any 9% Notes or 11% Notes unless it concurrrently redeems a proportionate amount of 13.50% Notes. –Redemption would require payment of redemption price in indenture rather than lower exchange offer price. Solution: Get tendering bondholders to consent to amendments to eliminate these barriers. Further incentive: Get tendering bondholders to consent to elimination of financial covenants. So no rational bondholder would want to remain holding these weakened bonds.
Katz v. Oak Industries Issues 6-112 1.Does an offer for purposes of benefitting stockholders constitute a legal wrong? No. 2.Is an offer “coercive” because it provides incentives for all bondholders to tender? No. 3.Does this offer violate the covenant that Oak won’t vote bonds in its treasury? No. 4.Is Oak’s attempt to force all bondholders to tender a de facto redemption at prices below the redemption prices in the indentures? No
Vote Buying 6-113 Kass v. Eastern Airlines, Inc., 1986 WL 13008 (Del. Ch. 1986), aff’d, 518 A.2d 583 (Del. 1986) involved a solicitation by Eastern of its bondholders to relax certain covenants so it could make a payment to its shareholders. Eastern offered a cash payment or ticket vouchers to each consenting bondholder. Chancellor Allen rejected an argument that vote buying was against public policy, citing Schreiber v. Carney, 447 A.2d 17 (Del. Ch. 1982) holding that buying shareholder votes was unlawful unless there is a showing of fraud or an attempt to disenfranchise other shareholders.
Vote Buying 6-115 Chancellor Allen also rejected an argument that vote-buying wasn’t contemplated by the bondholders and thus this violates the implied covenant of good faith & fair dealing. “For example, had Eastern not made its offer to all bondholders on the same terms, but had it privately paid money to sufficient holders to carry the election, one would, without more, feel some confidence in concluding, provisionally at least, that such conduct was so inconsistent with the concept of voting implied by the amendment provision [of the indenture] that it constituted a violation of what must have been the reasonable expectation of the contracting parties.”
Trust Indenture Act – 1 6-116 Applies to all debt issues in excess of $10 million (by exempting those issued pursuant to an indenture for $10 million or less). Mandates use of an indenture for the issuance of debt. Indenture contents must be approved by SEC that they meet requirements of Act. Trustees must have capital & surplus of at least $150,000. Trustees may not have specified conflicting interests after default: –being a trustee under another indenture for the same debtor –being an underwriter for a debt issue of the same issuer –owning 10% or more of the debtor’s voting securities –holding other debt of the debtor that is in default Trustee must report to the bondholders annually concerning any change in its eligibility to serve as trustee, and the amount owed it by the debtor. Limits on the exculpation that may be given the trustee.
Trust Indenture Act – 2 6-117 Trustee must report to the bondholders annually concerning any change in its eligibility to serve as trustee, and the amount owed it by the debtor. Limits on the exculpation that may be given the trustee. In the event of default, the trustee must notify the bondholders. –and take such actions as a prudent person would take in the conduct of his own affairs. Regulation of the terms of the indenture concerning amendment: –The indenture can’t be amended to change rights to payment of interest, unless holders of 75% of debt consent, and interest can’t be delayed for more than 3 years. Any other limits on payment obligations require the consent of the holder (unanimous consent).
Trust Indenture Act, Sec. 310(b) -1 6-118 For the purposes of this subsection, an indenture trustee shall be deemed to have a conflicting interest if the indenture securities are in default... and-- *(1) such trustee is trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of an obligor upon the indenture securities are outstanding… * * * (2) such trustee or any of its directors or executive officers is an underwriter for an obligor upon the indenture securities; (3) such trustee directly or indirectly controls or is directly or indirectly controlled by or is under direct or indirect common control with an underwriter for an obligor upon the indenture securities; (4) such trustee or any of its directors or executive officers is a director, officer, partner, employee, appointee, or representative of an obligor upon the indenture securities, or of an underwriter (other than the trustee itself) for such an obligor who is currently engaged in the business of underwriting, * * *
Trust Indenture Act, Sec. 310(b) – 2 6-119 For the purposes of this subsection, an indenture trustee shall be deemed to have a conflicting interest if the indenture securities are in default... and— * * * (5) 10 per centum or more of the voting securities of such trustee is beneficially owned either by an obligor upon the indenture securities or by any director, partner or executive officer thereof, or 20 per centum or more of such voting securities is beneficially owned, collectively by any two or more of such persons;...; (6) such trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default... -- (A) 5 per centum or more of the voting securities, or 10 per centum or more of any other class of security, of an obligor, * * * (9) such trustee owns, on the date of default upon the indenture securities..., in the capacity of executor, administrator, testamentary or inter vivos trustee, guardian, committee or conservator, or in any other similar capacity, an aggregate of 25 per centum or more of the voting securities, or of any class of security, of any person, the beneficial ownership of a specified percentage of which would have constituted a conflicting interest under paragraph (6), (7), or (8) of this subsection.
Trust Indenture Act, Sec. 310(b) – 3 6-120 "Except in the case of a default in the payment of the principal of or interest on any indenture security, or in the payment of any sinking or purchase fund installment, the indenture trustee shall not be required to resign as provided by this subsection if such trustee shall have sustained the burden of proving, on application to the Commission and after opportunity for hearing thereon, that-- "(i) the default under the indenture may be cured or waived during a reasonable period and under the procedures described in such application, and "(ii) a stay of the trustee's duty to resign will not be inconsistent with the interests of holders of the indenture securities. The filing of such an application shall automatically stay the performance of the duty to resign until the Commission orders otherwise. "Any resignation of an indenture trustee shall become effective only upon the appointment of a successor trustee and such successor's acceptance of such an appointment."
TIA § 315 Duties and responsibility of the trustee 6-121 (a) Duties prior to default. The indenture to be qualified shall automatically be deemed... to provide that, prior to default (as such term is defined in such indenture)-- (1) the indenture trustee shall not be liable except for the performance of such duties as are specifically set out in such indenture; and (2) the indenture trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, in the absence of bad faith on the part of such trustee, upon certificates or opinions conforming to the requirements of the indenture;.... (b) Notice of defaults. The indenture trustee shall give to the indenture security holders,... notice of all defaults known to the trustee,... Provided, That such indenture shall automatically be deemed... to provide that... the trustee shall be protected in withholding such notice if... the trustee in good faith determine[s] that the withholding of such notice is in the interests of the indenture security holders. (c) Duties of the trustee in case of default. The indenture trustee shall exercise in case of default... use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs.
TIA § § 310(b) Default 6-122 (a) The indenture trustee shall be authorized-- – (1) in the case of a default in payment of the principal of any indenture security, when and as the same shall become due and payable, or in the case of a default in payment of the interest on any such security, when and as the same shall become due and payable and the continuance of such default for such period as may be prescribed in such indenture, to recover judgment, in its own name and as trustee of an express trust, against the obligor upon the indenture securities for the whole amount of such principal and interest remaining unpaid; and – (2) to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of such trustee and of the indenture security holders allowed in any judicial proceedings relative to the obligor upon the indenture securities, its creditors, or its property. (b) Each paying agent shall hold in trust for the benefit of the indenture security holders or the indenture trustee all sums held by such paying agent for the payment of the principal of or interest on the indenture securities, and shall give to such trustee notice of any default by any obligor upon the indenture securities in the making of any such payment.
TIA § 317, Special powers of trustee; duties of paying agents 6-123 (a) The indenture trustee shall be authorized-- – (1) in the case of a default in payment of the principal of any indenture security, when and as the same shall become due and payable, or in the case of a default in payment of the interest on any such security, when and as the same shall become due and payable and the continuance of such default for such period as may be prescribed in such indenture, to recover judgment, in its own name and as trustee of an express trust, against the obligor upon the indenture securities for the whole amount of such principal and interest remaining unpaid; and – (2) to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of such trustee and of the indenture security holders allowed in any judicial proceedings relative to the obligor upon the indenture securities, its creditors, or its property. (b) Each paying agent shall hold in trust for the benefit of the indenture security holders or the indenture trustee all sums held by such paying agent for the payment of the principal of or interest on the indenture securities, and shall give to such trustee notice of any default by any obligor upon the indenture securities in the making of any such payment.
Elliot Associates v. Henry Shroder 6-124 Centronics Data Computer Corp. had $40 million of 10% convertible subordinated debentures outstanding, convertible into common stock @ $3.25 / share. §3.01 of the Indenture required 50 day notice of redemption by Debtor to Trustee unless waived by Trustee. §3.03 required notice by the Debtor to debenture holders of at least 15 days but not more than 60 days. Debentures provided that upon conversion accrued interest for the semi-annual period was lost. March 12, 1986, Gordon of Centronics called Sievers of Schroder to indicate Centronics’ intention to redeem debentures. Gordon asked Sievers how much time Schroder would need once the SEC cleared its registration statement, and Sievers responded that Schroder would only need one week.
Elliot Associates v. Henry Shroder 6-125 March 20, 1986, Centronics’ board approved the redemption effective May 16, 1986. April 4, 1986, Centronics wrote Schroder of its intent to redeem on May 16, 1986. May 1, 1986, SEC cleared the registration statement, and Centronics gave notice to debenture holders. Centronics disclosed that conversion would yield more than redemption ($2,038 vs. $1,146). And that no interest would be payable on conversion, while accrued interest would be paid on redemption on May 16. All debentures were converted prior to May 16. The interest payment date was June 1. Interest lost because of early conversion was $1.2 million.
Elliot Associates v. Henry Shroder Issue 6-126 Did the Trustee breach a duty to the debenture holders in waiving the 50 day notice, which caused redemption before the interest was due? No.
Elliot Associates v. Henry Shroder Issue 6-127 Centronics literally complied with all the terms of the indenture. The indenture specifically allowed the trustee to waive 50 days’ notice. There is no implied duty to secure greater benefits for the debenture holders beyond the duties the Trustee expressly undertook. Trust Indenture Act § 315(a)(1) allows a provision in the indenture that the trustee shall not be liable except for breach of duties specifically set out in the indenture. –Congress rejected a general “prudent man” standard for the Trustee.
Elliot Associates v. Henry Shroder Issue 6-128 State common law treats the Trustee’s duties as creatures of contract. –The Trustee is a stakeholder with duties defined by contract. ABF Commentaries make clear that this notice is for the convenience of the Trustee, to give it time to handle redemptions, so Trustee can waive it. Bondholders were only entitled to 15 days notice (Indenture §3.03 )
Global Crossing Indenture, §5.2 6-132 Section 5.2 Collection of Indebtedness by Trustee; Trustee May Prove Debt. The Issuer covenants that (a) in case default shall be made in the payment of any installment of interest on any of the Securities of any series when such interest shall have become due and payable, and such default shall have continued for a period of 30 days, or (b) in case default shall be made in the payment of all or any part of the principal of any of the Securities of any series when the same shall have become due and payable, whether upon maturity of the Securities of such series or upon any redemption or by declaration or otherwise, then upon demand of the Trustee, the Issuer will pay to the Trustee for the benefit of the Holders of the Securities of such series the whole amount that then shall have become due and payable... and in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection,... In case the Issuer shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name as trustee of an express trust, shall be entitled and empowered to institute any action or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceedings to judgment or final decree, and may enforce any such judgment or final decree against the Issuer or other obligor upon the Securities and collect in the manner provided by law out of the property of the Issuer or other obligor upon the Securities, wherever situated, all the moneys adjudged or decreed to be payable.
Global Crossing Indenture, §5.4 6-133 Section 5.4 Suits for Enforcement. In case an Event of Default has occurred, has not been waived and is continuing, the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either at law or in equity or in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law.
Trust Indenture Act § 316 6-134 (a) The indenture to be qualified – (1) shall automatically be deemed (unless it is expressly provided therein that any such provision is excluded) to contain provisions authorizing the holders of not less than a majority in principal amount of the indenture securities or if expressly specified in such indenture, of any series of securities at the time outstanding (A) to direct the time, method and place of conducting any proceeding for any remedy available to such trustee, under such indenture, or (B) on behalf of the holders of all such indenture securities, to consent to the waiver of any past default and its consequences;” * * * (b)Notwithstanding any other provision of the indenture to be qualified, the right of any holder of any indenture security to receive payment of the principal of and interest on such indenture security, on or after the respective due dates expressed in such indenture security, or to institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such holder, except as to a postponement of an interest payment consented to as provided in paragraph (2) of subsection (a) of this section, and except that such indenture may contain provisions limiting or denying the right of any such holder to institute any such suit, if and to the extent that the institution or prosecution thereof, or the entry of judgment therein would, under applicable law, result in the surrender, impairment, waiver or loss of the lien of such indenture upon any property subject to such lien.
Global Crossing Indenture, §5.7 6-135 Section 5.7 Unconditional Right of Securityholders to Institute Certain Suits. Notwithstanding any other provision in this Indenture and any provision of any Security, the right of any Holder of any Security or Coupon to receive payment of the principal of and interest on such Security or Coupon on or after the respective due dates expressed in such Security or Coupon or the applicable redemption dates provided for in such Security, or to institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder.
Implied Rights of Action under the Securities Laws 6-136 Kardon v. National Gypsum Co., (1946) - 10b-5 action implied in tort. J. I. Case Co. v. Borak, 377 U.S. 426 (1964) -action implied for proxy fraud from jurisdictional provision, §28(a). Supt. Ins. of N.Y. v. Bankers Life & Cas. Co., 404 U.S. 6 (1971) - 10b-5 liability acknowledged in footnote. Cort v. Ash, 422 U.S. 66 (1975) - closer look at (1) protected class; (2) legislative intent; (3) consistency with purpose of act, and (4) whether a state remedy existed. Touche Ross & Co. v Redington, 442 U.S. 560 (1979) - private right for false broker filings with SEC rejected under ‘34 Act §17, rejecting Case v. Borak, questioning Cort v. Ash & emphasizing importance of Congressional grant of action. TransAmerica Mtge Advisers, Inc. v. Lewis, 444 U.S. 11 (1979), rejecting private right of action under antifraud provisions of Investment Advisers Act of 1940. Merrill Lynch v. Curran, 456 U.S. 353 (1982), 5-4 holding of private right of action under general antifraud language of Commodities Exchange Act, holding that Congress approved lower court grants of implied private rights of action by reenacting the statute w/o change.
Trust Indenture Act §315(d) 6- 137 (d) Responsibility of the trustee. The indenture to be qualified shall not contain any provisions relieving the indenture trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that-- (1) such indenture shall automatically be deemed... to contain the provisions authorized by paragraphs (1) and (2) of subsection (a) of this section; (2) such indenture shall automatically be deemed... to contain provisions protecting the indenture trustee from liability for any error of judgment made in good faith by a responsible officer or officers of such trustee, unless it shall be proved that such trustee was negligent in ascertaining the pertinent facts; and (3) such indenture shall automatically be deemed... to contain provisions protecting the indenture trustee with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the holders of not less than a majority in principal amount of the indenture securities....
TIA § 322(b), ’33 Act §22(a) & ’34 Act § 27 6- 138 Trust Indenture Act, § 322(b): (b) Jurisdiction of offenses and suits. Jurisdiction of offenses and violations under, and jurisdiction and venue of suits and actions brought to enforce any liability or duty created by, this title, or any rules or regulations or orders prescribed under the authority thereof, shall be as provided in section 22(a) of the Securities Act of 1933. Amendments: 1990. Act Nov. 15, 1990, in subsec. (b), inserted "or duty". Securities Act, § 22(a): The district courts … shall have jurisdiction of offenses and violations under this subchapter … of all suits in equity and actions at law brought to enforce any liability or duty created by this subchapter. Securities Exchange Act, § 27: “... the district courts... shall have exclusive jurisdiction of violations of this title...and of all suits in equity and actions at law brought to enforce any liability or duty created by this title...."
Capitalized Leases 6-139 Operating Lease: Company expenses rentals as and when paid but shows not liability (note SEC is requiring disclosure of Commitments and Contingencies in MD&A. Capitalized Lease is like buying an asset with secured debt financing. Legal, tax and accounting treatment not always consistent. Cap Lease asset comes on balance sheet as well as the PV of lease obligations. Interest element is expensed each year.
Securitization 6-140 May make borrowing available on better terms for some borrowers. General Credit Rating low but if SPE is bankruptcy remote rating on the securitized asset is higher.