Another Chance to Learn the Eurobond Restructuring Lesson?
Andriy NIKIFOROV
Senior Associate, Baker & McKenzie (Kiev)
PROfile
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Kiev office.
Baker & McKenzie was the first international law firm to open an office in Ukraine in 1992. The Kiev office of Baker & McKenzie offers a full range of legal services and business solutions. The professional staff of the office presently consists of about 50 attorneys, including 10 partners.
To assist our professional staff, the office maintains a complete support staff including a full-time translation department, paralegals, and a research and information unit, which includes a library.
The Kiev office was ranked among the leading foreign law firms in Ukraine by Chambers Global, Legal500, IFLR, Ukrainian Law Firms: A Handbook for Foreign Clients (2005-2014 editions), TOP-50 Law Firms by Yuridicheskaya Practika Publishing, World Trademark Review, International Tax Review, among others.
The principal practice areas of the Kiev Office include:
— Antitrust & Competition;
— Banking & Finance;
— Corporate, including Mergers & Acquisitions and Securities;
— Compliance;
— Dispute Resolution;
— Employment and Migration;
— Intellectual Property;
— International Trade;
— IT and Communications;
— Major Projects and Project Finance;
— Pharmaceuticals and Healthcare;
— Real Estate and Construction;
— Tax and Customs.
Ukraine’s first financial crisis as an independent country in 1998 did not lead to any corporate Eurobond restructurings for the simple reason that no Ukrainian bonds had been issued in the international capital markets, but prompted a sovereign bond restructuring. Many Ukrainian corporate Eurobond issuers learnt the vocabulary of debt restructuring following the financial crisis that began in 2008. Those companies that weathered the credit crunch of 2008 nevertheless faced a sharp decrease in international investors’ appetite for Ukrainian bonds in 2013. On previous occasions, these issuers could generally refinance their bonds, whether at maturity or through a tender offer as MHP and DTEK did in spring 2013. But this option ceased to be available later in 2013 and today even the strongest Ukrainian companies have had to enroll in the complete foreign securities liability management course.
Liability Management Vocabulary
A Eurobond liability management exercise may have broadly similar objectives to any other debt restructuring: to reduce debt, extend maturity and/or amend the terms by easing or stripping out restrictive covenants, or simply take advantage of market conditions to refinance more cheaply. However, because of the large pool of creditors and the difficulty in identifying all of them (since bonds are generally held through the clearing systems), the restructuring toolkit is somewhat specialized. The popular techniques that are used for a liability management exercise involving a bond issued in the international capital markets are most commonly referred to as a (cash) tender offer, exchange offer and consent solicitation. Depending on its financial condition and objectives, and conditions in the capital markets, an issuer may choose to apply any of them on a stand-alone basis, or combine a tender offer or an exchange offer with a consent solicitation.
A cash tender offer assumes that an issuer offers bondholders the opportunity to tender bonds for cash consideration. A tender offer will not bind non-consenting bondholders to tender; therefore, the offer would likely include a cash payment at a premium to the price at which the relevant notes are currently trading. It is also common for tender offers to be conditional on certain minimum acceptance levels (e.g., 90%), and to be structured in such a way that the offer is to purchase “any and all” or “up to” a specified amount of the bonds. In addition, an “early bird” fee may be offered to incentivize bondholders to tender early.
An exchange offer is an offering of new notes in exchange for existing ones. Similar to tender offers, exchange offers are consensual and do not bind the bondholders to the exchange, therefore, a successful exchange strategy is always about balancing “carrots” and “sticks” for investors. There is no universal exchange offer formula, and transactions may differ quite significantly. The new notes offered for exchange will always at least in the short run impair the position of the holders in some respect, therefore, a meaningful consideration of the impact on investors is important. Although liquidity is important to the capital markets, there are multiple levers at the disposal of the issuer that can be used to incentivize acceptances, such as guarantees from operating companies of the issuer’s group, collateral, equity (whether in the form of shares or warrants for shares) and structural seniority. As is the case with tender offers, it is not uncommon for exchange offers to be conditional on high minimum acceptance levels and have incentives, including the “early bird” fee.
Neither a tender offer nor an exchange offer are binding upon non-consenting bondholders. As such, to further incentivize holders to accept the offer, such offers may be accompanied by a consent solicitation to amend the covenants of the existing bonds (known as “exit consent”). Bondholders who accept the tender or exchange offer will be automatically deemed to have consented to vote in favour of a resolution to allow the issuer to redeem the existing bonds ahead of their stated maturity or to amend the terms of the existing notes (e.g., by removing many of the covenants and events of default). If a sufficient number of consents are obtained under the terms of the bonds, then they will be binding on the non-accepting holders of the remaining bonds, subject to the considerations below. If done outside of the tender offer or exchange offer process, a consent solicitation would be aimed at changing both payment terms and covenants of the bond.
In addition to the foregoing, the issuer may also consider opportunistically repurchasing its Eurobonds in the open market provided that it has liquidity and the notes are trading at a discount to their face value.
Key Legal Сonsiderations
The legal analysis of a particular liability management exercise depends, in the first place, on the terms and conditions of the document which constitutes the Eurobond subject to restructuring and the governing law of such document. In relation to the bonds issued in the global capital markets by Ukrainian companies, the document constituting the notes would typically be either a trust deed governed by English law or an indenture governed by the New York law. The concepts of tender offer, exchange offer and consent solicitation have developed over a period of time based on market practice but also on principles contained in case law and regulation. There are also jurisdictional restrictions on public offers of securities and financial promotions and these need to be thought about carefully depending on where bondholders are located; the issuer will need to balance the need to maximize the number of acceptances, to treat bondholders equally and to avoid infringing applicable securities laws in various jurisdictions.
Since the tender offer and exchange offer are consensual processes, the primary legal risks that issuers face tend to be related to consent solicitations. Under English law in particular, consent solicitations can be challenged and may be overturned if they constitute an oppression or intimidation of minority bondholders by the majority. Similarly, while some incentives can be given for bondholders to consent through a mixture of “carrots” and “sticks”, excessively aggressive treatment of non-consenting bondholders, such when the threat is of a “scalping” rather than a “haircut”, is suspect and can be a basis for a successful noteholder claim. Many Ukrainian Eurobonds have US holders. Material amendments to the existing bond (e.g., extending the maturity or reducing amounts of principal or interest) through a consent solicitation may theoretically constitute an offer of new securities under the applicable US securities laws and, therefore, require registration in the US, absent an exemption. In addition, where bonds are held by US holders and a tender or exchange offer is made to those holders, US tender offer rules may apply. Among other things, the US rules generally require the issuer to keep the offer open for a minimum of 20 US business days and extend it for at least a further 10 business days if it changes the offer price or amount or makes certain other material amendments. The issuer should disclose the number of acceptances received to date if it extends the offer period and it must pay each holder the same as every other holder. US tender offer rules consideration may be an item number one on the agenda for the banks as it has a big impact on the timetable and process of the liability management exercise. The regulations are less stringent where US holders have less than 10% of the bonds.
Some issuers seek to exclude participation by US bondholders to avoid US legal restrictions, although it is best to give each bondholder an opportunity to participate in the consent process for the reasons described above. An issuer could also require US bondholders to participate in person rather than through clearing systems, such that all consents submitted through the clearing systems are from non-US bondholders and it is otherwise unlikely for US bondholders to participate in person. It is then necessary to ensure that approval levels through the clearing system are sufficiently high to clear the voting thresholds even without counting US bondholders that turn up in the room. Alternatively, the issuer could comply with the exemption envisaged by Rule 802 of the US Securities Act of 1933, which may be relied on if less than 10% of bondholders are US persons. This would require the issuer to conduct due diligence through a third party adviser to “look through” the record holders of the relevant notes, but also to file an application to the US Securities and Exchange Commission that must include the offering document. As hard as it may seem at first sight, Alfa-Bank Ukraine gave preference to this third option as part of the exchange offer and consent solicitation it launched in July 2009, the first use of Rule 802 in Europe.
In July 2012 an amendment to the Prospectus Directive 2003/71/ EC came into effect. Among other things it resulted in a change to the minimum denominations. For listed Ukrainian Eurobonds that are mostly denominated in US dollars, the minimum denominations changed in most cases from USD 100,000 to USD 200,000 in order to qualify as “wholesale debt” and avoid more onerous disclosure requirements. This poses a risk that, in case of a successful exchange offer for Eurobonds issued in smaller denominations, bondholders with less than USD 200,000 would have to be cashed out unless the new bonds are structured as retail bonds.
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On 19 September 2014, the Banking and Finance Committee of the Verkhovna Rada of Ukraine prepared a Bill on Amendments to Certain Legislative Acts of Ukraine on Securities No. 2072 for its second reading in Parliament. The Bill is quite detailed in terms of how a post-default restructuring should be conducted but confines the liability management exercises prior to an issuer's default to amendment of the terms of the bonds. The standards and practices that have developed in the global capital markets may be useful to the parliamentary draftsmen in giving the Bill a more comprehensive shape.