Actionable Ideas for Companies and Sponsors

Debt-for-Equity Exchange Offers in Restructurings

While debt-for-equity conversions can be accomplished through a Chapter 11 process, given the increasing direct and indirect costs of restructuring pursuant to Chapter 11, a growing number of companies are evaluating their ability to consummate an exchange offer outside of a bankruptcy.

There are several important considerations in utilizing exchange offers to complete out-of-court debt-for-equity conversions, including: (i) a very high acceptance rate (e.g., 95%) among bondholders is usually required, as most debentures in the United States have no collective action clause to drag along dissenters; (ii) the change of control provisions as exchanges can be very dilutive and trigger change of control provisions in the company’s debt instruments; (iii) potential tax liability as the exchange may result in cancellation of debt income which can result in a significant tax payment; (iv) the company must have a clear runway going forward, with respect to both liquidity and other debt maturities, in order to be attractive for creditors to relinquish debt claims in exchange for equity; and (v) the company must have enough authorized but unissued shares in order to complete the exchange.