Exchange offers can address maturing bond debt: with insufficient corporate cash to repay maturing debt-and few, if any, opportunities to issue new debt-many issuers are looking at exchange offers to capture some of the discount at which their debt might be traded or quoted.

• Author: Goodison, Eric
• Position: FINANCING

One of the hallmarks of the debt capital markets in recent years has been that a bond issuer could assume it would not have to repay its maturing debt out of corporate cash flow or asset sales.

The debt markets would allow the issuer to continually refinance maturing debt with new debt. Often, that refinancing could be done on more favorable covenant and economic terms for the issuer.

But the global collapse of the credit markets during the past year has eliminated the refinancing option for most issuers. Credit markets, for all but the most credit-worthy entities, remain virtually frozen and issuers with maturing debt face the looming prospect of default.

Indeed, issuers may not be the only parties for whom a default is not an economically attractive outcome. Though bondholders want to be paid at par in cash at maturity, they may also want to avoid a maturity default. Reasons for this include avoiding the costs imposed on the issuer, avoiding the risk of value destruction as a consequence of such default and avoiding the delay that a bankruptcy can involve with an uncertain outcome.

Accordingly, with insufficient corporate cash to repay maturing debt and few, if any, opportunities to issue new debt, many issuers are looking at exchange offers as a way to address maturity issues. Issuers are also looking at exchange offers as a way to potentially capture some of the discount at which their debt might be trading or quoted.

Successful Offers

An exchange offer will only be successful if it is agreed to by enough of the issuer's bondholders. Bondholders will only agree to an exchange offer if they believe it will yield a better result for them than the alternative, which could include bankruptcy. The ability of any issuer to complete a successful exchange offer will depend on the unique facts and circumstances of that issuer.

They include: its capital structure; the specific terms of all of its debt documents (not just the agreements governing the debt to be exchanged); its projected performance and the ability to comply with the terms of the exchanged debt; and its other outstanding debt and the nature and mix of its bondholders.

The rationale to accept an exchange offer is that the bondholder would be better off accepting the offer than turning it down. It is important that the exchange include attractive terms, however, because bondholders cannot be compelled to accept. There are numerous elements of an exchange offer (both in the form of...