Liability Management Transactions Accelerate Amid Pandemic

By Tom Zanki
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Law360 (May 14, 2020, 5:51 PM EDT) -- As coronavirus-related economic turmoil stresses corporate balance sheets, more companies are conducting what are called liability management transactions, a less glamorous but critical part of capital markets legal work that can help businesses ease financial pressures during a crisis.

Capital markets lawyers say an increasing amount of their workload is dedicated to advising liability management transactions these days, which is standard during a downturn and more so now given the disruption caused by the pandemic. Such transactions do not generate headlines like glitzy initial public offerings or massive debt deals, but they are crucial to corporate finance.

"It's definitely closer to 50%, which is not the typical mix," said Simpson Thacher & Bartlett LLP partner Marisa Stavenas, who regularly works on international capital raising and restructuring transactions, in describing the time dedicated to liability management transactions.

Liability management is an umbrella term for debt or equity restructuring transactions that companies pursue in order to gain more breathing room financially. Debt deals tend to be larger and are more prevalent now. The deals can include extending maturities on debt agreements in exchange for certain enticements provided to bondholders, among other things.

Distressed companies may conduct liability management transactions to stave off bankruptcy, while healthier businesses may pursue such deals to take advantage of changing interest rates or market conditions. Companies can also gain flexibility by modifying existing covenants with their bondholders, although that requires approval from investors through a consent solicitation.

Tender offers and exchange offers are among the most common forms of liability management transactions. Tender offers are a form of refinancing where companies retire their debt early by repurchasing bonds from their holders. Exchange offers don't rely as much on cash. Instead, a company gives investors the opportunity to exchange their holdings for another set of securities.

If debt exchange offers are structured correctly, lawyers say such deals can benefit investors by providing new bonds with appealing terms, albeit at later maturities, while the company wins a reprieve from looming principal payments.

"It gives the company an ability to focus more on its core mission, to get, or stay, financially healthy," said Simpson Thacher partner Art Robinson.

To win over bondholders, companies might offer them a chance to replace existing bonds that have fallen as a result of recent turmoil with newly issued bonds that trade at better value. Companies may also offer bonds that pay a higher coupon, or interest rate, or may also offer their holders secured bonds backed by collateral in exchange for unsecured bonds.

Offering investors secured bonds to replace unsecured bonds — a process called "up-tiering" — can placate holders who will now own bonds with a later maturity. Secured bonds provide their holders with higher priority in the event of a bankruptcy.

"The idea is you are moving to a higher tier in the capital structure," said Shearman & Sterling LLP partner Harald Halbhuber.

Such transactions could appeal to companies with lower credit ratings that have fewer avenues to raise new capital. When markets for new offerings are less friendly, debt exchange offers can help companies free up cash by retooling their existing balance sheets.

"The beauty of an exchange offer is that it is essentially new money provided by existing holders, who are already invested stakeholders," Stavenas said.

Companies across many industries are pursuing liability management transactions amid the pandemic, although some sectors have been hit harder than others. Oil and gas companies are facing a double whammy of the coronavirus outbreak plus geopolitical waves that are hurting oil prices.

"We have seen a lot of activity from oil and gas companies doing exchange offers," Shearman & Sterling partner Merritt Johnson said.

Oil and gas companies are pursuing cash tender offers as well. Pioneer Natural Resources Company on Tuesday announced a $500 million cash tender offer to buy back $500 million in outstanding debt, including notes that were paying 7.2% interest and set to mature in 2028.

Cash tender offers enable companies to better manage their debt, albeit differently than exchange offers. By repurchasing bonds ahead of maturity, companies can save on interest costs. Halbhuber said companies need to repurchase debt at an attractive price in order to persuade bondholders, who are giving up interest payments they were otherwise entitled to.

But unlike exchange offers that are securities-based transactions, tender offers require companies to come up with a large sum of cash, a valued commodity during a downturn that companies might want to conserve. Creditworthy issuers with access to capital markets sometimes raise cash through new bond offerings and use the proceeds to fund cash tenders.

ViacomCBS on Tuesday completed a $2 billion cash tender offer to buy back near-term debt from its bondholders. That same day, Viacom CBS sold $2 billion in newly issued bonds with later maturities in order to fund the tender offer.

Given economic uncertainty for the foreseeable future, capital markets attorneys don't expect liability management work to ease up anytime soon.

"As the range of types and circumstances in which liability management transactions are used is quite broad, I do think we'll continue to see a large number of these deals and that the types and structures will continue to expand," Stavenas said.

--Editing by Jill Coffey.

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