Interest Rate And Maturity Monetary Terms Outline

02. Monetary Terms

A. Interest Rate and Maturity in Indentures

• Material: Problem Set 1

  • UCC Section 8-202

  • Freeport-McMoran Indenture, 2.12, 4.01, 11.08, Exhibit A, Section 1 and 2

  • BMS Indenture, Section 2.14, Exhibit A, Section 1

  • Lennar Indenture, Section 2.12

  • Petrohawk Indenture, Section 11.07, 4.01, Exhibit A, Section 1

  • BMS Indenture, Section 2.14, 15.13, Note, Section 1 and 4

• UCC 8-202 “the terms of a security include … those stated on the security ... and those made part of the security by reference ... to another instrument, indenture or document … to the extent that the terms referred to do not conflict with the terms stated on the certificated security”

Problem Set #1

1) On what days does Freeport-McMoran have to pay interest? How much interest is due?

• Exhibit A [Front side of initial security]

  • Semiannually on Feb 1 and August 1 of each year

  • Interest accrue from most recent date to which interest has been paid, or duly provided for or, if no interest has been paid/ duly provided for, from Jan 29, 2003 to principal is due

• Exhibit A [Reverse side of initial security]

  • s.1(a) Interest: “company shall pay interest semiannually on Feb 1 and August 1 of each year”

• How much interest rate? 10(1/8)% per year on Feb 1 and Aug 1

  • Option 1: 10(1/8)% divided by 2 = 10/16%

  • Option 2: 181 and 184 days multiply no. of days/ 365 (or 366)

  • Here, s.1(a) “Interest shall be computed on the basis of a 360-day year of twelve 30-day months” 180 days in each period so both options would get the same amount (easier to administrate, simpler)

1. What if an interest payment date falls on a Sunday? What does the Indenture provide? What does the Security provide? Are the provisions identical? If not, do they conflict?

   • Indenture: section 11.08 Legal Holiday - if payment date is a legal holiday (Sat/ Sun/ Public holiday), payments shall be made on the next succeeding day that is not a Legal Holiday, and no interest shall accrue.

   • Security: Feb 1 and Aug 1

   • UCC 8-202: terms of security (debenture/ note) include those stated on the security (section 1 on Interest) and those made part of the security by reference to another instrument, indenture or document (an indenture in this case) to the extent that the terms referred to do not conflict [terms of indenture cannot conflict terms of security]

     • Is there a conflict between Indenture and Security?

       • Minor conflict (1-2days) between indenture and security, and indenture makes more sense (but security prevails) not good drafting

     • But here, the Security s.4 “The Securities are subject to all terms and provisions of the Indenture” if conflict, indenture prevails Kahan: don’t think you can do that, UCC reflects the notion that the bondholders (owners) are given the certificates – and there should not be any conflicting terms on that. Nowadays, people pay insufficient attention to security, without realizing that Security may trumps Indenture

2. How is the case of a payment date falling on a Sunday handled in the Petrohawk indenture? What does the Security provide? Are the provisions identical? If not, do they conflict?

   • Security s.1: if any such day is not a Business Day, on the next succeeding Business Day

   • Indenture s.11.07: Legal Holiday is a day that is not a Business Day. If payment date is a Legal Holiday, payment shall be made on the next succeeding day that is not a Legal Holiday and no interest shall accrue for the intervening period.

     • s.1.1: Business Day means any day other than a Saturday, Sunday or other day on which commercial banks in New York…

   • No conflict between indenture and security here

3. If payment is not made on the regular interest payment date because it falls on a Sunday, are interest payments on date or other payment dates adjusted?

   • What about amount of payment - more interest or same interest?

     • Same interest: to have twelve 30 days a year is to simply the calculation of interest and adjusting interest payment would complicate the calculation.

     • Same amount whether both/none is adjusted for the purpose of simplicity, shouldn’t adjust

     • Assuming you can more interest on Feb 3 on Aug 1, you would get a lower interest rate payment provision on both days have to correspond to each other: either make no adjustment to both, or adjustment to both

Compare the report Freeport-McMoran and the Petrohawk indentures.

• Freeport: s.11.08 No interest shall accrue for the intervening period

  • i.e. If interest paid on Feb 3, no interest accrue between Feb 1 and Feb 3

  • On Aug 1: you get 6 months (and not 6 months minus 2 days)

    • Security s.1(a) “Interest on the Securities shall accrue from the most recent date to which interest has been paid”

    • “To” = period up to which interest has been paid; vs. “on” = Feb 1

    • Don’t adjust Feb 1 nor Aug 1 payment

• Petrohawk: s.11.07, Security s.1

  • same structure interest amount would not change/ no adjusting

  • “interest accrue from the most recent date to which interest has been paid”

  • “no interest accrue for the intervening period”

4. How is the issue if adjustment to the interest payment because the payment date falls on a Sunday handled in the BMS indenture?

• Under Security section 1, the “interest has been paid… subject to Section 15.13… interest on this Security shall be calculated on the basis of a 360-day year and the actual number of days elapsed during the related Interest Period.”

  • c.f. “360-day year and twelve 30 day months” need not count the no. of days

    • interest payment date is always the same day of the month

    • if you do not make an adjustment because the interest payment date is delayed, benefit of simplicity (twelve 30 day month + no adjustment)

  • “360-day year and actual number of days elapsed = If interest rate is 5%: get 5 days extra of interest (needs adjustment) no simplicity”

    • no. of days in interest period 360/4 = 90 days (c.f. actual days: 92 days)

    • no. of days 360 (c.f. actual days: 365 days)

• Indenture section 15.13 Legal Holiday and Security section 4 “if any Interest...

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