LLM Law Outlines Corporate Bonds and Credit Agreement Outlines
Corporate Bonds and Credit Agreement with Kahan Spring 2019 ...
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C. Restricted Payments and Net Worth
Freeport-McMoran Indenture, Section 4.04
Petrohawk Indenture, Section 4.4
Alleco v. IBJ Schroeder, 745 F.Supp. 1467 (1989) (Part II) (review Alleco (I) for facts)
Northwest Note Agreement, Section 10.2
Newpage Credit Agreement, Section 6.5(a), (c), (e)(2), (h), (k), 6.7
Restricted Payment Covenant
Limitation to Co. on transactions that constitute outflow of assets
Company’s outflow of asset is limited: only outflow if there is sufficient inflow
3 components
Definition of outflow/ restrictive payment
Traditionally outflows of value from the Company to its shareholders without anything in return that is of value to creditors
Cash dividends to company shareholders (except stock dividends)
How about stock dividend? Outflow for shareholders; but not an outflow value
Wholly-owned Sub paying dividend stays within the company
Purchase of stock by company
Company’s own stock doesn’t worth any to the company
Purchase of stock by sub
If wholly-owned sub buys stock from co. payments within corporate family no change
Partial (e.g. 75%) owned sub 75% goes to co.; 25% goes to outside party not outflow
Economically, creditors only own 75% of the $100 they were owe 75% of the 100% now have 100% claim to the $75 left
Expanded to include
Certain payments on subordinated debts
If debt subordinated to you (more senior) treated as an outflow
Certain investments
E.g. Freeport 4.04:
(a) Restricted payments include “dividend, purchase of stock of company, payments to subordinated debt, investments”; Conditions: no default, incur $1 indebtedness, pot test (4 components)
(b) Not prohibit
Conditions for making RP, when RP is satisfied:
Pot condition
“Inflows” (such a profits, sale of equity)
Restricted Payments are “outflows”
RPs are only permitted if there is enough money left in pot, i.e. up to the limit of All prior inflows LESS All prior outflows
Permitted to incur additional $1 indebtedness under debt restriction covenant
No default
Special rules
Outflow that are permitted, despite insufficient money in the pot
But still affects co’s future ability to make restricted payments
Outflow that are not prohibited and do not count as outflow
Problem Set #10
1. Which of the following actions results, from the perspective of creditors, in a outflow of valuable assets from the company to its shareholders? In which actions does the Company receive valuable consideration from the perspective of creditors? What is the net effect?
(a) Company pays a cash dividend;
outflow, nothing of value in return
(b) Company repurchases its stock for cash;
outflow, nothing of value in return (Company stock has no value to Company
creditors)
(c) Company purchases stock of a subsidiary for cash;
outflow, value in return (Subsidiary stock has value, e.g, if purchases raise
Company’s % stake in subsidiary)
(d) a subsidiary of Company pays a cash dividend;
no outflow if dividend goes to Company or is proportionate
(e) a subsidiary of Company purchases Company stock for cash;
outflow, nothing of value in return (Company stock has no value to Company
creditors)
(f) a subsidiary of Company purchases its stock for cash;
outflow, value in return (Subsidiary stock has value)
(g) Company pays a stock dividend;
no outflow, at least if Common Stock
(h) Company purchases its stock in exchange for stock of another class;
no outflow, at least if paid with Common Stock
(i) Company purchases its stock in exchange for stock of a subsidiary;
outflow, Subsidiary stock has value
(j) Company sells common stock in a public offering;
inflow
(k) Company sells common stock to a subsidiary.
No inflow
Problem Set # 11
1. How do the following actions affect the ability of Company to make Restricted Payments? (Answer with respect to company noted in brackets.)
(a) On January 2, Company issues $50 million of Common Stock. On June 2, Company repurchases these stock for $50 million. [Freeport-McMoran]
Kahan: inflow 1/2; outflow 6/2
Issuance of redeemable convertible preferred Stock inflow
Does it count? 3(B) Issue of common stock and repurchase fits under (B) “the aggregate Net Cash Proceeds received by the Company from the issue or sale of its Capital Stock (other than Disqualified Stock) subsequent to the Closing Date (other than an issuance or sale to (x) a Subsidiary of the Company or Q an employee stock ownership plan or other trust established by the Company or any of its Subsidiaries)”
Repurchase of Stock outflow under the Indenture
Does it count? 4.04(a)(ii) The Company shall not, and shall not permit any Restricted Subsidiary, directly or indirectly, to (ii) “Purchase, repurchase, redeem, retire or otherwise acquire for value any Capital Stock of the Company or any Restricted Subsidiary held by Persons other than the Company or a Restricted Subsidiary”
Prof: note this is drafted overbroadly but to draft overbroadly is less problematic than too narrowly prevent company to abuse the loophole (esp. since bondholders are not organised)
(b) Same as (a), except that stock is sold and repurchased from a subsidiary. [Petrohawk]
Kahan: no inflow 1/2; no outflow 6/2
Economically all these transactions don’t change anything net affect is zero
This constitutes 4 transactions
Issuance of Stock to sub
Company selling stocks to sub inflow for co.? No
4.4(a) Company shall not (i) pay any dividend…
But not an inflow under (3)(B) 100% of net cash proceeds received by the Company from the sale of Equity Interest stocks sold to subsidiary
(3)(B) “other than Disqualified Stock” [same in Freeport]
Disqualified Stock means stocks that is mandatorily redeemable
Rationale: equity that may disappear, junior debt that is paid out before you would in effect be senior
Sub buying stock from company outflow for sub? No
4.4(a)(2) “other than Equity Interests owed by the Company”
Repurchase of Stock from Sub
When co. repurchases...
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Corporate Bonds and Credit Agreement with Kahan Spring 2019 ...
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