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Covenants Asset Sales Outline

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IV. Covenants - G. Asset Sales
G. Asset Sales
Freeport-McMoran Indenture, Section 4.06
Northwest Note Agreement, Section 10.4
Newpage Credit Agreement, Section 6.9 lead-in and (b), (c)
Energy Corp. of America v. MacKay Shields LLC, 2003 U.S. App. Lexis 25230 (P. #1)
Definition of Asset Sale [17/04 13:33]
- 2 conditions under s.4.7:

1. Requirements as to consideration: cash, term

receive at least fair amount of value + have to be in cash

2. Requirements as to use of proceeds: Reinvestments, Repayments

reinvest in the same line of business, repay other debts, and excess proceeds must make offer to buy back bonds for par
Purpose of Covenant
- Perhaps purpose is asset continuity

Similar to Merger and Sale of Substantially All Assets
- Perhaps purpose is to regulate speculation

Similar to Investment restriction in RP covenant

Query: What uses of proceeds are NOT permitted?-Definition often excludes sale of "substantially all" assets, see Petrohawk definition

1. "Substantially all assets" governed by 5.1  not cumbersome to comply
 [c.f. Lennar: substantially all assets is governed by 5.1]

2. Less than substantially all asset  4.7 "Sale of asset, except for sale of all substantially all of the assets of the Company"
 [c.f. Lennar: less than substantially all asset  not governed]
o 4.7 often more burdensome than 5.1  company would want to argue an asset sale is substantially all asset to avoid 4.7 conditions
 Depends on whether provision like 4.7 provides bondholder with rights and co. obligations on sale of assets (interest shift)
 Also, "substantially all" is a vague term
Company has to use cash for certain purposes (e.g. reinvest, pay debt, make an Offer) 
subject to restrictions:
o Restricted Payment Covenants: which restrict Company to pay dividend to shareholders, share repurchase, investments

Business Activities 4.10 "Company will not engage in business other than Oil and Gas Business, unless immaterial"
o Restrict co. from re-borrowing under ratio test after repayment
Why require fair terms on transaction with non-affiliate?
o Atypical for 4.7(a)(1) to require "at least equal to the Fair Market Value"

Functions of quantitative threshold incorporated in this covenant (rules of integration, whether we need to worry about excess or entire amount when exceed threshold)
- Petrohawk 4.7(c) $20M; Definition of "Asset Sale" (1)(a) $2M
- Freeport: 1M disposition of asset with Fair Market Value; 4.06(a) $50M, (b) $10M
1 IV. Covenants - G. Asset Sales

Asset Sale Covenant

1. Thresholds

2. Relation to Debt Covenant
Freeport 4.06
- Consideration: fair market value, 85% of consideration in cash,
- Use of Proceeds (a):
1) applied to pay debt under credit facilities,
2) reinvest additional assets,
o Additional Assets, Permitted Business 3) make an Offer,
o i.e. send notice to bondholder holder on their exit right (to sell bonds to company for par)
4) any general corporate purpose permitted: can include anythingThresholds for what constitutes an Asset Sale: Proviso [PS 15, Q3]
o Have to specify what happens if you exceed the threshold - whether apply to the excess, or the entire amount:
 Rationale of the exception: "de minimis" too small to bother (c.f. "freebies"
co. permitted to play around certain amount of money)
 Since it is de minimis  wants to impose requirement on the entire amount
(or would defeat purpose of the exception)
 Should use phrases like "to the extent that" "in the excess of"

1. $50M (a) co. can do whatever it wants
 Rationale: "freebie" exception
 Rule of aggregation: "…to the extent that the aggregate Net
Available Cash from all Asset Deposition that is not applied in accordance with s. 4.06(a) exceeds $50M"
 What if threshold exceeded: Only apply to the excess of $50M

2. $10M (b) no need to make offer if amount available is less than 10M
 Rationale of the threshold: "freebie" exception
 Rule of aggregation: "Any amount would be carried forward"  aggregate
 What if threshold exceeded: Only apply to the excess

3. $1M under definition of "Asset Disposition" = (series of related sales, leases,
transfers or dispositions), dispositions, restricted payment permitted in 4.04, less than
$1M (aggregate if related intercompany, not aggregate if related)

4.06 "For the purpose of this Section 4.06, the following are deemed to be cash"  Prof: bad drafting, should put in definition: reduction of debt =
cash, permitted use



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