90 Second Lesson: What is an Exchange Offer?

Why a Distressed Company May Make an Exchange Offer During Financial Restructuring

Question:

Fred T. asks: “I own securities of a company and heard on the news that [the company] is contemplating doing an ‘exchange offer’. What is an exchange offer?”

In this quick lesson, we will discuss distressed exchange offers.

Answer:

An exchange offer is one way a company can complete an out-of-court restructuring. And, for a distressed company that has public debt, it may be the only way to accomplish that.

A distressed exchange offer is a type of debt tender offer that requires documentation and registration like any other issued securities. Unlike a cash tender, however, in which a distressed company decides to purchase its outstanding debt securities at a discount, a distressed exchange offer allows a company without access to cash the ability to “purchase” outstanding debt securities in a different way. The company does so by offering and issuing its shareholders new debt or equity securities—which may be heavily discounted—in exchange for its outstanding debt securities. Where corporate bonds are being exchanged, the new securities typically comprise securities with a lower priority, such as equity.

Incentives or appealing terms on the new securities may also be used to persuade holders to take the offer. “Early taker” premiums, minimum conditions and other methods of making the new securities more attractive are often used.

As with any financial restructuring, the primary goals are to:

• Reduce corporate leverage (deleverage)
• Minimize near-term debt service
• Extend debt maturities

In a nutshell, an exchange offer is a liability management tool for distressed companies restructuring their debt.

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1. Dealing with Corporate Distress 07: Chapter 11 is Not Always the Answer: Strategic Alternatives For and Against Distressed Businesses
2. Dealing with Corporate Distress 15: Digging into DIP Financing & Cash Collateral Motions in Bankruptcy
3. Third-Party Litigation Funding (TPLF) and Ethical Issues In Bankruptcy

[Editors’ Note: This 90 Second Lesson is based, in substantial part, on material reprinted from Commercial Bankruptcy Litigation 2d and Strategic Alternatives For and Against Distressed Businesses, with permission of Thomson Reuters. Both books are written for a primary audience consisting of people who are not bankruptcy specialists. This is part of our irregular series in which we answer readers’ questions. If you have a question, submit it to [email protected], and we will try to answer it.

To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can watch at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Securities Law Compliance
2. Help, My Business is In Trouble!
3. Roadmap to Growing Your Business by Acquisition

This is an updated version of an article originally published on August 5, 2019 and previously updated April 16, 2021]

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