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; and
• extend debt maturities.

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

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[Editor’s Note:  This 90 Second Lesson 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. This lesson is based, in substantial part, in material reprinted from Commercial Bankruptcy Litigation 2d and Strategic Alternatives for and Against Distressed Businesses, with permission of Thomson Reuters.

To learn more about this and related topics, you may want to attend the following webinars: Opportunity Amidst Crisis – Buying Distressed Assets, Claims, and Securities for Fun & Profit and Securities Law Made Simple (Not Really). This is an updated version of an article originally published on August 5, 2019.]

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