Private Placement Investors Association Best Practices Recommendation for Amendments and Waivers

Transcription

1 Private Placement Investors Association Best Practices Recommendation for Amendments and Waivers Preamble The Private Placement Investors Association (PPIA) is pleased to recommend best practices for issuers and investors regarding amendments or waivers of existing Note Purchase Agreements. It is designed to make the process efficient and effective for all concerned, with the goal being prompt communication, discussion, and decision making regarding amendments and waivers. The PPIA hopes this suggested guide will enhance and facilitate the overall process. Investors and Issuer Contact Information Upon the closing of a new transaction, Investor s counsel will create a schedule in the form of Appendix 1 to this draft and provide it to all parties for informational purposes. The schedule will list a contact person for each investor and will also indicate which investor(s) are the lead lender(s). The issuer will also provide their contact information on the schedule. This schedule may be built into the Note Purchase Agreement, if feasible. Investor Best Practices Provide updated contact information to the issuer when the individual monitoring the credit changes. Commit the internal resources necessary to process the amendment in a timely manner. The amendment request should be a priority for the person handling it. Ensure that the individual handling the amendment request has the authority to approve the amendment, or is in close contact with the persons having such authority. If approval of an amendment will require a potentially lengthy or unique internal approval process, make sure that the other parties involved are aware of this. The investor group should approach the amendment process in a manner that is consistent with the amendment request. The scope of amended terms should also include consideration of the original terms that were agreed upon at the initial funding. The investor group should negotiate changes to the agreement in a fair and reasonable manner. The investor group will attempt to reach a consensus among all investors, taking into account all current views and prior amendment negotiations. The group position and response to the issuer will be predicated on the consent of the required holders as defined in the Note Purchase Agreement. This means that at times an amendment will go forward despite objections from non-consenting holders. Investors should follow the Amendment Process Recommendations as detailed in this document. Issuer Best Practices Maintain a current list of investors and contact persons. An initial list, which indicates the lead lender(s) and the other original purchasers, will be provided at closing. 1

2 Offer investors periodic conference calls or meetings to provide updates on the business. This is particularly important if material changes to the business occur or are contemplated. The amendment process will be more difficult if the only communication with the investors after the closing is an amendment request. Expect that the amendment process, like any other commercial transaction, may involve some negotiation. Provide sufficient lead time for investors to review the request and its impact on the investment. Commit internal and external resources necessary to process the amendment in a timely manner. Follow the Amendment Process Recommendations as detailed in this document Investment Banker Best Practices An Investment Banker may be involved in this process at the request of the issuer if the issuer feels it would be appropriate. The Investment Banker should facilitate, but not replace, direct communication between the issuer and the investor group. The Banker may advise and expedite the initial written communication (to include business update and details on amendment request) from the issuer to the investor group and work with the lead lender(s), as necessary, to identify and organize the investor group. Manage expectations by informing issuer of the range of possible outcomes. Work with amendment team to set a realistic timeline. The Investment Banker should reinforce with the issuer the concept of periodic communication with the investor group. Amendment Process Recommendations The issuer should prepare a detailed amendment request which outlines the need for the modification and specific changes being requested. The issuer should include financial information relevant to the request. 1. In the case of changes to financial covenants, pro-forma calculations of existing and proposed covenants should be provided. 2. In the case of more material changes to the business, financial projections or other relevant information should be provided. The issuer should include information about changes being made to or requested on other agreements, especially bank facilities and other financial obligations. The issuer should prepare a list of noteholders with name and contact information by tranche and dollar amounts outstanding, to enable the noteholders to select an Amendment Team if required. Prior to the selection of an Amendment Team, the lead lender(s) should be available to advise the issuer on process questions. The issuer should submit the amendment request to all investors simultaneously and then schedule a conference call for all investors during which the issuer can present the request and answer initial questions from the investors. Subsequent to the initial call, the lead lender(s) should schedule a separate investor only call. In selected situations at the lead lender(s) discretion, the lead lender(s) may contact outside counsel prior to this call and have counsel join this discussion, as outside counsel may be the most effective party to organize calls. Each investor 2

3 should have analyzed the request and have their views formulated to share with the group on the subsequent call. The call will have the following objectives: 1. If the modification is simple in nature, arrange for a vote on the amendment. If approved, the lead lender will communicate with the issuer and coordinate drafting of the amendment. 2. If the modification is complicated, the investor group will designate an Amendment Team (see criteria set forth below) to work on the modification, following the suggested steps outlined below. The group should also discuss and determine the need to hire outside counsel. In selected situations at lead lender(s) discretion, the lead lender(s) may contact outside counsel prior to this call and have counsel join this discussion. As part of the process, the Amendment Team should solicit opinions from all lenders and will coordinate communication among the appropriate parties. The Amendment Team should have the following responsibilities: 1. Select outside counsel if deemed appropriate and not already done. 2. Analyze the amendment request within the context of thoughts and suggestions voiced on the investor group conference call. 3. Formulate a recommended response to the amendment, consulting with outside counsel as necessary, and circulate recommendation to the group. 4. Present the recommendation to all investors via a subsequent conference call (with external counsel on the call) and vote on the recommendation. 5. Revisit the proposal if the required percentage does not approve. 6. Communicate with the issuer, explain the response of the investors, and negotiate changes as required. In most cases, a business person or persons on the Amendment Team should contact the issuer directly, rather than (for instance) asking outside lenders counsel to contact the issuer s counsel. 7. Communicate status of the negotiation to all investors via conference call or and repeat steps 4-6 as necessary. 8. Coordinate drafting/review of the amendment with outside counsel (though all lenders should be responsive with any comments to the documentation). Recommended Composition of Amendment Team The size of the Amendment Team may vary according to the number of participants in the transaction. In general, the Amendment Team should be composed of at least 3 investors, account for at least 30% of the total outstanding amount of Notes, and include at least one holder of the issue with the longest dated maturity. The ultimate composition of the Amendment Team may vary depending upon familiarity with the credit, availability, and desire to be part of the process. Other Points to Convey to Issuer 3

4 Participation by an investor in a new issuance should not be directly or indirectly conditioned on the investor s agreement to waive or amend an existing note issue; the amendment or waiver should be negotiated on its own merits. The combination or linking of an amendment with a simultaneous new issue may create conflicting legal issues for investors regarding communications and negotiations among themselves and with the issuer, and may make it more difficult to respond to either situation in a timely and efficient manner. If an issuer requires simultaneous consideration and decision making regarding the amendment and new issue, investors should, to the extent practicable, pursue separate communications and negotiations on each transaction. Amendment or consent fees or other compensation may be required based on the time required for analysis and negotiation, the fact that compensation is paid to other lenders and/or a change in the issuer s credit quality. In most situations, Lenders Counsel will be required to draft and review modifications to the legal documents. The Issuer will be required to pay the fees incurred by Lender Counsel as defined in the existing agreements. In the event an issuer has multiple private placement securities issued, the initial communication of the requested amendment may be jointly communicated to all investors with the investors subsequently deciding how the negotiation process is to be most efficiently constructed. An amendment request in the context of a material change in the issuer s business may require material changes in the document. The issuer should be prepared for a more detailed negotiation process. If other financial agreements are being amended at the same time as the private placement (i.e. bank agreement), the issuer should endeavor to contact all parties simultaneously. Consent by the bank group to an amendment is not indicative of consent by the private placement group. Legal opinions are likely to be required for amendments that affect economic structure or if new credit support will be put in place (such as guaranties or collateral) and may be required in other circumstances as well. Outside Counsel may be the most effective party to organize calls and arrange meetings. Issuer will be expected to pay these expenses per the terms of the various documents. These Best Practices recommendations will only apply where a material adverse change in the credit quality of the issuer or a default or event of default has not occurred. If such a change has occurred, then it may be necessary for the investors to fully evaluate the issuer s entire business and credit quality, as well as the position of other creditors, before agreeing to any requests for amendments and waivers. This situation is beyond the scope of this document. Each investor reserves / controls its investment discretion and therefore the right to vote its interest. 4

5 PPIA Due-Diligence Best Practice Standards - Draft Pre-Circle Due Diligence Information / Material Delivered to Potential Investors Issuer Business Disclosures* Existing Bank or Other Lending Facilities o Provide grid of lending facilities including: borrower, lender, pricing, maturity o Provide most recent bank compliance certificate Business Overview o Sales, earnings and margins by business segment & geography (5yr trend analysis) o Largest customers and suppliers o Market share by each segment and direct competitors in each segment o Industry landscape today and trends or developments going forward o Strategic outlook for the business in the next 3-5 years including acquisition/divestments Business Information o Unions Disclose presence of unions The percentage of the workforce unionized The number of unions and key labor contracts Discuss labor relationships and any issues related to strikes or disputes o History of capacity and utilization rates at key manufacturing facilities o Ratings History of NAIC designations for repeat issuers Existence of Private Letter (PL) Rating and PL Rating History o Financial Dividend Policy Maintenance Cap-ex vs. Investment Cap-ex Target Leverage Ratio Issuer Legal Disclosures* OFAC and Related Matters (Standardized OFAC Questionnaire is under review by the PPIA) o Discuss nature of operations & business activities in regions sanctioned by national, federal or state regulations or law. o Disclose percentage of sales and earnings from sanctioned countries. Corporate Legal Structure including ownership and affiliated entities and identify the amount of sales, earnings, assets and debt at the specific legal entities 1 Discuss Ownership Matters

6 o Distribution of ownership within family owners; o Tax-related issues upon death; family involvement in management; o Succession planning for private companies and public companies under voting control of individual(s) Litigation/Environmental include detailed discussion of exposure and disclosure of relevant data Identify any Material Business Risks Tax/Regulatory Matters any pending matters that may result in regulatory sanctions, liens or fines Placement Agent Disclosures / Activity* Early pricing and comparable public analysis Terms sheet included in offering document at deal launch Legal Document Timing o Legal documents provided to potential investors at deal launch o Investor s Counsel should have 3-5 business days to review NPA if prepared by Company s Counsel for a standard private placement issue and 5-10 business days for structured or project finance transactions o Investor s Counsel should have access to consult with Company and Company s Counsel prior to the deal launch o Bank Agreement should be provided to Pre-designated Counsel before the deal launch o Schedules referenced in the NPA should be provided to potential investors at least 24 hours before bid time Deal Timing o Master Q&A published and distributed 72 hours prior to circle, addendums can follow o Minimum of one week between investor conference call and circle date o Questions submitted prior to circle should be answered in good faith prior to circle Potential Investor Disclosures / Activity* Provide early feedback regarding level of interest in transaction Submit due diligence questions early in the process Categorize questions submitted by 1) Must Know Pre-Circle 2) Would Like Pre-Circle or 3) Due Diligence Questions State all information provided by company will not be shared externally or internally (i.e. with public desk) without consent of issuer Post-Circle Matters Circulation by Placement Agent o Working Party List o Issuer Contact Information o Legal Counsel Revised pro-forma capitalization table depicting any changes from initial offering documents 2

7 Due Diligence Meeting Logistics Timing 1 weeks advance notice for domestic travel and 2-3 weeks preferred for international Location location which will optimize access to management, ability to observe manufacturing process and convenience for Company and investors Participants CEO participation is preferred (dinner or meeting), CFO, Treasurer, Heads of major business lines/operations Investors submit due diligence questions the week before due diligence meeting Make arrangements for dial-in and material distribution to lenders that are unable to attend in person Placement Agents should consider arranging meetings with existing USPP issuers within close proximity of the due diligence location Investors should disclose at the time of bid if they plan to attend due diligence and once committed should attend the event Content Information expanded beyond that provided in initial Offering Memorandum & Investor Presentation Reinforcement of investment thesis/assumptions as presented in offering materials Investors should be prepared with pertinent questions and fully engaged Establish future communication expectations between issuer and investors Set expectations for issuers to host an annual lender update in person or via conference call Tour of major facility/asset for first time issuers Joint-Lead Transactions (Under Discussion) Protocol is communicated to each investor in terms of the role of each Lead Bank in the transaction In multi-agented transaction, investors exclusively discuss the transaction with the agent that is assigned the deal Do not contact the Company directly for questions but go through agent * The disclosure items are not meant to provide an exhaustive list of disclosures but simply supplements the historical standard practice and Private Placement Offering Memorandum. 3

8 Private Placement Investor Association - Draft Best Practices Regarding OFAC Due Diligence for Potential Borrowers Draft, 1/18/14 SDN List: (Note: An SDN listing is a non-starter for investment.) 1) Are any of the issuers, guarantors, subsidiaries, affiliates, officers, or directors listed on the OFAC Specially Designated Nationals ( SDN ) list? 2) Are any of the issuers, guarantors, subsidiaries, or affiliates owned or controlled by a sanctioned person/entity on the SDN list? Risk Countries: (Note: If entities are domiciled in or owned/controlled by the governments of Cuba, Iran, North Korea, (North) Sudan, or Syria, this is usually a non-starter for investment. If domiciled in or owned/controlled by the remaining jurisdictions, further due diligence may be required; consult your internal OFAC expert.) 3) Are any of the issuers, guarantors, subsidiaries, affiliates, officers or directors owned or controlled by the government of Iran, Syria, Cuba, Belarus, Burma (Myanmar), Cote d Ivoire, Democratic Republic of Congo, Libya, North Korea, Somalia, Sudan or (North) Sudan, Yemen, or Zimbabwe? If yes, please explain. 4) Are any of the issuers, guarantors, subsidiaries, affiliates, officers or directors located in or organized under the laws Iran, Syria, Cuba, Belarus, Burma (Myanmar), Cote d Ivoire, Democratic Republic of Congo, Libya, North Korea, Somalia, Sudan or (North) Sudan, Yemen, or Zimbabwe? If yes, please explain. 5) Does any issuer, guarantor, subsidiary, affiliate, or joint venture do business in or with Iran, Syria, Cuba, Belarus, Burma (Myanmar), Cote d Ivoire, Democratic Republic of Congo, Libya, North Korea, Somalia, Sudan or (North) Sudan, Yemen, or Zimbabwe? If yes: a. State the nature of the business conducted, goods sold, assets owned, or services rendered in these states. b. How long has there been a presence in these countries? And, do you plan to continue that presence? If in wind-down mode, how long will it be until you no longer have a presence in these countries? c. Please state the annual revenue generated by such business or service in each of these countries, and express as a percentage of total annual revenues. d. Please state the total value of assets located in each of these countries, and express as a percentage of total assets. e. Is any U.S.-origin product sold into these countries or used in the goods that are sold into these countries? If yes, please explain. (Note: Sanction programs extend to the incorporation of U.S.-origin product into other products sold abroad. The risk of an OFAC-related fine is higher when U.S. goods are part of the supply chain for goods sold in sanctioned countries.) 1

9 f. Will any of the proceeds from this transaction support any business in (or associated with) these countries, either directly or indirectly? (Note: You should obtain a clean representation that proceeds from the transaction will not support business in sanctioned countries.) Note: U.S. law prohibits U.S. companies from doing business with companies whose revenues are predominantly derived from sanctioned countries. While there is no official legislation or precedent that defines what constitutes predominant, many are focusing on the 10% threshold. If the entity has less than 10% of its revenues or assets in the sanctioned jurisdictions, then it is assumed that it does not predominantly derive its revenue stream from sanctioned jurisdictions. There are some exceptions, which focus on whether the transaction proceeds involve a sanctioned activity. For example, more scrutiny exists for petroleum/energy and sectors that surround those businesses (e.g. companies that transport oil). More recently, the auto and shipbuilding sectors in Iran are garnering attention. If your borrower has less than 10% presence in sanctioned jurisdictions, but the borrower engages in the energy/transport, auto, or shipbuilding sectors (or other sanctioned activities) in those jurisdictions, further due diligence is warranted. Consult your internal OFAC expert. 6) Does the issuer, or any guarantor, subsidiary, affiliate, or joint venture have unfunded commitments or plans to engage in a sanctioned activity/country during the next 12 months? If yes, please explain. Proactive Policies & Procedures: 7) Does the issuer, or any guarantor, subsidiary, affiliate, or joint venture have policies and procedures in place to ensure that it will not engage in activities that would render it subject to sanctions under CISADA or similar U.S. economic sanctions laws? a. If yes, please briefly describe. b. If no, please explain why no such policies are in place. 8) Does the issuer or any guarantor, subsidiary, affiliate or joint venture routinely screen its business counterparties against any list of prohibited parties, such as the OFAC SDN list in the U.S. or the Consolidated List of Financial Sanctions Targets in the U.K.? 9) Is the issuer, primary guarantor, or any subsidiary or affiliate subject to US reporting requirements (10-Qs/Ks, 20-Fs, etc.)? a. If yes, have such entities been required to make disclosures under the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRA s219)? b. If yes to part (a), then please provide such disclosure. Question for Financial Institutions Only: 10) Will the offering proceeds be added to general pool of funds? If yes, will the sanctioned activities comprise 10% or more of the financial institution s cash flows for the most recent 12 months (for which financial information is available), using interest payments and dividend payments received, loan repayments, and investment returns? (Note: If the 10% threshold is exceeded, further due diligence may be merited. Consult your internal OFAC expert.) 2

10 General Question: (Note: It s always good to ask the following question. In addition, if the answers to any of the jurisdictional questions above are yes, then it s best to ask the borrower to confirm that proceeds from this offering will not support activity in a sanctioned country whether directly or indirectly and to properly document the response through an affirmative representation.) 11) What is the intended use of proceeds from this offering? State CISADA Lists: The list of questions above relates to Federal OFAC rules; however, individual states have divestment lists authorized by CISADA (primarily focused on energy companies doing business in Iran and/or Syria). Investments of $20mm or greater in listed companies can impact your company s ability to obtain state contracts; each investor must determine which list(s) makes most sense to monitor and the appropriate course of action, should one of your investments be named on a list. You can access the lists on the following websites: California List: /index.cfm#Insurers Other State Lists: Additional OFAC Resources: OFAC Sanction Programs: SDN Search Tool: SDN Search FAQs: 3