Private Placement Financial Covenants Reference Manual

Commentary:

The modules in this chapter provide typical merger, consolidation and sale of assets covenants. The alternatives range from the simpler forms of these types of covenants to the more complex forms that offer more flexibility for the issuer.

The first set of merger and consolidation covenants (Covenants 8.01.1 through 8.01.4) prohibit the merger of the Company (without mention of the Subsidiaries) unless certain conditions are satisfied. The second set (Covenants 8.02.1 through 8.02.3) extends the prohibition to Subsidiaries. Alternatives that include the "additional $1.00 of Debt" incurrence test appear in Covenants 8.01.3 and 8.02.2. Provisions requiring approval of forms by the Required Holders and the delivery of an opinion of counsel in connection with documents relating to the assumption of the Notes are added in Covenants 8.01.4 and 8.02.3.

A basic version of a Sale of Assets covenant is shown in Covenant 8.11.1. It begins by prohibiting all transfers of property, other than certain types of transfers excluded from the definition of Asset Disposition, and then creates a basket (subparagraph (c)) allowing a limited amount of Asset Dispositions subject to certain conditions (subparagraphs (a) and (b)). A few commonly used formulas for defining the size of the basket appear in Formulas 8.31 through 8.33.

The variation in Covenant 8.11.2 allows the issuer to restore availability in the basket by applying net proceeds from an Asset Disposition within a certain period of time either to pay down debt (a "Debt Prepayment Application") or to acquire other property (a "Property Reinvestment Application") or both. The basket is not restored until debt is actually paid down or property is acquired. In contrast, Covenant 8.11.3 in effect never charges the basket in respect of a transfer so long as a Debt Prepayment Application or a Property Reinvestment Application is made within the period specified, thereby allowing the issuer to sell more assets at one time than would be permitted under Covenants 8.11.1 or 8.11.2.

The last sentence of Definition Z.75 ("Transfer") is intended to allow an issuer selling a single asset to apply a portion of the proceeds to a Debt Prepayment Application, apply another portion to a Property Reinvestment Application, and count the remainder as an unredeemed charge against the basket.

Three alternatives are presented for the definition of "Debt Prepayment Application":

Definition Z.30.1 imposes no restrictions on the issuer's choice of which items of debt to prepay within the specified category (e.g., Debt or Funded Debt or Senior Funded Debt).

Definition Z.30.2 requires, among other things, that each Note be prepaid by the amount of its ratable portion of all the debt. The payments section of the note purchase agreement should make sufficient provision for such prepayments (e.g., an optional prepayment provision).

Definition Z.30.3 calls for offers to prepay each Note by its ratable portion of all debt. The payments section of the note purchase agreement should make sufficient provision for each holder to decide whether or not to accept the offer to prepay. If a holder of a Note fails to accept the offer to prepay, the issuer is given credit for basket purposes without having to apply that Note's ratable portion to prepay another item of debt.

There are, of course, other variations that parties might negotiate.

For accounting reasons some investors may prefer that offer of prepayment provisions, where the holder will be prepaid only if it accepts the offer of prepayment,⁵³ be written instead as rejectible prepayment provisions, where the holder will be prepaid unless it declines the prepayment. In such case language in the definition of "Debt Prepayment Application" would need adjustment.

The covenant restricting the disposition of Subsidiary Stock (Covenant 8.12) is included in this chapter because it is a logical and common extension of the Sale of Assets covenant.

Covenant 8.01.1 (Company - survivor of merger)

Merger, Consolidation, etc.54 The Company will not consolidate with or merge with or into any other corporation or convey, transfer or lease substantially all of its assets in a single transaction or series of transactions to any Person, except the Company may merge with another corporation if (a) the Company is the survivor of such merger and (b) immediately after giving effect to such merger no Default or Event of Default would exist.

Covenant 8.01.2 (Company - no incurrence test)

Merger, Consolidation, etc. The Company will not consolidate with or merge with any other corporation or convey, transfer or lease substantially all of its assets in a single transaction or series of transactions to any Person unless:      (a) the successor formed by such consolidation or the survivor of such merger or the Person that acquires by conveyance, transfer or lease substantially all of the assets of the Company as an entirety, as the case may be (the "Successor Corporation"), shall be a solvent corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia;      (b) if the Company is not the Successor Corporation, such corporation shall have executed and delivered to each holder of Notes its assumption of the due and punctual performance and observance of each covenant and condition of this Agreement55 and the Notes; and      (c) immediately after giving effect to such transaction no Default or Event of Default would exist. No such conveyance, transfer or lease of substantially all of the assets of the Company shall have the effect of releasing the Company or any Successor Corporation from its liability under this Agreement or the Notes.

Covenant 8.01.3 (Company - incurrence test)

Merger, Consolidation, etc. [same as Covenant 8.01.2 except replace subparagraph (c) with the following:]      (c) immediately after giving effect to such transaction:      (i) no Default or Event of Default would exist, and      (ii) the Successor Corporation would be permitted by the provisions of Section [ ___ ]56 hereof to incur at least $1.00 of additional [Debt/Funded Debt] owing to a Person other than a Subsidiary of the Successor Corporation.

Covenant 8.01.4 (Company - form approval and opinion)

Merger, Consolidation, etc. [same as Covenant 8.01.2 or Covenant 8.01.3 except insert the following immediately after the term "Notes" in the last line of subparagraph (b):] (pursuant to such agreements and instruments as shall be reasonably satisfactory to the Required Holders), and the Company shall have caused to be delivered to each holder of Notes an opinion of nationally recognized independent counsel, or other independent counsel reasonably satisfactory to the Required Holders, to the effect that all agreements or instruments effecting such assumption are enforceable in accordance with their terms and comply with the terms hereof

Covenant 8.02.1 (Company and Subsidiaries - no incurrence test)

Merger, Consolidation, etc. The Company will not, and will not permit any of its Subsidiaries to, consolidate with or merge with any other corporation or convey, transfer or lease substantially all of its assets in a single transaction or series of transactions to any Person (except that a Subsidiary of the Company may (x) consolidate with or merge with, or convey, transfer or lease substantially all of its assets in a single transaction or series of transactions to, the Company or another Subsidiary57 of the Company and (y) convey, transfer or lease all of its assets in compliance with the provisions of Section [ ___ ]58 ), provided that the foregoing restriction does not apply to the consolidation or merger of the Company with, or the conveyance, transfer or lease of substantially all of the assets of the Company in a single transaction or series of transactions to, any Person so long as:      (a) the successor formed by such consolidation or the survivor of such merger or the Person that acquires by conveyance, transfer or lease substantially all of the assets of the Company as an entirety, as the case may be (the "Successor Corporation"), shall be a solvent corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia;      (b) if the Company is not the Successor Corporation, such corporation shall have executed and delivered to each holder of Notes its assumption of the due and punctual performance and observance of each covenant and condition of this Agreement59 and the Notes; and      (c) immediately after giving effect to such transaction no Default or Event of Default would exist. No such conveyance, transfer or lease of substantially all of the assets of the Company shall have the effect of releasing the Company or any Successor Corporation from its liability under this Agreement or the Notes.

Covenant 8.02.2 (Company and Subsidiaries - incurrence test)

Merger, Consolidation, etc. [same as Covenant 8.02.1 except replace subparagraph (c) with the following:]      (c) immediately after giving effect to such transaction:      (i) no Default or Event of Default would exist, and      (ii) the Successor Corporation would be permitted by the provisions of Section [ ___ ]60 hereof to incur at least $1.00 of additional [Debt/Funded Debt] owing to a Person other than a Subsidiary of the Successor Corporation.

Covenant 8.02.3 (Company and Subsidiaries - form approval and opinion)

Merger, Consolidation, etc. [same as Covenant 8.02.1 or Covenant 8.02.2 except insert the following immediately after the term "Notes" in the last line of subparagraph (b):] (pursuant to such agreements and instruments as shall be reasonably satisfactory to the Required Holders), and the Company shall have caused to be delivered to each holder of Notes an opinion of nationally recognized independent counsel, or other independent counsel reasonably satisfactory to the Required Holders, to the effect that all agreements or instruments effecting such assumption are enforceable in accordance with their terms and comply with the terms hereof

Covenant 8.11.1 (basket)

Sale of Assets, Etc. Except as permitted under Section [ ___ ],61 the Company will not, and will not permit any of its Subsidiaries to, make any Asset Disposition unless:      (a) in the good faith opinion of the Company, the Asset Disposition is in exchange for consideration having a Fair Market Value at least equal to that of the property exchanged and is in the best interest of the Company or such Subsidiary; and      (b) immediately after giving effect to the Asset Disposition, no Default or Event of Default would exist; and      (c) immediately after giving effect to the Asset Disposition, [insert one or more of Formulas 8.31 through 8.33].

Covenant 8.11.2 (basket restored upon proceeds application)

Sale of Assets, Etc. [same as Covenant 8.11.1 except add the following paragraph:] If the Net Proceeds Amount for any Transfer is applied to [a Debt Prepayment Application] [or] [a Property Reinvestment Application] within [ ___ ] days after such Transfer, then such Transfer, only for the purpose of determining compliance with subsection (c) of this Section [ ___ ] as of a date on or after the Net Proceeds Amount is so applied, shall be deemed not to be an Asset Disposition.

Covenant 8.11.3 (basket spared subject to subsequent proceeds application)

Sale of Assets, Etc. [same as Covenant 8.11.1 except add the following paragraph:] If the Net Proceeds Amount for any Transfer is applied to [a Debt Prepayment Application] [or] [a Property Reinvestment Application] within [ ___ ] days after such Transfer, then such Transfer, only for the purpose of determining compliance with subsection (c) of this Section [ ___ ] as of any date, shall be deemed not to be an Asset Disposition.

Covenant 8.12

Disposal of Ownership of a Subsidiary. The Company will not, and will not permit any of its Subsidiaries to, sell or otherwise dispose of any shares of Subsidiary Stock, nor will the Company permit any such Subsidiary to issue, sell or otherwise dispose of any shares of its own Subsidiary Stock, provided that the foregoing restrictions do not apply to:      (a) the issue of directors' qualifying shares by any such Subsidiary;      (b) any such Transfer of Subsidiary Stock constituting a Transfer described in clause (a) of the definition of "Asset Disposition"; and      (c) the Transfer of all of the Subsidiary Stock of a Subsidiary of the Company owned by the Company and its other Subsidiaries if:      (i) such Transfer satisfies the requirements of Section [ ___ ]62 hereof,      (ii) in connection with such Transfer the entire Investment (whether represented by stock, Debt, claims or otherwise) of the Company and its other Subsidiaries in such Subsidiary is sold, transferred or otherwise disposed of to a Person other than (A) the Company, (B) another Subsidiary not being simultaneously disposed of, or (C) an Affiliate, and      (iii) the Subsidiary being disposed of has no continuing Investment in any other Subsidiary of the Company not being simultaneously disposed of or in the Company.

Formula 8.31 (current year transfers - balance sheet test)

( _ ) the Disposition Value of all property that was the subject of any Asset Disposition occurring in the [a: then current fiscal year of the Company] [b: period of four fiscal quarters of the Company then next ending] [c: period of 12 calendar months then next ending] [d: period of 365 days then ending] would not exceed [ ___ ]% of [Consolidated Assets]63 as of the end of the then most recently ended fiscal year of the Company.

Formula 8.32 (current year transfers - income statement test)

( _ ) all the property of the Company and its Subsidiaries that was the subject of any Asset Disposition occurring in the [a: then current fiscal year of the Company] [b: period of four fiscal quarters of the Company then next ending] [c: period of 12 calendar months then next ending] [d: period of 365 days then ending] did not account for more than [ ___ ]% of [Consolidated Cash Flow]64 for the then most recently ended fiscal year of the Company.

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