January 5, 2009

Court Finds No Independent Duty to File SEC Reports Under the TIA

Last winter, I noted the continuing saga of whether the typical delivery covenant in an indenture can be used to declare a default when an issuer stops filing its Exchange Act reports, and now we have yet another court weighing in on the topic.

The issue was put in play a few years ago by the New York State Supreme Court decision in The Bank of New York v. BearingPoint, Inc., and has been a source of concern as hedge funds and activist bondholders have sought to use leverage gained with delinquent issuers by declaring a default and seeking “consent fees” or acceleration of the debt. A federal court weighed in for the first time in Cyberonics, Inc. v. Wells Fargo Bank N.A., interpreting the delivery covenant at issue to require that Exchange Act reports be filed with the trustee only after being filed with the SEC, stating that Section 314(a) of the Trust Indenture Act did not independently provide a deadline for filing such reports with the SEC.

Now, in UnitedHealth Group Inc. v. Wilmington Trust Co., the Eight Circuit found that the issuer’s delay in filing its SEC reports (due to an options backdating investigation/restatement) did not violate the indenture covenant, Section 314(a) of the Trust Indenture Act or New York’s implied covenant of good faith and fair dealing. This decision is significant because it is the first federal appellate court ruling to date on this issue, and may serve to quell some of the efforts to exploit this covenant going forward.

In the meantime, issuers are well advised to revisit the covenants in their indentures, in particular any potential triggering of an acceleration by a breach of the delivery covenant. Further, the more restrictive covenant that calls for delivery of SEC filings to the trustee within 15 days after the company is required to file the reports should definitely be avoided, given that it essentially incorporates the Exchange Act’s filing deadlines as part of the issuer’s obligations under the indenture.

For more on this topic, check out the numerous memos in our “Debt Financing/Loans,” “Trust Indentures” and “Late SEC Filings” Practice Areas. Be sure to renew your subscription now for 2009 access to

Delaware Chancery Court Disrupts Debt Exchange Offer

‘Tis the season of debt restructuring, and by the looks of things so far, it is going to get ugly. On December 18th, the Delaware Chancery Court granted summary judgment to noteholders of Realogy, who sought to block the company’s efforts to restructure its debt through an exchange offer that would have essentially permitted subordinated noteholders to jump over more senior debt in the company’s capital structure. The case is The Bank of New York Mellon and High River Limited Partnership v. Realogy.

As noted in this Simpson Thacher memo: “Realogy Corporation, an affiliate of Apollo Management, terminated its invitations to holders of its outstanding unsecured high yield notes to exchange those notes for second lien term loans under an available tranche of its senior secured credit facility after Vice Chancellor Lamb of the Delaware Chancery Court found that the second lien term loans did not constitute ‘Permitted Refinancing Indebtedness’ under Realogy’s senior secured credit facility and, consequently, the second liens securing such loans would not constitute ‘Permitted Liens’ under Realogy’s senior notes indentures.”

The court only addressed the contractual claims in the summary judgment order, staying further consideration of fraudulent transfer claims. For more on this development, check out the memos in our “Debt Financing/Loans” Practice Area.

As noted in this Bloomberg article, the Realogy case is a battle of titans in the sense that it pits Carl Icahn (as bondholder) against Leon Black (owner, through Apollo Management, of Realogy). An Icahn representative is quoted as saying: “Private equity cannot just step all over debt in order to save itself.”

SEC Delivers Mark-to-Market Accounting Study

Last week, the SEC delivered the mark-to-market accounting study mandated by Section 133 of the Emergency Economic Stabilization Act of 2008.

As previewed last month at the AICPA conference, the study recommends against suspending fair value accounting standards, and, as noted in this press release, instead recommends improvements to existing practice, “including reconsidering the accounting for impairments and the development of additional guidance for determining fair value of investments in inactive markets, including situations where market prices are not readily available.”

– Dave Lynn