January 20, 2017

Inauguration Day: Is Edgar Open?

As we watch the peaceful transition of power & wonder if we will come together as a nation after a deeply divisive election, there’s one question on everyone’s mind this Inauguration Day – “So, is Edgar open?”  According to this press release from the SEC, the answer is “yes.”

The SEC’s press release notes that due to Inauguration activities, there will only be limited filer support – as DC is shut down & government employees there aren’t heading into the office. The press release doesn’t address the issue of whether today is a “business day” for purposes of determining filing due dates.  However, as Broc pointed out in this blog from 2009, Inauguration Day is not a national holiday – so in the absence of any guidance from the SEC to the contrary, companies should assume that it is a “business day.”

The “Make-Whole” Investor Revolt

This Bloomberg News story tells the tale of a revolt among bond investors over efforts by issuers to change indenture language relating to make-whole payments. Apparently, a number of high-profile issuers were sent back to the drawing board earlier this month after investors refused to come on board for new language intended to prohibit make-whole payments in connection with defaults.

Make-wholes entitle investors who have their notes redeemed to receive the discounted present value of the future payments they would have received absent the redemption. They have historically been payable only in connection with optional redemptions. Last fall, two judicial decisions imposed make-whole obligations on issuers in non-traditional settings. The first, Wilmington Savings v. Cash America (SDNY 9/16) applied a make-whole as a remedy for a “voluntary” non-bankruptcy default. The second, In Re Energy Future Holdings (3d Cir. 11/16) held that a make-whole was payable in a bankruptcy redemption.

In response, issuers added language to indentures “undoing” the result in these cases – by clarifying that no make-whole is due upon default or bankruptcy.

The investor revolt was prompted by comments from a covenant review service to the effect that this new language was “the end of covenants” and the “single worst change” ever to emerge in the bond market. This Davis Polk memo responds to these contentions by trying to provide some historical perspective:

Not all capital markets notes include an optional right of redemption. We believe that market participants and practitioners have generally understood that an issuer’s right of redemption, including at a stated premium or make-whole, exists to provide flexibility for the benefit of the issuer. It would be odd, to say the least, if when an issuer defaults on notes without this feature, the issuer only has to pay principal and interest, but if that additional feature is included–for the issuer’s benefit– the issuer must pay a premium.

Accordingly, the memo contends that this new language “is not really much of a change at all from what has been, in our view, established practice.”

John Jenkins