USA Law and Practice Contributed by: Nicholas A Dorsey, Ryan J Patrone, Kelly M Smercina and Margaret R M Rallings, Cravath, Swaine & Moore LLP
• the delivery of periodic financial statements (and usually reports relating to those financial statements); • repayment covenants in the case of certain events (including asset sales and a change of control); and • of course, the obligation to satisfy the pay- ment obligations in the indenture and notes. In the absence of extenuating circumstances, such as a distressed issuer, indentures do not include financial covenants. Historically, cov- enants in indentures have been less restrictive than in credit agreements due in large part to a recognition of the greater difficulty in seeking amendments to indentures and the higher pre- payment penalties associated with debt secu- rities. However, in light of the relatively recent convergence between high-yield debt securities and the leveraged loan market, particularly the term loan “B” market, these differences have become much less pronounced. For example, like indentures, many term loan “B” facilities do not have financial covenants. On the other hand, debt securities used in acquisition finance rarely require amortisation (although term loan “B” facility amortisation is minimal) and do not require repayment with excess cash flow. One of the most notable differences between credit agreements and indentures is that debt securities are more expensive to prepay. Invest- ment grade debt securities are generally redeem- able only by paying a make-whole premium (often with “par call” feature, which allows the securities to be redeemed at par a few months to a year before maturity). Non-investment grade debt securities include a call schedule that becomes less expensive over time, eventually allowing redemption at par (floating rate notes, which are considered more similar to loan instru- ments, generally have a lower prepayment pre-
mium than fixed rate notes). In contrast, loans are generally prepayable with little or no pre- mium. An indenture does not include representations and warranties; instead, representations and warranties are made by the issuer to the under - writers in the underwriting or purchase agree- ment. In addition, an issuer (and underwriter) can face US securities law liability for mate- rial misstatements or omissions in the offering document, which creates a strong incentive for accurate statements in the offering docu- ment. An indenture does not include conditions to funding because the indenture is executed substantially simultaneously with funding. Inden- tures generally permit the issuance of additional notes of the same or a different series than the notes originally issued, subject to compliance with the covenants in the indenture. In the case of an issuance of additional notes, a new under- writing or purchase agreement will most likely be entered into, which will require the issuer to make representations and warranties again. The note is the legally binding agreement exe- cuted by the issuer and acknowledged by the trustee that sets forth the payment obligations of the issuer. In many cases, the note is a relatively short document that refers back to the other terms contained in the indenture, including the covenants. Sometimes the note also recites the principal covenants in summary form. Typically, the indenture provides that one or more series of notes may be issued pursuant to the same indenture. The note (and potentially a supple- mental indenture) will set forth specific terms that apply to that particular series of notes but may not apply to other series of notes issued under the same indenture, such as any optional redemption terms.
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