Secured limited recourse notes (commonly known as “repackaging”), once issued by an orphan special purpose vehicle (SPV), are generally expected to continue until the notes mature. Occasionally, during the term of the notes and for reasons unforeseen by the transaction parties when the transaction was put together, the terms and conditions of the notes or other transaction documents may need to be amended, certain breaches may have occurred such that a waiver will have to be obtained, or the transaction parties may wish to early unwind the transaction.

 

In this Bulletin, we discuss some of the mechanics and issues relating to an amendment, waiver and unwind of a repackaging transaction.

 

Amendments and Waivers

 

There may be situations where the underlying collateral securing the notes does not perform as expected, requiring an amendment to certain economic terms of the notes such as payment terms, certain triggers and/or leverage ratios. Occasionally, amendments may be required to correct errors in the notes documentation. If a breach or other event of default has occurred or may potentially occur under the terms of the notes, a waiver will have to be obtained if the notes were to continue.

 

The way to effect such amendments and waivers would depend on the nature of the amendments/waivers required. Repackaging notes documentation typically contain provisions allowing the trustee to agree, without the consent of the noteholder(s), to (i) a modification of the notes terms or any provisions in the transaction documents that in the opinion of the trustee is of a formal, minor or technical nature or is made to correct a manifest error; or (ii) a modification or a waiver of any breach or proposed breach, of any of the notes terms or provisions in the transaction documents that in the opinion of the trustee is not materially prejudicial to the interests of the noteholder(s). If the trustee is willing to agree to the amendments/waiver on these grounds, then the trustee’s agreement will be binding on all the noteholders. However, we note that these provisions are to be construed strictly and such outcome may be difficult to achieve in practice. For example, a formal trustee consent letter will need to be prepared for the trustee’s consideration, and the trustee may wish to instruct its own counsel to consider whether it can exercise itsbdiscretion in relation to the proposed amendments/waiver, which could add to the time and cost involved.

 

If the amendments/waiver required are not of a nature described above, then noteholder consent will have to be obtained. Notes documentation usually provide for certain ways in which noteholders can authorise a modification to the notes terms or provisions in the trust deed, such as an extraordinary resolution passed at a meeting of noteholders, a written resolution or electronic consent through the clearing systems. It is important to review the terms and conditions of the notes and other transaction documents (especially the trust deed) to find out the ways in which noteholders can consent to the amendments or give the waiver and the applicable requirements (e.g. the requisite percentage of holders to pass a written resolution or to give electronic consent).

 

The terms of some repackaging notes may permit decisions to be made or consents to be given by a noteholder representative. If this is the case the process for obtaining consent can be further streamlined.

 

Once the noteholders and the relevant transaction parties have agreed on the changes, the transaction parties will typically enter into a deed of amendment to formally document the amendments.

 

Obtaining noteholder consent

 

It is rare in practice nowadays for physical meetings of noteholders to be held to pass extraordinary resolutions.

 

A written resolution or electronic consent obtained through the clearing systems is the more likely way to get consent for an amendment / waiver.

 

Where there is a single noteholder or a small number of identifiable noteholders, it may be more practicable (and quicker) to obtain a written resolution signed by the noteholders. A print out of the electronic records provided by the clearing systems or other document issued by an accountholder or an intermediary in the holding chain would usually suffice to prove holdings.

 

For widely-held notes, electronic consent communicated through the clearing systems may be another option.

 

Although this may be more time-consuming, it may be an easier way to get around problems such as obtain noteholders’ signatures and proving requisite authority (e.g. with asset managers). There is also less need for co-ordination with multiple layers of intermediaries.

 

Unwinds

 

In certain situations, an investor may wish to exit its investment in the notes early. This may be due to a range of factors: from a favourable performance of the notes (such that by unwinding the notes early, the investor can lock in any profits), a not so favourable performance (with the investor limiting its losses by an early unwind), to the more extreme situation such as a collateral default and the investor opting for a consensual unwind rather than going through the early redemption process.

 

The notes terms usually provide for the possibility of the issuer purchasing the notes for cancellation, provided that the issuer has satisfied the trustee that arrangements have been made for the realisation of a pro rata share of the underlying collateral and/or the reduction in the notional amount of any swap in connection with the proposed purchase, such that the issuer will be left with no assets or net liabilities. It would be advisable to engage the trustee and agents early in the unwind process to obtain any trustee consent and to ensure a smooth settlement.

 

Whilst the notes terms provide for the contractual possibility for an unwind, the economics and the timing of the unwind would be something for the transaction parties and the noteholders to agree on. In addition to the commercial terms, there are operational and other issues to consider. Some examples are:

 

  • How would the cashflow be dealt with on termination? Generally speaking, it would be easier for a dealer to buy the notes from the noteholders and then conduct the unwind, rather than having the issuer effect an unwind with the noteholder(s) directly.
  • Will the entire series of notes be unwound or just a portion? Partial unwinds are generally more complex than a full unwind especially if more than one noteholder is involved. If other changes to the transaction terms are required to be made concurrently, noteholder consent may be required.

  • How widely are the notes held? If there are multiple noteholders, will they be unwinding the notes concurrently?

  • Will there be any tax implications for the transaction parties from the termination of the transaction?

     

Given the number of transaction parties, the nature of the instrument (with most repackaging notes being held in the clearing systems) and the more complex nature of the transaction documentation, restructuring repackaging notes will involve many steps that need to be considered well in advance. Parties contemplating such transactions are advised to ensure that all relevant parties are involved at an early stage and to check the requirements in the notes documentation carefully. 

 

 

For further information, please contact:

 

Chong Liew, Partner, Linklaters

chin-chong.liew@linklaters.com