Page 111 - Bankruptcy Volume 1

pate? What disclosure documents are necessary? Will the securities to be issued fall within an exception
to registration, or must they be registered? What are the ratings implications of the exchange offer?
What are the income tax implications of the exchange offer (for example, will the transaction result in
cancellation of debt income)?

Acceptance of exchanged debt is often conditioned on the debt holders’ consent to covenant modifica-
tions. The costs of retaining securities that are stripped of desirable covenants generally outweigh the
benefits of nonparticipation in the exchange offer. Consequently, such exit consents give debt holders a
powerful incentive to participate in the exchange offer.

Though securities regulations shape the precise form of the exchange offer, the mechanics of executing
an exchange offer in a prepackaged plan can be generalized as follows. The debtor solicits the exchange
of old debt securities for new securities and simultaneously solicits the acceptance of the prepackaged
plan. A vote for the exchange offer is also a vote in favor of the prepackaged plan. Typically, the debtor
(that is, the issuer) will condition the effectiveness of the exchange offer on a high level of acceptance to
reduce the number of holdouts. If the requisite number of acceptances is achieved, the exchange offer is
completed outside of bankruptcy. If the requisite threshold is not reached, but the statutory threshold for
confirmation of a plan (that is, two-thirds in amount and a majority in number of the claims voting), the
debtor will file for Chapter 11 and proceed with the confirmation of the plan.

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