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Private Placement Investors Association Best Practices
Recommendation for Amendments and Waivers
Preamble
The Private Placement Investors Association (PPIA) is pleased to
recommend best practices for issuers and investors regarding
amendments or waivers of existing Note Purchase Agreements. It is
designed to make the process efficient and effective for all
concerned, with the goal being prompt communication, discussion,
and decision making regarding amendments and waivers. The PPIA
hopes this suggested guide will enhance and facilitate the overall
process.
Investors and Issuer Contact Information
Upon the closing of a new transaction, Investor’s counsel will
create a schedule in the form of Appendix 1 to this draft and
provide it to all parties for informational purposes. The schedule
will list a contact person for each investor and will also indicate
which investor(s) are the lead lender(s). The issuer will also
provide their contact information on the schedule. This schedule
may be built into the Note Purchase Agreement, if feasible.
Investor Best Practices
Provide updated contact information to the issuer when the
individual monitoring the credit changes.
Commit the internal resources necessary to process the amendment
in a timely manner. The amendment request should be a priority for
the person handling it.
Ensure that the individual handling the amendment request has
the authority to approve the amendment, or is in close contact with
the persons having such authority.
If approval of an amendment will require a potentially lengthy
or unique internal approval process, make sure that the other
parties involved are aware of this.
The investor group should approach the amendment process in a
manner that is consistent with the amendment request. The scope of
amended terms should also include consideration of the original
terms that were agreed upon at the initial funding. The investor
group should negotiate changes to the agreement in a fair and
reasonable manner. The investor group will attempt to reach a
consensus among all investors, taking into account all current
views and prior amendment negotiations. The group position and
response to the issuer will be predicated on the consent of the
required holders as defined in the Note Purchase Agreement. This
means that at times an amendment will go forward despite objections
from non-consenting holders.
Investors should follow the Amendment Process Recommendations as
detailed in this document.
Issuer Best Practices
Maintain a current list of investors and contact persons. An
initial list, which indicates the lead lender(s) and the other
original purchasers, will be provided at closing.
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Offer investors periodic conference calls or meetings to provide
updates on the business. This is particularly important if material
changes to the business occur or are contemplated. The amendment
process will be more difficult if the only communication with the
investors after the closing is an amendment request.
Expect that the amendment process, like any other commercial
transaction, may involve some negotiation. Provide sufficient lead
time for investors to review the request and its impact on the
investment.
Commit internal and external resources necessary to process the
amendment in a timely manner.
Follow the Amendment Process Recommendations as detailed in this
document Investment Banker Best Practices
An Investment Banker may be involved in this process at the
request of the issuer if the issuer feels it would be
appropriate.
The Investment Banker should facilitate, but not replace, direct
communication between the issuer and the investor group. The Banker
may advise and expedite the initial written communication (to
include business update and details on amendment request) from the
issuer to the investor group and work with the lead lender(s), as
necessary, to identify and organize the investor group.
Manage expectations by informing issuer of the range of possible
outcomes.
Work with amendment team to set a realistic timeline.
The Investment Banker should reinforce with the issuer the
concept of periodic communication with the investor group.
Amendment Process Recommendations
The issuer should prepare a detailed amendment request which
outlines the need for the modification and specific changes being
requested.
The issuer should include financial information relevant to the
request. 1. In the case of changes to financial covenants,
pro-forma calculations of
existing and proposed covenants should be provided. 2. In the
case of more material changes to the business, financial
projections or
other relevant information should be provided.
The issuer should include information about changes being made
to or requested on other agreements, especially bank facilities and
other financial obligations.
The issuer should prepare a list of noteholders with name and
contact information by tranche and dollar amounts outstanding, to
enable the noteholders to select an Amendment Team if required.
Prior to the selection of an Amendment Team, the lead lender(s)
should be available to advise the issuer on process questions.
The issuer should submit the amendment request to all investors
simultaneously and then schedule a conference call for all
investors during which the issuer can present the request and
answer initial questions from the investors.
Subsequent to the initial call, the lead lender(s) should
schedule a separate investor only call. In selected situations at
the lead lender(s) discretion, the lead lender(s) may contact
outside counsel prior to this call and have counsel join this
discussion, as outside counsel may be the most effective party to
organize calls. Each investor
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should have analyzed the request and have their views formulated
to share with the group on the subsequent call. The call will have
the following objectives:
1. If the modification is simple in nature, arrange for a vote
on the amendment. If approved, the lead lender will communicate
with the issuer and coordinate drafting of the amendment.
2. If the modification is complicated, the investor group will
designate an Amendment Team (see criteria set forth below) to work
on the modification, following the suggested steps outlined below.
The group should also discuss and determine the need to hire
outside counsel. In selected situations at lead lender(s)
discretion, the lead lender(s) may contact outside counsel prior to
this call and have counsel join this discussion. As part of the
process, the Amendment Team should solicit opinions from all
lenders and will coordinate communication among the appropriate
parties.
The Amendment Team should have the following
responsibilities:
1. Select outside counsel if deemed appropriate and not already
done. 2. Analyze the amendment request within the context of
thoughts and
suggestions voiced on the investor group conference call. 3.
Formulate a recommended response to the amendment, consulting
with
outside counsel as necessary, and circulate recommendation to
the group. 4. Present the recommendation to all investors via a
subsequent conference call
(with external counsel on the call) and vote on the
recommendation. 5. Revisit the proposal if the required percentage
does not approve. 6. Communicate with the issuer, explain the
response of the investors, and
negotiate changes as required. In most cases, a business person
or persons on the Amendment Team should contact the issuer
directly, rather than (for instance) asking outside lenders’
counsel to contact the issuer’s counsel.
7. Communicate status of the negotiation to all investors via
conference call or email and repeat steps 4-6 as necessary.
8. Coordinate drafting/review of the amendment with outside
counsel (though all lenders should be responsive with any comments
to the documentation).
Recommended Composition of Amendment Team
The size of the Amendment Team may vary according to the number
of participants in the transaction. In general, the Amendment Team
should be composed of at least 3 investors, account for at least
30% of the total outstanding amount of Notes, and include at least
one holder of the issue with the longest dated maturity. The
ultimate composition of the Amendment Team may vary depending upon
familiarity with the credit, availability, and desire to be part of
the process.
Other Points to Convey to Issuer
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Participation by an investor in a new issuance should not be
directly or indirectly conditioned on the investor’s agreement to
waive or amend an existing note issue; the amendment or waiver
should be negotiated on its own merits. The combination or linking
of an amendment with a simultaneous new issue may create
conflicting legal issues for investors regarding communications and
negotiations among themselves and with the issuer, and may make it
more difficult to respond to either situation in a timely and
efficient manner. If an issuer requires simultaneous consideration
and decision making regarding the amendment and new issue,
investors should, to the extent practicable, pursue separate
communications and negotiations on each transaction.
Amendment or consent fees or other compensation may be required
based on the time required for analysis and negotiation, the fact
that compensation is paid to other lenders and/or a change in the
issuer’s credit quality.
In most situations, Lenders’ Counsel will be required to draft
and review modifications to the legal documents. The Issuer will be
required to pay the fees incurred by Lender Counsel as defined in
the existing agreements.
In the event an issuer has multiple private placement securities
issued, the initial communication of the requested amendment may be
jointly communicated to all investors with the investors
subsequently deciding how the negotiation process is to be most
efficiently constructed.
An amendment request in the context of a material change in the
issuer’s business may require material changes in the document. The
issuer should be prepared for a more detailed negotiation
process.
If other financial agreements are being amended at the same time
as the private placement (i.e. bank agreement), the issuer should
endeavor to contact all parties simultaneously. Consent by the bank
group to an amendment is not indicative of consent by the private
placement group.
Legal opinions are likely to be required for amendments that
affect economic structure or if new credit support will be put in
place (such as guaranties or collateral) and may be required in
other circumstances as well.
Outside Counsel may be the most effective party to organize
calls and arrange meetings. Issuer will be expected to pay these
expenses per the terms of the various documents.
These “Best Practices “recommendations will only apply where a
material adverse change in the credit quality of the issuer or a
default or event of default has not occurred. If such a change has
occurred, then it may be necessary for the investors to fully
evaluate the issuer’s entire business and credit quality, as well
as the position of other creditors, before agreeing to any requests
for amendments and waivers. This situation is beyond the scope of
this document.
Each investor reserves / controls its investment discretion and
therefore the right to vote its interest.
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PPIA Due-Diligence Best Practice Standards - Draft
Pre-Circle Due Diligence – Information / Material Delivered to
Potential Investors
Issuer Business Disclosures*
Existing Bank or Other Lending Facilities
o Provide grid of lending facilities including: borrower,
lender, pricing, maturity
o Provide most recent bank compliance certificate
Business Overview
o Sales, earnings and margins by business segment &
geography (5yr trend analysis)
o Largest customers and suppliers
o Market share by each segment and direct competitors in each
segment
o Industry landscape today and trends or developments going
forward
o Strategic outlook for the business in the next 3-5 years
including acquisition/divestments
Business Information
o Unions
Disclose presence of unions
The percentage of the workforce unionized
The number of unions and key labor contracts
Discuss labor relationships and any issues related to strikes or
disputes
o History of capacity and utilization rates at key manufacturing
facilities
o Ratings
History of NAIC designations for repeat issuers
Existence of Private Letter (PL) Rating and PL Rating
History
o Financial
Dividend Policy
Maintenance Cap-ex vs. Investment Cap-ex
Target Leverage Ratio
Issuer Legal Disclosures*
OFAC and Related Matters (Standardized OFAC Questionnaire is
under review by the PPIA)
o Discuss nature of operations & business activities in
regions sanctioned by national, federal or
state regulations or law.
o Disclose percentage of sales and earnings from sanctioned
countries.
Corporate Legal Structure including ownership and affiliated
entities and identify the amount of sales,
earnings, assets and debt at the specific legal entities
Discuss Ownership Matters
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o Distribution of ownership within family owners;
o Tax-related issues upon death; family involvement in
management;
o Succession planning for private companies and public companies
under voting control of
individual(s)
Litigation/Environmental – include detailed discussion of
exposure and disclosure of relevant data
Identify any Material Business Risks
Tax/Regulatory Matters – any pending matters that may result in
regulatory sanctions, liens or fines
Placement Agent Disclosures / Activity*
Early pricing and comparable public analysis
Terms sheet included in offering document at deal launch
Legal Document Timing
o Legal documents provided to potential investors at deal
launch
o Investor’s Counsel should have 3-5 business days to review NPA
if prepared by Company’s
Counsel for a standard private placement issue and 5-10 business
days for structured or project
finance transactions
o Investor’s Counsel should have access to consult with Company
and Company’s Counsel prior
to the deal launch
o Bank Agreement should be provided to Pre-designated Counsel
before the deal launch
o Schedules referenced in the NPA should be provided to
potential investors at least 24 hours
before bid time
Deal Timing
o Master Q&A published and distributed 72 hours prior to
circle, addendums can follow
o Minimum of one week between investor conference call and
circle date
o Questions submitted prior to circle should be answered in good
faith prior to circle
Potential Investor Disclosures / Activity*
Provide early feedback regarding level of interest in
transaction
Submit due diligence questions early in the process
Categorize questions submitted by 1) Must Know Pre-Circle 2)
Would Like Pre-Circle or 3) Due
Diligence Questions
State all information provided by company will not be shared
externally or internally (i.e. with public
desk) without consent of issuer
Post-Circle Matters
Circulation by Placement Agent
o Working Party List
o Issuer Contact Information
o Legal Counsel
Revised pro-forma capitalization table depicting any changes
from initial offering documents
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Due Diligence Meeting
Logistics
Timing – 1 weeks advance notice for domestic travel and 2- 3
weeks preferred for international Location – location which will
optimize access to management, ability to observe manufacturing
process and convenience for Company and investors Participants –
CEO participation is preferred (dinner or meeting), CFO, Treasurer,
Heads of major
business lines/operations Investors – submit due diligence
questions the week before due diligence meeting Make arrangements
for dial-in and material distribution to lenders that are unable to
attend in person Placement Agents should consider arranging
meetings with existing USPP issuers within close
proximity of the due diligence location Investors should
disclose at the time of bid if they plan to attend due diligence
and once committed
should attend the event
Content
Information expanded beyond that provided in initial Offering
Memorandum & Investor Presentation Reinforcement of investment
thesis/assumptions as presented in offering materials Investors
should be prepared with pertinent questions and fully engaged
Establish future communication expectations between issuer and
investors Set expectations for issuers to host an annual lender
update in person or via conference call Tour of major
facility/asset for first time issuers
Joint-Lead Transactions (Under Discussion)
Protocol is communicated to each investor in terms of the role
of each Lead Bank in the transaction In multi-agented transaction,
investors exclusively discuss the transaction with the agent that
is
assigned the deal Do not contact the Company directly for
questions but go through agent
* The disclosure items are not meant to provide an exhaustive
list of disclosures but simply supplements the historical
standard practice and Private Placement Offering Memorandum.
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Private Placement Investor Association - Draft
Best Practices Regarding OFAC Due Diligence for Potential
Borrowers—Draft, 1/18/14
SDN List: (Note: An SDN listing is a non-starter for
investment.)
1) Are any of the issuers, guarantors, subsidiaries, affiliates,
officers, or directors listed on the OFAC Specially Designated
Nationals (“SDN”) list?
2) Are any of the issuers, guarantors, subsidiaries, or
affiliates owned or controlled by a sanctioned person/entity on the
SDN list?
Risk Countries: (Note: If entities are domiciled in or
owned/controlled by the governments of Cuba, Iran, North Korea,
(North) Sudan, or Syria, this is usually a non-starter for
investment. If domiciled in or owned/controlled by the remaining
jurisdictions, further due diligence may be required; consult your
internal OFAC expert.)
3) Are any of the issuers, guarantors, subsidiaries, affiliates,
officers or directors owned or controlled by the government of
Iran, Syria, Cuba, Belarus, Burma (Myanmar), Cote d’Ivoire,
Democratic Republic of Congo, Libya, North Korea, Somalia, Sudan or
(North) Sudan, Yemen, or Zimbabwe? If yes, please explain.
4) Are any of the issuers, guarantors, subsidiaries, affiliates,
officers or directors located in or organized under the laws Iran,
Syria, Cuba, Belarus, Burma (Myanmar), Cote d’Ivoire, Democratic
Republic of Congo, Libya, North Korea, Somalia, Sudan or (North)
Sudan, Yemen, or Zimbabwe? If yes, please explain.
5) Does any issuer, guarantor, subsidiary, affiliate, or joint
venture do business in or with Iran, Syria, Cuba, Belarus, Burma
(Myanmar), Cote d’Ivoire, Democratic Republic of Congo, Libya,
North Korea, Somalia, Sudan or (North) Sudan, Yemen, or Zimbabwe?
If yes:
a. State the nature of the business conducted, goods sold,
assets owned, or services rendered in these states.
b. How long has there been a presence in these countries? And,
do you plan to continue that presence? If in wind-down mode, how
long will it be until you no longer have a presence in these
countries?
c. Please state the annual revenue generated by such business or
service in each of these countries, and express as a percentage of
total annual revenues.
d. Please state the total value of assets located in each of
these countries, and express as a
percentage of total assets.
e. Is any U.S.-origin product sold into these countries or used
in the goods that are sold into these countries? If yes, please
explain. (Note: Sanction programs extend to the incorporation of
U.S.-origin product into other products sold abroad. The risk of an
OFAC-related fine is higher when U.S. goods are part of the supply
chain for goods sold in sanctioned countries.)
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f. Will any of the proceeds from this transaction support any
business in (or associated with) these countries, either directly
or indirectly? (Note: You should obtain a clean representation that
proceeds from the transaction will not support business in
sanctioned countries.)
Note: U.S. law prohibits U.S. companies from doing business with
companies whose revenues are “predominantly derived” from
sanctioned countries. While there is no official legislation or
precedent that defines what constitutes predominant, many are
focusing on the 10% threshold. If the entity has less than 10% of
its revenues or assets in the sanctioned jurisdictions, then it is
assumed that it does not predominantly derive its revenue stream
from sanctioned jurisdictions. There are some exceptions, which
focus on whether the transaction proceeds involve a sanctioned
activity. For example, more scrutiny exists for petroleum/energy
and sectors that surround those businesses (e.g. companies that
transport oil). More recently, the auto and shipbuilding sectors in
Iran are garnering attention. If your borrower has less than 10%
presence in sanctioned jurisdictions, but the borrower engages in
the energy/transport, auto, or shipbuilding sectors (or other
sanctioned activities) in those jurisdictions, further due
diligence is warranted. Consult your internal OFAC expert.
6) Does the issuer, or any guarantor, subsidiary, affiliate, or
joint venture have unfunded commitments or plans to engage in a
sanctioned activity/country during the next 12 months? If yes,
please explain.
Proactive Policies & Procedures:
7) Does the issuer, or any guarantor, subsidiary, affiliate, or
joint venture have policies and procedures in place to ensure that
it will not engage in activities that would render it subject to
sanctions under CISADA or similar U.S. economic sanctions laws?
a. If yes, please briefly describe.
b. If no, please explain why no such policies are in place.
8) Does the issuer or any guarantor, subsidiary, affiliate or
joint venture routinely screen its business counterparties against
any list of prohibited parties, such as the OFAC SDN list in the
U.S. or the Consolidated List of Financial Sanctions Targets in the
U.K.?
9) Is the issuer, primary guarantor, or any subsidiary or
affiliate subject to US reporting requirements (10-Qs/Ks, 20-Fs,
etc.)?
a. If yes, have such entities been required to make disclosures
under the Iran Threat Reduction and Syria Human Rights Act of 2012
(ITRA s219)?
b. If yes to part (a), then please provide such disclosure.
Question for Financial Institutions Only:
10) Will the offering proceeds be added to general pool of
funds? If yes, will the sanctioned activities comprise 10% or more
of the financial institution’s cash flows for the most recent 12
months (for which financial information is available), using
interest payments and dividend payments received, loan repayments,
and investment returns? (Note: If the 10% threshold is exceeded,
further due diligence may be merited. Consult your internal OFAC
expert.)
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General Question: (Note: It’s always good to ask the following
question. In addition, if the answers to any of the jurisdictional
questions above are “yes,” then it’s best to ask the borrower to
confirm that proceeds from this offering will not support activity
in a sanctioned country—whether directly or indirectly—and to
properly document the response through an affirmative
representation.)
11) What is the intended use of proceeds from this offering?
State CISADA Lists: The list of questions above relates to
Federal OFAC rules; however, individual states have divestment
lists authorized by CISADA (primarily focused on energy companies
doing business in Iran and/or Syria). Investments of $20mm or
greater in listed companies can impact your company’s ability to
obtain state contracts; each investor must determine which list(s)
makes most sense to monitor and the appropriate course of action,
should one of your investments be named on a list. You can access
the lists on the following websites:
California List:
http://www.insurance.ca.gov/0250-insurers/0300-insurers/0100-applications/IRI-2010/index.cfm#Insurers
Other State Lists:
http://www.unitedagainstnucleariran.com/our-initiatives/state-legislation
Additional OFAC Resources: OFAC Sanction Programs:
http://www.treasury.gov/resource-center/sanctions/Programs/Pages/Programs.aspx
SDN Search Tool: http://sdnsearch.ofac.treas.gov/ SDN Search FAQs:
http://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/fuzzy_logic.aspx
http://www.insurance.ca.gov/0250-insurers/0300-insurers/0100-applications/IRI-2010/index.cfm#Insurershttp://www.insurance.ca.gov/0250-insurers/0300-insurers/0100-applications/IRI-2010/index.cfm#Insurershttp://www.unitedagainstnucleariran.com/our-initiatives/state-legislationhttp://www.treasury.gov/resource-center/sanctions/Programs/Pages/Programs.aspxhttp://sdnsearch.ofac.treas.gov/