Reopening of Previous Issuance Flashcards
What is a reopening?
A new issuance of securities that form part of and are fungible with a previously issued series of the same securities.
Terms/conditions must be identical to those of the old securities except for: price at which the new securities are offered.
Why do a reopening?
(1) Increase liquidity (increases size of particular series)
(2) Cover unexpectedly high investor demand
(3) Can re-open long after 30-day over-allotment period.
(4) More cost-efficient and expedient than a new series
(5) Less burdensome from a debt servicing standpoint bc interest is the same
What is over-allotment?
Allows initial purchasers to purchase additional securities with terms identical to the original issuance of securities.
What must be the same for securities law purposes?
1 - Maturity date.
2 - Coupon.
3 - Interest payment dates.
4 - Any redemption, interest rate adjustments or other special features.
5 - CUSIP numbers and ISINs.
6 - Any securities exchange listings.
7 - Applicable indenture or fiscal agency agreement.
What’s an Indenture?
Written agreement between issuer and trustee for the debt securities acting as a representative of the securityholders that specifies the terms and conditions of the debt securities, including interest rate, maturity, redemption, timing and methods of payment, covenants, events of default and information regarding the trustee and any other specifically negotiated terms and conditions.
What must be the same for tax purposes?
1 - issue date
2 - issue price
3 - original issue discount (OID)
What is the Original Interest Discount (OID)?
Discount from the face value of a debt instrument at the time it is issued.
Tax - Difference between (a) stated redemption price at maturity and (b) offering price.
If more than de minimis, this discount is accrued over the life of the bond or other debt instrument and is treated as a form of taxable interest.
Bond or debt holders include OID in income as it accrues, whether or not the issuer makes any taxable interest payments.
Other tax-related requirements
1 - occurs within 13 days of original issuance or
2 - is a “qualified reopening” issued after 13 days
3 - no more than de minimis OID (usually 25 basis points per year)
When is reopening “qualified”?
After Sept 13, 2002
a - old securities publicly traded for tax purposes OR
b1 - new securities issued for cash to unrelated persons at an arm-length’s price AND
b2a - new securities issued within 6 months of issue date of old securities and 110% yield test satisfied
b2b - new securities have a de minimis amount of OID, regardless of amount of time since old securities issued OR
b2c - new securities issued after 6 months of issue date of old securities and 100% yield test satisfied
BEFORE Sept. 13, 2012
a - old securities publicly traded
b - did not include a reopening more than 6 months after old securities offered and met 100% yield test
When is a post-13 day reopening prohibited?
1 - Old/new securities offered with more than de minimis OID and
2 - reopening not qualified
How does reopening affect Restricted Period?
Restarts it to make old and new securities fungible.
How does Interest Acccrual and Payment work?
New holders pay interest from (1) old issue date to (2) new issue date, as do new holders.
New holders “made whole” during next payment of interest.
