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Tumultuous markets, rising interest rates, and private placements in debt approval resolutions

By Rudy S. Salo

In turbulent markets with rising interest rates and geopolitical shocks, issuers and their advisers should have all financing options at their disposal in the event of, among other things, unexpected negative reception in the public markets or rating hiccups. Among the alternative financing options to a public offering is a private placement. A private placement may take the form of a limited offering to knowledgeable purchasers or a direct purchase wherein a bank purchases the bonds or notes as a loan. When first seeking authorization from their boards, in anticipation of the possibility of using a private placement, issuers may incorporate the material business provisions necessary to complete private placement transactions to avoid costly delays in obtaining the additional authorizations at a later date. In a rising interest rate environment, purchasers and institutional lenders cannot guarantee rates for extended periods of time.

 Included in the initial authorization resolution could be any or all of the following options:

  • The ability to execute a placement agent agreement with a placement agreement or a continuing covenant or similar agreement with an institutional investor (in place of a bond purchase agreement with an underwriter), in each case with such provisions that the officer executing the agreements deems necessary and convenient to provide for the placement or purchase of the bonds or notes, including representations and warranties, covenants, events of default, and additional provisions typically required for a transaction of that nature
  • Inclusion of provisions authorizing payment of a maximum default rate upon the occurrence of an event of default
  • Provisions relating to redemption and/or the payment of a taxable rate should the bonds or notes become taxable

Sample language that can be included in a board resolution for a traditional private placement follows:

“The Board hereby further approves the sale of the [Bonds][Notes][Certificates] through a placement agent or to a purchaser, in a private placement to knowledgeable purchasers or a direct purchase should the [Authorized Officer(s)] determine that due to the unavailability of a public offering on reasonable terms, a private placement or direct purchase is in the best interest of the [Issuer], which such private placement or direct purchase is hereby approved. The [Authorized Officer] is hereby authorized and directed, for and in the name and on behalf of the [Issuer], to execute a placement agreement or a continuing covenant or similar agreement with an institutional investor serving in the role of placement agent or direct purchaser, respectively. The Board hereby approves changes to the documents presented to the Board to accommodate a private placement or direct purchase, including, but not limited to, allowing for a reasonable default rate and a taxable rate, if applicable, and required by the placement agent or purchaser and allowed under applicable law, and other additions and changes commonly required by such placement agents or purchasers as approved by the [Authorized Officer] in consultation with [Bond][Special] Counsel and General Counsel to the [Issuer] to be in the best interest of the [Issuer], the approval of such additions or changes to be conclusively evidenced by the execution and delivery of the applicable documents by the [Authorized Officer].”

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Rudy S. Salo


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