On March 8, 2016, the US District Court for the Southern District of New York held in Citibank, N.A. v. Norske, et al. that an exchange-offer refinancing in which unsecured notes were exchanged for secured notes, encumbering certain previously unencumbered assets, could not be considered a financing for purposes of an indenture agreement.

The court, however, denied a preliminary injunction for failure to show irreparable harm ( (S.D.N.Y. Mar. 8, 2016)).

Norske Skogindustrier ASA (Norske) is a distressed global paper company with extensive debt. This debt includes EUR330 million in unsecured notes due in 2016 and 2017 (unsecured notes). Norske also issued EUR290 million in senior secured notes due in 2019 (senior secured notes), which are held in trust for the noteholders by Citibank, N.A., as indenture trustee (trustee) for the holders of the senior notes (senior secured noteholders). The trustee and Norske are party to an indenture agreement (the senior indenture) that governs the senior notes and limits Norske's ability to incur or refinance new debt.

Norske sought to enter into an exchange offer with certain principal noteholders of the unsecured notes under which the unsecured notes would be exchanged for certain secured notes with later maturity dates (new secured notes). The trustee sought to enjoin Norske from entering into the exchange offer, arguing that the exchange offer was not permitted under the senior indenture. The trustee asserted that the consummation of the exchange offer would cause unencumbered assets of Norske's subsidiaries to become encumbered, and thus holders of senior secured notes would lose priority over these assets in the event of a Norske bankruptcy.

Both parties agreed that the exchange offer was prohibited under a provision in the senior indenture that prohibits refinancings. But Norske contended that the exchange offer was permitted by an exception in the senior indenture for "qualified securitization financing." However, the trustee argued that, because the exchange offer is a refinancing, and not a financing, it does not belong in the exception for "qualified securitization financing."

The senior indenture defines "qualified securitization financing" as "any financing" by which an issuer grants a security interest in securitization assets on market terms and at a market interest rate. Norske argued for a broad construction of the term "any financing" that would include the refinancing contemplated by the exchange offer.

The trustee contended that if the exchange offer were to proceed, the senior secured noteholders would lose priority over currently unencumbered Norske assets, which Norske sought to encumber under the new secured notes, in the event of a Norske bankruptcy. The trustee therefore commenced this action to enjoin the exchange offer before it closed, and the New York State Supreme Court granted a temporary restraining order preventing Norske from consummating the exchange offer. Norske subsequently removed the action to the US District Court for the Southern District of New York (SDNY).

The SDNY agreed with the trustee that the exchange offer was not permitted under the indenture because it did not fall into the "qualified securitization financing" exception. However the court declined to issue a preliminary injunction for lack of a showing of irreparable harm.

The court reasoned that the exchange offer was not permitted by the senior indenture because:

Furthermore, the court rejected Norske's argument that a refinancing is a common subset of financing. It instead quoted Black's Law Dictionary that financing is "the act or process of raising or providing funds," which is distinct from the delayed payment of unsecured notes in exchange for notes secured by a subsidiary's assets, as contemplated in the exchange offer (Financing, Black's Law Dictionary, 10th ed. 2014).

The court, however, determined that the senior secured noteholders would not suffer irreparable harm from the exchange offer, denying the trustee's request for a preliminary injunction. The court reasoned that:

This case exhibits the court's reluctance to give broader meaning to agreement terms and its preference for literal readings of contract provisions, particularly in situations in which a common understanding of a term conflicts with the language in the agreement.

For more information on exchange offers, see Practice Note, Debt Exchange Offers: Purpose and Process.

For more information on covenants, see Practice Notes, Loan Agreement: Financial Covenants and Loan Agreement: Negative Covenants.