BearingPoint Decision--Implications for Delinquent Filers

September 27, 2006

On September 19, 2006, a New York State trial court issued a ruling with significant implications for companies that are late in their SEC filings and have outstanding debt securities subject to the Trust Indenture Act (TIA). The TIA applies to debt securities issued in SEC-registered offerings, and issuers also agree to comply with the TIA when they sell debt securities with registration rights and in some other Rule 144A offerings.

The decision involves BearingPoint Inc., which has experienced significant delays in filing its periodic reports with the SEC. A group of investors holding convertible bonds of BearingPoint gave BearingPoint a notice of default and a notice of acceleration, on the grounds that BearingPoint violated the financial reporting covenant in the indenture governing the bonds. At the demand of these investors, The Bank of New York acting as indenture trustee brought suit against BearingPoint.

The decision addresses two separate elements of BearingPoint’s reporting covenant:

First, the covenant required the issuer to file with the trustee copies of its periodic and other reports “within 15 days after it files such … reports … with the SEC.” BearingPoint argued in effect that the 15-day period under the indenture did not start running until it filed its reports with the SEC. In other words, it sought to interpret the reporting covenant as imposing a requirement to file with the trustee if it files with the SEC, but not imposing any independent requirement to file periodic reports. The court rejected this argument, concluding that the covenant “unambiguously obligates BearingPoint to make the required SEC filings” and that the failure to file was therefore a default.

Second, the covenant incorporates Section 314(a) of the TIA. Section 314(a) applies to every TIA-governed indenture and requires the issuer to file with the trustee copies of the reports the issuer is required to file with the SEC. While some practitioners have questioned whether Section 314(a) should be read to create an obligation to file on a timely basis, this court characterized the provision by saying, “Section 314(a) of the TIA specifically obligates an issuer of bonds or notes, such as BearingPoint, to provide the Indenture Trustee with current SEC filings.”

Based on these conclusions, the court granted summary judgment to the plaintiffs. This decision comes from a lower court and may very well be appealed. Nonetheless, it represents the only case of which we are aware that interprets this aspect of Section 314(a) or a related reporting covenant.

Unless the decision of this court is overturned on appeal, it will stand for the proposition that a failure to file timely SEC reports is a breach of any TIA-governed indenture—an important point not only for an issuer with outstanding debt, but also for an issuer contemplating a new offering or an amendment to existing debt securities. For example, the standard remedy for a breach of most covenants is acceleration. While the TIA mandates the inclusion of certain covenants in an indenture, we believe it does not mandate specific remedies for breach of those covenants. Therefore, issuers and their financial advisers may wish to consider modifications to the standard remedies section found in indentures. For example, an issuer might provide for a longer cure period or a materiality standard before a breach of the reporting covenant can result in acceleration, or it might provide for a monetary penalty in lieu of acceleration.

For your reference, a copy of the decision is attached to this alert.