What it means
Bond documents are contracts, and a company that needs to do something the contract forbids has two options: refinance the whole issue, or ask holders for permission. Asking is nearly always cheaper, and the mechanism for asking is a consent solicitation.
The company appoints a solicitation agent, sends a formal statement setting out the proposed amendment and the reasons for it, and sets a deadline. Holders return their consent or do nothing, and doing nothing counts as a no.
The approval threshold depends on what is being changed. Ordinary covenants typically need a simple majority of principal outstanding, while core economic terms such as the interest rate, the maturity date or the principal amount usually require unanimity or a very high supermajority.
A consent fee, quoted as an amount per $1,000 of principal, is standard. It compensates holders for giving up protection and, just as importantly, gives them a reason to open the envelope and respond before the deadline.
The same tool appears in equity markets, where a company solicits written shareholder consents to approve an action without convening a full meeting, and in contested situations where an activist solicits consents to remove directors. The mechanics differ, but the principle of gathering formal written approval is the same.
In practice
Real-world examples.
Example
A retailer wants to sell its distribution centres and lease them back, but its bond covenants restrict sale-and-leaseback transactions. It launches a consent solicitation offering $2.50 per $1,000, wins approval from 68% of holders, and completes the sale two weeks later.
Example
A borrower discovers it filed its annual accounts three days late, breaching a reporting covenant. Rather than risk an acceleration notice, it solicits consent for a waiver and an extension of the reporting deadline, paying a nominal fee of $1.00 per $1,000.
Example
An activist investor holding 9% of a company's shares runs a consent solicitation to remove two directors and appoint its own nominees without waiting for the annual meeting. The company responds with its own solicitation urging shareholders to withhold consent.
Formula
Calculation
Consent fee payable = (Principal amount consenting / $1,000) x Fee per $1,000 of principal.
A company has $300,000,000 of notes outstanding and needs holders to relax a covenant so it can complete an acquisition. The indenture requires consent from holders of more than 50% of principal, and the company offers a consent fee of $5.00 per $1,000.
Holders of $210,000,000 of notes tender their consent, which is $210,000,000 / $300,000,000 = 70% of the issue, comfortably above the 50% threshold.
Number of $1,000 units consenting = $210,000,000 / $1,000 = 210,000.
Consent fee payable = 210,000 x $5.00 = $1,050,000.
Adding $400,000 of legal, solicitation agent and tabulation costs gives a total of $1,050,000 + $400,000 = $1,450,000.
The alternative was calling the notes early at a price of 102, costing a redemption premium of $300,000,000 x 2% = $6,000,000, plus the cost of refinancing $300,000,000 at current market rates. At under a quarter of that premium, the consent solicitation is clearly the cheaper route.Case study
Seen in the real world.
The following scenario is illustrative and the company is fictional. Crestline Foods had $300,000,000 of notes outstanding with a covenant capping acquisitions at $25,000,000 a year. When a $90,000,000 target came up unexpectedly, the covenant blocked the deal.
The finance team costed the options. Redeeming the notes at a call price of 102 meant a $6,000,000 premium plus refinancing $300,000,000 at rates well above the coupon on the existing notes. A consent solicitation at $5.00 per $1,000 would cost $1,050,000 if every holder consented, plus about $400,000 of adviser fees.
Crestline launched the solicitation with a ten business day deadline. Holders of $210,000,000, or 70%, consented, so the fee came to $1,050,000 and the total cost was $1,450,000. The illustrative lesson recorded in the board minutes was that the covenant had been negotiated years earlier by people who never imagined this deal, and that renting permission was far cheaper than buying the debt back.
Watch out
Common mistakes.
- Assuming silence counts as approval. Unreturned consents are treated as refusals, so a solicitation can fail simply because holders did not engage before the deadline.
- Believing a majority can change anything. Core economic terms such as coupon, maturity and principal normally need unanimity or a very high supermajority.
- Confusing a consent solicitation with a tender offer. A consent solicitation changes the terms of securities that stay outstanding, while a tender offer buys them back.
Questions
People also ask.
Who pays the consent fee?
The issuer pays it, and it is typically only paid to holders who consent by the deadline, which is what creates the urgency.
How long does a solicitation take?
Commonly one to three weeks from launch to expiry, though contested equity solicitations and complex amendments can run considerably longer.
What happens if the threshold is not reached?
The amendment fails, no fee is paid, and the company must either sweeten the offer, extend the deadline or fall back on refinancing the securities.
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