Unfortunately, there’s likely to be an avalanche of debt restructurings over the coming months, and this Ropes & Gray memo says that some of them may trigger CFIUS review. Although loans are generally exempt from the CFIUS review process, adding a slice of equity or convertible debt to a foreign lender’s interest as part of a restructuring may alter the analysis:
In general, lending transactions are not within the scope of CFIUS’s jurisdiction, provided that they do not grant the foreign person economic or governance rights more characteristic of an equity investment. If a financing or lending transaction, for example, grants a foreign party (1) an interest in profits of a U.S. business; (2) the right to appoint members of the board of directors of the U.S. business; or (3) other comparable financial or governance rights characteristic of an equity investment, CFIUS could have jurisdiction over the transaction. Where a non-U.S. lender acquires a convertible debt instrument that will confer equity-like rights upon conversion, the CFIUS jurisdictional analysis becomes fact-specific.
Convertible instruments raise potential concerns because under the CFIUS regs, they are regarded as “contingent equity interests” and have the potential to trigger CFIUS jurisdiction either at the time of their acquisition or upon their conversion, depending on the circumstances.
The memo also notes that CFIUS jurisdiction can also be triggered by a default under a loan agreement, if there is a significant possibility that a foreign lender may acquire control of a U.S. business or qualifying access or rights over a technology, infrastructure or data (TID) U.S. business.
– John Jenkins