Proposed Amendments to Electronic Arts’ Bonds Requiring Majority Consent Could Reduce Legal Uncertainty Around Change-of-Control Put Defeasance; S&P Dampens Acquirers’ Hopes of an IG Rating

Relevant Document:
Tender Announcement
Base Indenture
Supplemental Indenture
 

On Feb. 10, the acquisition vehicle Oak-Eagle AcquireCo launched a tender offer and consent solicitation that has brought this debate into sharp focus. Rather than offering to repurchase the notes at 101 or redeeming the notes at par – as bondholders had been expecting – the sponsor group is offering consideration tied to the yield of specified Treasury bonds, implying prices well below par for both series. In our article last week, we estimated the tender offer, inclusive of a $50 per $1,000 of bonds early tender premium, at $0.969 for the 2031s and $0.791 for the 2051s. These values are subject to change as they are set based on the yield of specific Treasury instruments on the pricing date. The tender is backed by a concurrent consent solicitation seeking to strip the indenture of most of its restrictive covenants and, critically, to ease the conditions for a defeasance of the notes.
 

Oak-Eagle AcquireCo Inc. is offering to purchase for cash any and all of EA’s outstanding 2031s and 2051s. The total consideration is based on a fixed spread pricing formula of +0bps over the applicable reference U.S. Treasury security, determined on Feb. 25. Holders who tender by the early tender deadline of Feb. 24 receive an additional $50 per $1,000 principal amount as an early tender payment. The withdrawal deadline – the last day to withdraw tenders and revoke consents provided – is also Feb. 24.

In conjunction with the tender, Oak-Eagle is soliciting consents from holders to amend the existing indenture under which the notes have been issued – some of these amendments relate to provision in the base indenture dated Feb. 24, 2016, while other seek to amend provisions in the second supplemental indenture dated Feb. 11, 2021, under which the 2031s and 2051 were established. The consents require a majority in principal amount of a series to become effective with respect to such series.
 

The proposed amendments, if adopted, would result in significant changes to the base indenture and the second supplemental indenture governing the notes.

With respect to the restrictive covenants, the amendments would delete the limitation on liens, the limitation on sale and leaseback transactions, the SEC and compliance reporting obligations and many of the conditions specified under the merger covenant. The general event of default for breach of any “other” covenant or agreement – section 5.03(a)(4) of the supplemental indenture – would also be removed. The cumulative effect is a near-complete strip of the restrictive covenant package.

With respect to the defeasance provisions, the amendments target sections 7.2 (termination of company’s obligations), 7.3 (defeasance and discharge of indenture) and 7.4 (defeasance of certain obligations) of the base indenture, as well as the related repayment provision in section 7.6. Across all four sections, the existing requirement that the sufficiency of funds / Treasuries deposited in trust be confirmed by a nationally recognized firm of independent public accountants is replaced with a simple officer’s certificate delivered to the trustee.

Beyond this change in verification standard, the amendments delete several additional procedural safeguards for defeasance. Of particular relevance to the discussion at hand, clauses (ii) through (iv) of sections 7.3 and 7.4 are removed entirely. These contained conditions including the requirement that the deposit will not result in a default under any other agreement, that no default exist through the 91st day following the deposit and – crucially in the case of section 7.3 – the requirement to deliver an opinion of counsel on tax matters. That tax opinion requirement is significant and warrants separate discussion, as explained further below.

The proposed amendments do not modify the change-of-control repurchase event provisions in section 4.02 of the supplemental indenture or the related event of default in section 5.03(a)(3). This is almost certainly attributable to section 8.2(d) of the base indenture, which constitutes a sacred right requiring the consent of each affected holder for any amendment that would “modify any redemption or repurchase right to the detriment of a holder.”
 

The implications of a successful consent solicitation are threefold.

First, and most obviously, remaining holders of notes that are not tendered would be left with an instrument stripped of virtually all restrictive covenants. The limitation on liens, sale-leaseback restrictions, merger covenant, reporting obligations and the related event of default would all be gone. In the context of a transaction that will see the offeror incur substantial indebtedness, this would leave remaining bondholders with no documentary protections against the resulting re-leveraging of the business. Such exit consents are often combined with tender offers to incentivize (or threaten) holders to tender because they are left in an instrument without most restrictive covenants. Still, if bondholders are entitled to the change-of-control put right (and that is a big if), then the covenant strip may not be that potent of a threat on its own.

Second, and perhaps more consequentially, the amendments could reduce the legal uncertainty surrounding the company’s ability to use defeasance to avoid the change-of-control put. As discussed in the next section, there is a live debate about whether “covenant defeasance” under section 7.4 of the base indenture would actually eliminate the company’s obligation to offer to repurchase the notes at 101 following a change-of-control repurchase event. There is however another defeasement option set out under section 7.3 of the base indenture, which also encompasses a “legal defeasance” that would result in the discharge of any and all obligations of the issuer, including payment obligations. Accordingly, if available, unlike section 7.4, there is no debate surrounding the survival of the change-of-control repurchase rights – they will not survive.

Prior to the effectiveness of the amendments, a key practical impediment to using the legal defeasance option under section 7.3, at least in the context of a defeasance that would result in the discharge of payment obligations, has been the requirement to deliver an opinion of counsel on tax matters, accompanied by an IRS tax ruling (unless there has been a change in tax law) to the effect that bondholders will not recognize income, gain or loss for U.S. federal income tax purposes as a result of the defeasance. Our understanding is that under current law, it may not be possible to obtain a tax opinion/IRS ruling of this type if there is a defeasance of payment obligations, making legal defeasance an option in theory only. This appears to be the primary reason that market participants have focused their attention on “covenant defeasance” under section 7.4 rather than the defeasance option under section 7.3 – more on that a bit later. By deleting the tax opinion requirement, the amendments would transform the section 7.3 legal defeasance option from a largely theoretical option into a practically executable one – removing what is arguably the single most significant barrier to the company defeasing its way out of the change-of-control obligation.

There is a possible counter-argument relying on the sacred right under 8.2(d) of the indenture requiring each affected noteholder to consent to any modifications to any redemption or repurchase right to the detriment of a holder. Although not a direct modification of the change-of-control repurchase obligations, the effect of the proposed amendments is to permit a defeasement of the change-of-control repurchase obligations (or at least make it easier to do so) potentially raising the argument that what cannot be done directly should not be able to be done indirectly.

Third, and as a related point, if the amendments are adopted and the company proceeds to defease its payment obligations under a modified section 7.3, bondholders may face adverse tax consequences. Without this safeguard, bondholders who do not tender could find themselves in a position where the company has defeased away the change-of-control obligation and they are simultaneously being required to recognize income for U.S. federal income tax purposes as if they had exchanged their notes. The existing tax opinion requirement was designed to protect bondholders from exactly this outcome.
 

Setting aside the consent solicitation, the question of whether the company could defease the change-of-control repurchase obligation under the existing terms of the indenture – without any amendments – has been the subject of considerable debate since the leveraged buyout was announced and is perhaps the bigger threat to creditors underlying the tender offer.

Our October 2025 article surmised (subject to some important caveats) that defeasance could be a route for the sponsor group to avoid the 101% change-of-control put, estimating potential savings of up to $278 million compared with the cost of honoring the put and at that time the market was pricing in 50% odds of this happening. The offeror has now made the threat of a defeasement abundantly clear in the tender offer announcement stating that to the extent any notes have not been tendered and remain outstanding following the tender offer, “the Company may (or the Offeror may cause the Company to) defease one or both series of Notes, in which case Holders of such Notes will continue to receive interest on each scheduled interest payment date and principal on the stated maturity date but will not benefit from any restrictive covenants removed pursuant to the defeasance, including the change-of-control repurchase obligations,” even going out of its way to mention that the proposed amendments do not need to be adopted in order to go down the defeasance route.

There are however diverging views on this in the market. We summarize each of the arguments in turn. Investors will have to factor in the legal risk of defeasement and related credibility of the defeasement threat into a decision to tender or not tender the notes – not an easy task given the significant legal uncertainty involved.
 

Pushback from market participants against the defeasance option appears to focus on the covenant defeasance option under section 7.4 of the base indenture. The argument runs as follows (with a few counter-arguments to follow in the next section).

Section 7.4 permits the company, upon satisfying certain conditions, to “omit to comply with any term, provision or condition set forth in any covenant established with respect to such Series pursuant to Section 2.1(i).” Section 2.1(i) of the base indenture permits additional “events of default or covenants” to be added to a series of notes via a supplemental indenture. However, arguably the change-of-control repurchase event provision in the supplemental indenture is not established through section 2.1(i), but rather through section 2.1(f), which relates to the right or obligation of the company to redeem, purchase or repay the securities, including “at the option of a Holder thereof.” If the change-of-control repurchase provisions in the supplemental indenture falls within the authority of section 2.1(f) rather than section 2.1(i), covenant defeasance under section 7.4 would not release the company from this obligation. The argument, in essence, is that the change-of-control repurchase event is a bondholder repurchase right, not a “covenant” within the meaning of section 7.4, and that it cannot be defeased through the covenant defeasance mechanism.

This reading is reinforced by the architecture of the indenture. The change-of-control repurchase obligation resides in section 4.02 of the supplemental indenture, which is located in article 4 (Redemption of Securities ) rather than article 5 (Covenants and Remedies) furthering the argument that it is not a “covenant.” Moreover, while section 7.4 defeases the catch-all event of default in section 5.03(a)(4) (5.1(c) of the base indenture) – which applies to breaches of “any other covenant or agreement” – there is a separate, standalone event of default in section 5.03(a)(3) that specifically addresses a failure by the company to repurchase notes tendered following a change-of-control repurchase event. Since section 5.03(a)(3) is not referenced in the covenant defeasance provisions under section 7.4, theoretically it would survive and remain enforceable, giving bondholders the ability to accelerate the notes if the 101% payment is not made.
 

The above argument singularly focuses on section 7.4 as the only defeasance option available. Our earlier article surmising (subject to a material tax caveat reiterated below) that the company could achieve the outcome of avoiding the change-of-control put obligation if it exercises its defeasance option focused not on covenant defeasement under the section 7.4 defeasance but on the broader defeasance option available under section 7.3 of the base indenture.

The distinction is material. Section 7.3 is a much broader provision than section 7.4. While section 7.4 only allows the company to stop complying with covenants established under section 2.1(i), section 7.3 contemplates the discharge of “any and all obligations” under the relevant series, except for a finite list of surviving obligations. Critically, section 4.02 of the supplemental indenture – the change-of-control repurchase event provision – is not on the list of provisions specified to survive a defeasance under section 7.3.

Except for one crucial exception regarding the tax opinion described below, the conditions for a defeasance of EA’s bonds under section 7.3 and 7.4 (as they stand before the proposed amendments) are the same, requiring the following:
 

• Deposit with the trustee in trust of money or U.S. government obligations in an amount sufficient to pay all amounts on that series when due without reinvestment of interest and after paying all taxes. An opinion of independent public accountants is required to be delivered to the trustee in this regard.
   
• Delivery of an opinion by counsel regarding certain matters, including an outside counsel tax opinion that bondholders will not recognize income, gain or loss for U.S. federal income tax purposes as a result of the exercise of the defeasance option and will be subject to U.S. federal income tax on the same amount, manner and times as would have been the case if it had not exercised such option. Under section 7.3, however, this opinion must be accompanied by an IRS tax ruling (unless there has been a change in tax law) and until such opinion and/or IRS ruling is provided specifically without relying on the continuance of the issuer’s payment obligations, the payment obligations will not be terminated.
   
• No default will have occurred under the indenture regarding the relevant series and be continuing on the date of deposit or during the period ending on the 91st day after the date of deposit.
   
• The deposit will not result in a default under any other agreement or instrument to which the company is a party or is bound.
   
• Delivery of an officer’s certificate and opinion of counsel stating that the conditions for the defeasance have been met.
   

As highlighted above, the big difference between the two types of defeasance stems from the tax effect of the transaction and therefore the ability to provide the tax opinion (and/or an IRS ruling). Our understanding is that under current law, on the one hand, it may not be possible to obtain a tax opinion or IRS ruling of this type if there is a defeasance of payment obligations, making legal defeasance an option in theory only.

Importantly, section 7.3 does not exclusively deal with the defeasance of payment obligations or what would normally be referred to as a legal defeasance, but also embeds a defeasance option that is broader in scope than the covenant defeasance in section 7.4 while still keeping payment obligations intact. In fact, unlike certain other indentures we have reviewed to ascertain this point, the EA indenture does not define the concepts of legal defeasance or covenant defeasance, and any such classifications should be given less weight than the actual language of the indenture.

First, the opening paragraph of section 7.3 lists “rights of Holders of such Series to receive payments of principal thereof and interest thereon” as a surviving right. Even if this is construed to be a right to receive payments from the defeasance trust, section 7.3 also explicitly envisages a scenario where section 3.1 (i.e., the payment obligations) survives. This is clear from the following sentence in the antepenultimate paragraph of section 7.3: “Subsequent to the end of such 91-day period (or longer period, if applicable) with respect to this Section 7.3, the Company’s obligations in Sections 2.2, 2.3, 2.4, 2.5, 2.6, 2.7, 2.8, 2.12, 3.1, 3.2, 6.7, 6.8, 7.6 and 7.7 shall survive with respect to such Series until the Series is no longer outstanding.”

In fact, it is explicitly acknowledged that the payment obligations under Section 3.1 are only defeased following delivery of the tax opinion, and further that the required tax opinion (which we noted above is unlikely to be able to be delivered in the case of a discharge of payment obligations, i.e., legal defeasance) can be issued in reliance upon the continuation of the company’s payment obligations under section 3.1. In that scenario, the payment obligations survive, but all other obligations that are not on the specified survivor list, including the change-of-control repurchase obligation, would be discharged.

This again can be found in the following language included in the antepenultimate paragraph of section 7.3, couched in the negative: “If and when a ruling from the Internal Revenue Service or Opinion of Counsel referred to in clause (iv)(A) above is able to be provided specifically without regard to, and not in reliance upon, the continuance of the Company’s obligations under Section 3.1, then the Company’s obligations under such Section 3.1 with respect to such Series shall cease upon delivery to the Trustee of such ruling or Opinion of Counsel and compliance with the other conditions precedent provided for herein relating to the defeasance contemplated by this Section 7.3.”

The question therefore boils down to whether such a tax opinion can be given relying on the continuation of payment obligations under section 3.1 (i.e., the payment obligations are not being defeased), because the bondholders’ economic position with respect to principal and interest payments would not change. The counterargument is that obtaining the required tax opinion and related IRS ruling for a defeasance under section 7.3 (even where the payment obligations survive) is not straightforward, and obtaining one could be problematic. As we did before in connection with our initial analysis in October 2025, we are duty-bound to caution that we are not tax lawyers. Since there is so much stress on the tax analysis and this is not a well-trodden path, what we have said here comes with that caveat.

If the consent solicitation is successful that would render much of this debate academic for Section 7.3 specifically, because the proposed amendments delete the tax opinion requirement entirely. If the amendments are adopted, the company could arguably pursue a defeasance under a modified section 7.3 without needing to navigate the tax opinion hurdle at all. However, the proposed amendments do not appear to get rid of the timing mismatch resulting from the crystallization of the defeasance under section 7.3 only 91 days after the deposit has been made (until which the obligations survive), versus the change-of-control obligations which could potentially be triggered earlier, even as soon as acquisition closes, depending on the timing of the ratings decision. While there might be ways to structure around this – such as waiting for the 91-day period to expire before closing the acquisition (or more aggressively, before the 30 day period to make the change-of-control offer or even the additional 60-day period to close the offer and make the change-of-control payment) – the practicality of EA doing so will need to be considered.

Keeping section 7.3 aside for a minute, even with respect to the section 7.4 covenant defeasance, the sponsor group could put forward some arguments to support its position that it remains available notwithstanding the compelling arguments set out above with respect to that provision.

To recap, that argument against defeasement, in essence, is that the change-of-control repurchase event is a bondholder repurchase right, not a “covenant” within the meaning of section 7.4, and that it cannot be defeased through the covenant defeasance mechanism. The counterargument is that company obligations involved in the change-of-control provision are the kinds of issuer obligations that are typically considered “covenants” by practitioners. While the placement of the provisions in article 4 of the supplemental indenture rather than article 5 is suggestive, section 10.14, which provides that “The Table of Contents, Cross Reference Table, and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof” could be used to challenge that argument.

Finally, the argument that the event of default in section 5.03(a)(3) would survive in any event (giving bondholders the ability to accelerate the notes if the 101% payment is not made) would have to overcome the challenge that it is not independently enforceable, as it applies when there has been a failure to repurchase note tendered “following the occurrence of a Change of Control Repurchase Event in conformity with Section 4.02.” If section 4.02 is able to be defeased under section 7.4, does the event of default referring to it still remain independently enforceable?
 

As discussed in our original change-of-control analysis, the 101% repurchase obligation under EA’s notes is not triggered by a change of control alone. It requires a “change of control repurchase event,” which is defined as the occurrence of both a change of control and a “ratings event.” The ratings event requires the bonds to cease having an investment-grade rating from both Moody’s and S&P during a specified period commencing upon the public announcement of the intention to effect a change of control and ending 60 days following consummation of the change of control, with extensions if the ratings are under consideration for a possible downgrade.

This double trigger means that if, for whatever reason, either S&P or Moody’s were to maintain an investment-grade rating on the notes, the change-of-control repurchase event would not occur, and bondholders would have no 101% put right..

In a significant development, Bloomberg reported on Feb. 20 that S&P has privately signaled to some investors that it may grant a high-grade rating to the notes. However, S&P’s official position also on Feb. 20 appears to contradict that report stating that “we would expect to rate the bonds Electronic Arts Inc. (BBB+/Watch Neg/–) plans to defease based on our issuer credit rating on EA once the announced take-private transaction closes and not in line with the default risk of the collateral.”

This largely dispels the theory that investment-grade ratings for the notes are in the cards and would follow automatically upon Treasurys being placed in a defeasement trust. In any event, we wonder if such a rating would not have been intrinsically connected to the legal determination of the change-of-control put defeasement in the first place, i.e., an investment-grade rating would likely only result if the change-of-control put rights were also defeased under the indenture, or even a full legal defeasance (making this almost a secondary consideration to the legal discussion above).

We further confirmed in a conversation with S&P Global Ratings that on the basis of current information, the notes could not be rated in line with the default risk on the collateral, given the sponsor’s goal to defease its obligations under the 2031 and 2051 notes with Treasury securities that carry a lower market price than the par value of current outstanding bonds. This is because if an acceleration event were to occur in the future, the debt would become payable in full, therefore leaving the defeased securities with some EA credit risk. If the sponsor were to defease the bonds with Treasury securities that are at an equivalent market price to the par value of existing bonds, the defeased bonds would no longer carry EA credit risk, but this would largely defeat the savings objective of the sponsor.

In our conversation with S&P ratings, the analyst indicated that there are potentially other ways that EA retains an investment-grade issuer rating at close. One would be if the sponsors put in additional equity, but given an already assumed 6x leverage at close, it would need to be substantial to get the leverage at close to being in line with an investment-grade rating. Separately, he indicated that an investment-grade rating is theoretically possible if the notes obligations are fully recourse to PIF via a securitization or other credit support transaction which functions to tie the EA rating with the PIF rating, however also noting that PIF has yet to go through the process to secure a S&P long-term rating, which would be required.

With the early tender deadline looming (Tuesday, Feb. 24, at 5 p.m. ET) we may just have to wait a day or so to know how all of this will shake out, particularly if majority participation and consents are achieved. On the other hand, if the majority threshold is not achieved (or close to being achieved), things may get even more interesting.