ETSY Etsy Inc

Indenture and Notes

On August 24, 2020, Etsy, Inc. (“Etsy”) completed its previously announced private offering of an aggregate of $650 million principal amount of its 0.125% Convertible Senior Notes due 2027 (the “Notes”) to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The Notes were issued pursuant to an Indenture, dated August 24, 2020 (the “Indenture”), between Etsy and U.S. Bank National Association, as trustee (the “Trustee”).

The Notes are senior, unsecured obligations of Etsy. The Notes bear interest at a rate of 0.125% per year, payable semiannually in arrears on March 1 and September 1 of each year, beginning on March 1, 2021. The Notes will mature on September 1, 2027, unless earlier converted or repurchased. The Notes are convertible into cash, shares of Etsy’s common stock or a combination of cash and shares of Etsy’s common stock, at Etsy’s election.

Holders may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding May 1, 2027 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2020 (and only during such calendar quarter), if the last reported sale price of Etsy’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Indenture) per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of Etsy’s common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after May 1, 2027 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Upon conversion, Etsy will pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at Etsy’s election.

The conversion rate will initially be 5.0007 shares of Etsy’s common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $199.97 per share of Etsy’s common stock). The initial conversion price of the Notes represents a premium of approximately 52.5% over the last reported sale price of Etsy’s common stock on August 19, 2020. The conversion rate is subject to adjustment under certain circumstances in accordance with the terms of the Indenture. In addition, following certain corporate events that occur prior to the maturity date, Etsy will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Notes in connection with such a corporate event, subject to a maximum conversion rate of 7.6260 shares of Etsy’s common stock per $1,000 principal amount of Notes. A maximum of 4,956,900 shares of Etsy’s common stock may be issued upon conversion of the Notes in full, based on this maximum conversion rate, which is subject to customary adjustments set forth in the Indenture. Etsy may not redeem the Notes prior to the maturity date, and no sinking fund is provided for the Notes.

If Etsy undergoes a fundamental change (as defined in the Indenture), holders may require Etsy to repurchase for cash all or any portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

The Indenture includes customary terms and covenants, including certain events of default. The following events are considered “events of default” with respect to the Notes, which may result in the acceleration of the maturity of the Notes: (1) Etsy defaults in any payment of interest on any Note when due and payable, and the default continues for a period of 30 days; (2) Etsy defaults in the payment of principal of any Note when due and payable at its stated maturity, upon any required repurchase, upon declaration of acceleration or otherwise; (3) failure by Etsy to comply with Etsy’s obligation to convert the Notes in accordance with the Indenture upon exercise of a holder’s conversion right and such failure continues for five (5) business days; (4) failure by Etsy to give a fundamental change notice, notice of a make-whole fundamental change (as defined in the Indenture) or notice of a specified corporate transaction, in each case when due and such failure continues for five (5) business days; (5) failure by Etsy to comply with its obligations under the Indenture with respect to consolidation, merger and sale of Etsy’s assets;

(6) failure by Etsy for 60 days after written notice from the Trustee or the holders of at least 25% in principal amount of the Notes then outstanding has been received to comply with any of Etsy’s other agreements contained in the Notes or Indenture; (7) Etsy or any of its significant subsidiaries (as defined in the Indenture) defaults with respect to any mortgage, agreement or other instrument under which there may be outstanding, or by which there may be secured or evidenced, any indebtedness for money borrowed in excess of $100 million (or its foreign currency equivalent) in the aggregate of Etsy and/or any such significant subsidiary, whether such indebtedness now exists or shall hereafter be created (i) resulting in such indebtedness becoming or being declared due and payable prior to its stated maturity date or (ii) constituting a failure to pay the principal of any such debt when due and payable (after the expiration of all applicable grace periods) at its stated maturity, upon required repurchase, upon declaration of acceleration or otherwise, and, in the cases of clauses (i) and (ii), such acceleration shall not have been rescinded or annulled or such failure to pay or default shall not have been cured or waived, or such indebtedness is not paid or discharged, as the case may be, within 30 days after written notice to Etsy by the Trustee or to Etsy and the trustee by holders of at least 25% in aggregate principal amount of Notes then outstanding in accordance with the Indenture; or (8) certain events of bankruptcy, insolvency, or reorganization of Etsy or any of its significant subsidiaries. Generally, if an event of default occurs and is continuing under the Indenture, either the Trustee or the holders of at least 25% in aggregate principal amount of the Notes then outstanding may declare the principal amount plus any accrued and unpaid interest on the Notes to be immediately due and payable.

The Notes are Etsy’s general unsecured obligations and rank senior in right of payment to all of Etsy’s indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment with all of Etsy’s liabilities that are not so subordinated, including Etsy’s 0% Convertible Senior Notes due 2023 (the “2023 Notes”) and Etsy’s 0.125% Convertible Senior Notes due 2026; effectively junior to any of Etsy’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of Etsy’s subsidiaries.

The net proceeds from the offering were approximately $639.5 million, after deducting the initial purchasers’ discount and estimated offering expenses payable by Etsy. Etsy used a portion of the net proceeds from the offering to pay the cost of the capped call transactions described below. In addition, Etsy used approximately $137.2 million of the net proceeds from the offering and issued approximately 7.3 million shares of Etsy’s common stock (the “Exchange Consideration”) to repurchase approximately $301.1 million aggregate principal amount of its outstanding 2023 Notes through privately negotiated transactions entered into concurrently with the pricing of the offering. To the extent that the amount of cash paid in such repurchases is less than the aggregate principal amount of 2023 Notes purchased, such difference may be used to repurchase shares of its common stock following the completion of the offering under a separate repurchase program approved by Etsy’s board of directors in connection with the offering. Etsy intends to use the remainder of the net proceeds from the offering for general corporate purposes, which may include other repurchases of Etsy’s common stock from time to time under Etsy’s existing stock repurchase program approved by Etsy’s board of directors in November 2018 or any future stock repurchase program, working capital, operating expenses and capital expenditures.

A copy of the Indenture and form of Note are filed as Exhibit 4.1 and Exhibit 4.2, respectively, to this Current Report on Form 8-K and are incorporated by reference herein. The foregoing description of the Indenture and Notes does not purport to be complete and is qualified in its entirety by reference to such exhibits.

Capped Call Transactions

On August 19, 2020, concurrently with the pricing of the Notes, Etsy entered into capped call transactions with certain financial institutions (the “Option Counterparties”). Etsy used approximately $74.7 million of the net proceeds from the offering of the Notes to pay the cost of the capped call transactions. The capped call transactions are expected generally to reduce potential dilution to Etsy’s common stock upon any conversion of Notes and/or offset any cash payments Etsy is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap initially equal to approximately $327.83 (which represents a premium of 150% over the last reported sale price of Etsy’s common stock on August 19, 2020). The capped call transactions are separate transactions, entered into by Etsy with the Option Counterparties, and are not part of the terms of the Notes.

A copy of the form of confirmation for the capped call transactions is filed as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated by reference herein. The foregoing description of the terms of the capped call transaction does not purport to be complete and is qualified in its entirety by reference to such exhibit.