Minority bondholders given ammunition to fight back

by Craig Barrett, Chadbourne & Parke

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31 May 2013

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THE RESTRUCTURING PROFESSION has been rocked by the recent legal battle in which bondholders believe they are being unfairly penalised in restructured businesses.

The case involved German business Assénagon Asset Management, which was a bondholder in Anglo Irish Bank, and Irish Bank Resolution, which took over the struggling AIB.

The Court of Appeal had been due to rule on an earlier court decision which had found that measures by Ireland forcing bondholders to accept losses as part of AIB's restructuring were unfair to minority investors, "coercive" and should not have been used.

The Financial Times explains the case as focused on the use of "exit consent" measures, in which a bank or company invites its bondholders to sell or exchange their bonds in return for voting in favour of a debt restructuring.
Assénagon made no vote in favour of this policy and cashed in its old bond notes which saw the company lose millions when its holding was reduced to just €170 from €170m.

Because the Appeal case never transpired the floodgates could be open to other bondholders clambering into the litigation ring to recoup losses they feel they have suffered due to unfair restructuring models.

The judge in the initial case focused on the rights of the minority against the majority: "oppression of a minority is of the essence of exit consents of this kind, and it is precisely that at which the principles restraining the abusive exercise of powers to bind minorities is aimed."

The new bond notes were not a financial inducement to vote in favour but rather a negative inducement to deter bondholders from voting against it. He held that it could not be lawful for "the majority to lend its aid to the coercion of a minority by voting for a resolution which expropriates the minority's rights under their bonds for a nominal consideration." The exit consent "is, quite simply, a coercive threat which the issuer invites the majority to levy against the minority, nothing more or less."

The Assénagon case will clearly have a strong impact on any form of process by which debt is due to be compromised, including all forms of restructurings and perhaps CVAs.

Remarkably, in this case, the inducement being offered, although a significant write-down of debt, was arguably to the advantage of the large bondholders; it would have shortened the term of the debt from seven years to two. The restructuring and exchange of bond could also be priced at roughly the current market price and would be guaranteed by the Irish government (subject to the condition of acceptance).

Craig Barrett is an associate in the London office of Chadbourne & Parke

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