Minority bondholders given ammunition to fight back

by Craig Barrett, Chadbourne & Parke

More from this author

31 May 2013

  • Comments
guns

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

Visitor comments

blog comments powered by Disqus
display:none

Add your comment

We won't publish your address


By submitting a comment you agree to abide by our Terms & Conditions

Your comment will be moderated before publication

Submit
  • Send
HM Revenue & Customs

Head Of Financial Control

HM Revenue & Customs, Telford, Full Time, Permanent/p>

 

Newsletters

Get the latest financial news sent directly to your inbox

  • Best Practice
  • Business
  • Daily Newsletter
  • Essentials

Careers

Search for jobs
Click to search our database of all the latest accountancy roles

Create a profile
Click to set up your profile and let the best recruiters find you

Jobs by email
Sign up to receive regular updates with the latest roles suitable for you

Briefings

budget-management

Why budgeting fails: One management system is not enough

If budgeting is to have any value at all, it needs a radical overhaul. In today's dynamic marketplace, budgeting can no longer serve as a company's only management system; it must integrate with and support dedicated strategy management systems, process improvement systems, and the like. In this paper, Professor Peter Horvath and Dr Ralf Sauter present what's wrong with the current approach to budgeting and how to fix it.

cchcover

iXBRL: Taking stock. Looking forward

In this white paper CCH provide checklists to help accountants and finance professionals both in practice and in business examine these issues and make plans. Also includes a case study of a large commercial organisation working through the first year of mandatory iXBRL filing.