By Dennis Hranitzky, Richard East, Liesl Fichardt, Epaminontas Triantafilou, Yasseen Gailani, and Rupert Goodway (Quinn Emmanuel Urquhart & Sullivan, LLP)
The article summarizes the likelihood and implications of a sovereign bond default by the Russian Federation. It first discusses the economic sanctions imposed on the Russian Federation, their impact on Russia’s ability to access gold and foreign currency reserves and the consequences of sanctions on Russia’s ability to satisfy its obligations under the approximately $40 billion in UK law bonds. Noting that a payment default will likely lead to litigation arbitration, the article analyzes key provisions of the bonds, noting that atypical of sovereign bonds, they include no choice of law or venue provisions or waiver of sovereign immunity. The article explores anticipated litigation hurdles in both the US and the UK, with a focus on sovereign immunity and forum non conveniens defenses that may be available to Russia, including the particular difficulties that may be faced by litigants in enforcing a judgment from a US or UK court in the absence of a sovereign immunity waiver. The analysis of sovereign immunity necessarily includes consideration of the commercial activity exception and the article analyzes the US and UK interpretation of this exception. The availability of judgment enforcement discovery is also addressed, noting that broad written and sworn deposition discovery of both the debtor and third parties is the norm in the US and also potentially available in the UK. The article concludes with a recommendation that holders of Russian bonds organize themselves and seek advice on their options prior to the occurrence of a default.
By Francesca Prenestini (Bocconi University, Milan)
Francesca Prenestini
Most legal systems follow one of two rules for regulating the capacity of an issuer to renegotiate the terms of the bond loan to avoid insolvency or to accommodate changing capital needs. The first rule requires the individual consent of every bondholder while the second one permits the proposed agreement to be approved upon a majority decision which also binds dissenting bondholders.
This article analyzes the desirability of adopting a regulatory approach that allows a binding vote of bondholders on amendments of the core terms of the loan and other restructuring measures, including the conversion of bonds into shares. In doing so, this article examines the drawbacks of the prohibitive approach, which requires consent from all bondholders, with particular regard to the judicial cases and business practices of two major legal systems (the U.S. and Italy).
In the U.S., the Marblegate and Caesars cases have reignited the debate on out-of-bankruptcy restructurings of bond issues. In 2015, the U.S. District Court for the Southern District of New York reaffirmed that coercive exit consent transactions which force bondholders into questionable restructurings are prohibited by § 316(b) of the Trust Indenture Act of 1939 (“TIA”). Then, in January 2017, the U.S. Court of Appeal for the Second Circuit adopted a narrower interpretation, holding that § 316(b) only prohibits formal non-consensual modifications of an indenture’s core payment terms.
The district court’s interpretation, though broad, is more coherent with the text, the legislative history, and the purpose of the TIA. Section 316(b) provides that the individual right of each bondholder to receive payment of the principal of and interest on their indenture security on the due dates cannot (with a few minor exceptions) be impaired without the bondholder’s consent. This section was enacted to protect bondholders from insider abuses by giving individual bondholders the power to veto proposed amendments in an out-of-court restructuring. However, this individual veto power often precludes even fair renegotiation agreements between the issuer and the bondholders.
Under Italian law, the meeting of bondholders may approve “amendments of the terms of the loan” by majority vote. Nevertheless, in the light of quite restrictive interpretations of such a rule, those modifications may not change the structural characteristics of the bond loan.
This article suggests that governments should adopt rules that allow a majority bondholders’ vote to accept out-of-bankruptcy restructurings of bond issues. Currently two different solutions may be implemented in the U.S. and Italy: in the U.S., until § 316(b) can be reformed, the Securities and Exchange Commission could exercise its power to grant exemptions to authorize transactions and agreements otherwise banned; and in Italy, in the absence of a statutory prohibition, the contract governing the loan could include a provision allowing the meeting of bondholders to vote upon amendments of the core terms of the loan and other restructuring measures, such as the conversion of bonds into shares.
This article first examines the two different approaches to bond loans restructuring in various legal systems and in the context of sovereign debt, and considers why allowing a binding vote of the bondholders in workouts is so important given the rationales for and against this rule. Then it focuses on the U.S. legal system, and discusses the statutory provision that bans the majority rule, how the jurisprudence and business practices have evolved, and recent proposals for reform. The article also considers the Italian system, its rules and business practices, and how to overcome its limits. In the end, this article suggests an alternative rule and proposes interim solutions to the problem while awaiting statutory reform.
By Steven T. Kargman (Kargman Associates/International Restructuring Advisors)
Steven T. Kargman
Argentina’s new government under President Alberto Fernández recently completed a bond exchange which was approved overwhelmingly by its foreign bondholders. The final restructuring deal that Argentina reached with its foreign bondholders in early August was the product of a fraught and tortuous negotiating process that lasted several months and came after Argentina had defaulted on its sovereign debt in late May for the ninth time in its history.
A recent four-part article published in Global Restructuring Review examines the negotiating dynamics in the restructuring negotiations between Argentina and its foreign bondholders. The article focuses in particular on what I call the “three P’s”—namely, the pandemic, the professoriate, and the Pope—that I argue underpinned Argentina’s strategy in those negotiations.
Argentina sought to use each of the “three P’s” to its advantage. First, the pandemic likely made Argentina’s foreign creditors more accommodating in their stance vis-à-vis Argentina in light of the strains the pandemic placed on Argentina’s sovereign balance sheet. Second, Argentina benefited from the support of prominent professors from around the world who expressed their strong support for Argentina’s negotiating position. The professors weighed in on various matters such as whether Argentina’s debt sustainability would or would not be restored by debt restructuring proposals then under consideration and what type of collective action clauses (CACs) for binding dissenting creditors through a supermajority vote should be used in the new bonds issued pursuant to the restructuring. Third, Argentina sought to benefit from the Pope’s moral authority as reflected in a meeting the Pope held in late January with President Fernández as well as in the Pope’s participation a few days later in a Vatican conference on issues of debt and development.
In its final section, the article discusses the economic prospects for Argentina post-restructuring in view of the major economic challenges that Argentina will continue to face notwithstanding the outcome of the recently concluded sovereign debt restructuring. The article also provides an overview of certain factors that may be relevant to Argentina’s upcoming discussions with the International Monetary Fund (IMF) concerning the IMF’s outstanding loan of $44 billion to Argentina.
The full article can be found here. This four-part article was first published in Global Restructuring Review (GRR) and is reposted with the permission of the GRR.
