Exit consents are often used as a restructuring tool by issuers of bonds. Issuers invite bondholders to exchange their existing bonds for new bonds (usually with a lower principal amount). In order to participate in the exchange, bondholders must agree to vote in favour of a resolution that amends the terms of the existing bonds so as to negatively affect (or, in Assénagon, [1] substantially destroy) their value. This is referred to as ‘covenant-stripping’. If the issuer does not achieve the majority needed to pass the resolution, the covenant-strip and the exchange do not happen. But if the resolution is passed, each participating holder’s bonds are exchanged for the new bonds, and the terms of the old bonds are amended to remove most of the protective covenants. This incentivises bondholders to participate in the exchange: accepting the new bonds (even though they will usually have a lower face amount than the existing bonds) may be preferable to being ‘left behind’ in the old bonds, which will cease to have any meaningful covenant protection.

Facts of the case

Anglo Irish Bank Corporation Limited (the “Bank”) suffered severe financial difficulties as a result of the financial crisis, and was nationalised in January 2009. As part of its restructuring, the Bank proposed an exchange offer whereby:

…continue reading: Exit Consents in Restructurings – Still a Viable Option?

The Second Circuit has ordered Argentina to submit a payment proposal, following oral argument in the NML v. Argentina appeal.

As we reported in a February 28 note, the three-judge panel of the Second Circuit expressed interest in whether an alternative Ratable Payment formula might be appropriate – one that would provide for equitable payments to the plaintiffs over time but would not amount to a 100% one time payment. At the oral argument, payment proposals made by counsel for both Argentina and the Exchange Bondholders were vague. Following up on those proposals, the panel ordered Argentina’s counsel to state “in writing” “the precise terms” of any “alternative payment formula and schedule to which it is prepared to commit.” The March 1, 2013 order provides in full as follows:

…continue reading: Second Circuit Orders Argentina to Submit a Payment Proposal

An update on the final round of appellate filings in the NML v. Argentina appeal.

On January 25, briefs were filed with the Second Circuit on behalf of two groups of plaintiff-appellees in the appeal from District Court Judge Griesa’s November 21 injunction, NML and Aurelius. And on February 1, four sets of reply briefs were filed, on behalf of appellants Argentina, Bank of New York Mellon (BNY Mellon), the Exchange Bondholders Group, and Fintech Advisory. Under the schedule set by the Second Circuit, briefing is now concluded, and the next major event will be oral argument before the Second Circuit on February 27.

Copies of all of these papers can be found on our Argentine Sovereign Debt webpage, at http://www.shearman.com/argentine-sovereign-debt/. Our summary of the prior briefing on this appeal can also be found there.

We summarize below the major points made in each of these six briefs, followed by our compilation of the major issues cutting across the virtual mountain of briefing confronting the three-judge panel that will decide this case.

…continue reading: Don’t Cry for Argentine Bondholders

The Delaware Supreme Court has affirmed the Court of Chancery’s decision not to aggregate a series of dispositions in determining whether they constitute a transfer of “substantially all” of a company’s assets under a bond indenture. See Bank of New York Mellon Trust Co. v. Liberty Media Corp., No. 284, 2011 (Del. Sept. 21, 2011) (en banc).

The case arose out of a June 2011 proposal by Liberty Media Corporation to split off its Capital and Starz businesses. Certain of Liberty’s bondholders objected to the split-off as a transfer of “substantially all” of the company’s assets in violation of Liberty’s bond indentures. Although the Capital and Starz businesses alone would not amount to “substantially all” of Liberty’s assets, the bondholders argued that the proposed split-off should be considered together with three prior dispositions undertaken by Liberty since March 2004.

…continue reading: What Constitutes a Sale of Substantially All Assets?

(Editor’s Note: This post is Lucian Bebchuk’s most recent column in his series of monthly commentaries titled “The Rules of the Game” for the international association of newspapers Project Syndicate, which are available here.)

A year after the United States government allowed the investment bank Lehman Brothers to fail but then bailed out AIG, and after governments around the world bailed out many other banks, key question remains: when and how should authorities rescue financial institutions?

It is now widely expected that, when a financial institution is deemed “too big to fail,” governments will intervene if it gets into trouble. But how far should such interventions go? In contrast to the recent rash of bailouts, future government bailouts should protect only some creditors of a bailed-out institution. In particular, the government’s safety net should never be extended to include the bondholders of such institutions.

In the past, government bailouts have typically protected all contributors of capital of a rescued bank other than shareholders. Shareholders were often required to suffer losses or were even wiped out, but bondholders were generally saved by the government’s infusion of cash.

…continue reading: Should Bondholders be Bailed Out?