Eurobonds

Before looking at the resolutions that are open to the companies on default of the bond it is first important to look at the type of bond that we are dealing with. The bond in this situation is a Eurobond. A Eurobond is a bond which is outside of the control of the country in whose currency they are denominated and they are sold n different countries at the same time by large companies. Eurobonds typically have maturities of 5 to 15 years and interest on them, which is payable gross may be at either a fixed or a floating rate. Eurobonds are bearer securities, which means that their owners are unregistered, and so they offer investors the attraction of anonymity. Because Eurobonds are unsecured, companies that issue them must be internationally known and have an excellent credit ratings. Companies may find that Eurobonds useful for financing long-term investment, or as a way of balancing their long term asset and liability structures in terms of exposure to exchange rate risks. Next to look at the situation on default if there is a trustee in place. A trustee will be able to deal with the default and the issues that arise out of this. The fundamental feature of the trust is the separation of legal and equitable title. In the commercial sphere various advantages flow from this. Equitable ownership vests in the beneficiaries of the trust. The use of a trust permits the trustees to exercise their discretion in the vent of a default and thereby protects the borrower from arbitrary legal action at the hands of an individual bondholder. If there is a trustee in place the bondholders will enjoy the equitable protection of being treated equally and the financial expertise of the trustee, who has the resources to bring action against the borrower if required. As S &C are Italian the Hague Convention will apply to this transaction. Article 2 of the Hague Convention states that the trustee has the power and the duty, for in respect of which he is accountable, to manage, employ or dispose of the assets in accordance with the terms of he trust and the special duties imposed upon him by law. As safeguards, nothing in the Hague Convention prejudices the powers of states in fiscal matters or the power of a court to apply its own public policy rules, while if all maters are internal to a state, other than the choice of a foreign law to govern the trust and foreign trustees, a court of hat state had the option not to recognise the trust. Where there is a trustee in a bond issue, it is common that the trustee should be given discretion to make determinations as to whether or not a matter is material. This will be relevant to issues such as whether the trustee, of its own volition and without seeking instructions from the bondholders, should be permitted to consent to a request made by the issuer for a minor amendment to the conditions attached to the bonds or to the giving of an inconsequential waiver from compliance with such conditions. It is also not uncommon for the documentation to provide in relation to certain of the events of default set forth in the relevant clause, that enforcement action will only be taken where such an event has arisen if the trustee considers that what has occurred is "materially prejudicial to the interests of the bondholders". Peter Smith J. in the High Court considered that phrase in Law Debenture Trust Corporation PLC v Acciona SA[1] where an event of default allegedly had occurred occurrence of an event of default was materially prejudicial to the interests of the bondholders, so that enforcement action could be taken, the trustee had first to determine that the event was presently occurring and secondly that it was prejudicial to the interests of the bondholders in a material way. By way of further amplification, his Lordship said that the interests of the bondholders related to their interests in the bonds, that is, their contractual entitlement to the payment of interest and capital and, as well, any ancillary rights which the bondholders might have to protect their entitlement to the payment of interest and principal, such as security rights and significant rights having a commercial protective interest, such as the right in this case to appoint a director to the board of the issuer. Material prejudice did not necessarily mean the same thing as material breach, as such prejudice might exist even without such a breach and even the existence of a material breach might not, on the facts, mean that the interests of the bondholders had been materially prejudiced. In most cases, the trustee would need to investigate the circumstances and their consequences to determine if the relevant element of material prejudice existed. However, the facts on their face might be sufficient to establish the relevant degree of material prejudice without the need for further investigation. His Lordship held that the facts in this case were sufficient on their own for the trustee to make a determination that there was material prejudice to the interests of the bondholders, in that the acts of the issuer in excluding the nominated director from the board, in failing to appoint a replacement nominated by the bondholders and in entering into the unauthorised transactions were obviously prejudicial as they stood, so that it was not necessary for the trustee to investigate the consequences of those things further before it could make a determination that what had happened had actually caused material prejudice to the interests of the bondholders. A trustee may be able to prevent an event of default from triggering repayment of the bonds if the effect is not materially prejudicial to bondholders. With a fiscal agent it is possible for bonds to become repayable if a single opportunistic bondholder detects a minor event of default that cannot be cured quickly, even if the damage caused to the borrower and the remaining bondholders is potentially enormous (e.g. such as this triggering cross-default provisions in other financing agreements). Bondholders can be better off under a trust arrangement if the borrower does default. First, the trustee can require payments to be made directly to it for the bondholders’ benefit; by contrast, funds held by the fiscal agent may be at risk of attack from a liquidator. Second, a trustee can ensure that all bondholders are treated equally, so avoiding a scramble by bondholders to start individual proceedings in different jurisdictions to establish preferential claims to the borrower’s assets. Trustees are able to balance the competing interest of the various bondholders, wereas, as will be shown when a bond holder meeting takes place there are complications, not only with time, logistics and expense, but with balancing the competing interests of the creditors. Perhaps the single most important role that an experienced trustee can play is in crisis management. Credit standing is matter of market confidence. A trustee can act behind the scenes in helping a borrower to overcome potential events of default. A trustee can provide an accurate gauge of bondholders’ likely reaction to a proposed course of action. In the absence of a trustee, a borrower may have to convene a bondholders’ meeting to agree even minor changes in the issue terms or to waive insignificant breaches of covenant. Such a meeting can be difficult to arrange, expensive to hold, and the outcome may be uncertain if the borrower has been unable to communicate with bondholders in advance. The convening of a meeting can also have an adverse impact on the borrower’s market standing and leaves the borrower vulnerable to the short-term whims of aggressive bondholders. Use of a trustee can avoid this expense and uncertainty. If a payment is missed on one loan, cross-default clauses may be invoked to declare the debtor in default on other instruments and to demand accelerated repayment of the entire corpus of the obligation. A 'material adverse conditions' clause in lending agreements allows creditors to declare a default whenever a material change in the condition of the debtor leads creditors to believe that the debtor may be unable to repay[2]. These clauses are all intended to protect the interests of each individual creditor, but when broadly exercised may end up hurting creditors as a group. Bibliography August R, (2004) “International Business Law: Text Cases and Reading” Fourth Edition, Pearson Arnold G, (2002) Corporate Financial Management, Second Edition, Harlow, FT Prentice Hall Burgess R (1992) “Corporate Finance Law”, “Second Edition, Sweet and Maxwell Cranston R, (2005) “Principles of Banking Law, 3rd Edition, Oxford University Press Ferren E, (1999) “Company Law and Corporate Finance”, Oxford University Press Ross S, (1999) “Corporate Finance”, Fifth Edition, McGraw-Hill Watson D, (1998) “Corporate Finance: Principles and Practice”, Pitman 1

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Footnotes

[1] [2004] EWHC 270, Ch D [2] For an explanation and example of such clauses, see Lee C. Buchheit, How to Negotiate Eurocurrency Loan Agreements (London: Euromoney Publication 1995) 101-05.

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