The proposed future banking regulatory liquidity framework is widely regarded as favouring corporate bond issues as compared to corporate lending. The reasons for this are explained by Walter Gapp in his article in this roadmap. Provided that recent investor experience in a prominent Austrian insolvency scenario does not distract the (international) investor base from Austrian bond markets, this, along with modernised documentation and bondholder legislation (such as the German Schuldverschreibungsgesetz, which entered into force in 2009), could be an important driver of corporate bond financing and investment banks’ origination services in Austria and other European countries.
Can a legal technique contribute to fostering corporate bond issuance activity?
Leaving aside commercial restraints (inherent in the rather granular Austrian corporate landscape) to achieving the issuance sizes and bond ratings desired to tap (international) bond markets, certain peculiarities of Austrian insolvency and corporate bond legislation, and the resulting market standard documentation, will have to be addressed at the drafting level (or, especially as concerns insolvency matters [see Wolfgang Höller’s article in this roadmap], even the legislative level) in order to achieve a level playing field of issuance activity.
In light of lessons learned in times of distress of certain issuers, (potential) issuers and also investors have started exploring alternatives to the currently rather inflexible regime when it comes to bondholders rights and, even more, when it comes to readjusting the commercial terms of an issuance to changed economic circumstances.
Market-standard Austrian bond documentation operates on the basis that each bondholder can exercise his rights (including termination rights) individually. It does not anticipate that in certain circumstances, amendments to the terms and conditions of an issuance may be beneficial to both issuer and investor (eg, recalibration of covenant levels following a corporate reorganisation or temporary waivers to overcome short term financial distress).
In contrast to a loan instrument, where a borrower can turn to a specific lender or group of lenders, amendments to bond documentation can usually be achieved only with the consent of all parties (which, for all practical purposes, is not an option in case of a publicly offered and/or listed instrument) or by involving a bondholder trustee (Kurator) on the basis of a statute as old as 18741. This creates a level of inflexibility that is not desirable. Whereas few issuers have launched exchange offers, others have been left with no option but to open insolvency proceedings and have the court appoint a bondholder trustee.
Changes to documentation
One way to address the above dilemma is to use bond documentation that (not dissimilar to the Anglo-Saxon market standard) provides for bondholder decisions to be taken by majority vote, with (of course) required majorities differing depending on the subject of the vote. Stipulations to this effect would in practice be supplemented by provisions on the appointment of a Kurator under the documentation governing the issuance.
Legal writing supports such structuring options also under Austrian law as it currently stands, provided that a level of bondholder protection equivalent to the statutory regime of the KuratorenG is achieved2. However, some uncertainty remains. For retail issuances, this uncertainty is mainly caused by the increasingly restrictive case law of the Austrian Supreme Court of Justice (Oberster Gerichtshof; OGH), testing terms and conditions of Austrian law governed bond issues against consumer protection legislation. In addition, two 1937 decisions of the OGH3 will have to be taken into account, which held that the competent court may appoint a Kurator notwithstanding the fact that a bondholder trustee had been appointed in the terms and conditions of issuance.
Need for legislative action?
To date, the Austrian legislator has not moved to modernise bondholder legislation. However, we believe that not only arranging investment banks and their (legal) advisors would welcome certain changes to this effect. Also corporate issuers aiming at tapping the (international) bond markets would certainly appreciate a more up-todate and flexible legal regime. Ideally, the legislative process should be completed a bit swifter than in Germany, where the Schuldverschreibungsgesetz took some 15 years to finally be enacted – against the backdrop of the financial crisis, to enhance flexibility in restructuring situations.