The role of a bondholders’ representative (BR) improves the protection of bondholders’ rights and provides additional oversight of the execution of the issuer’s bond obligations. Let’s look at some of the practical aspects of BR activities.
Non-default period of a deal
The main BR responsibility during a regular deal period (when there is no default or signs of it) is to oversee the issuer’s activities and inform third parties. The law offers no list of events that a BR should control.
This may cause a situation where a BR is forced to prove to bondholders and third parties that the control measures taken were sufficient and that the BR acted with due diligence.
In order to avoid such situations TMF Russia suggests developing a mechanism of interaction and control that would contain a specific list of measures and describe the required actions of a BR and an issuer in different situations. This type of procedure can be incorporated in a contract with a BR and approved by a General Bondholders Meeting (GBS).
Restructuring (default occurred or approaching)
BR actions in the event of restructuring differ significantly from a BR’s activities during a non-default period. The focus shifts towards building a dialogue among different categories of bondholders, executing decisions related to termination of obligations, and participation in court proceedings as a third party and defendant.
Obviously, any restructuring is a redistribution of the values of a specific bond issue, which excites conflicts of interest among deal parties. The interests of different classes of investors collide with each other and with the interests of an issuer. From a BR’s point of view, such a situation creates difficulties because, according to the law, a BR must act in the interests of all bondholders. However, when the GBS carries a resolution by a majority vote (for example on termination of obligations on bond settlements), it raises a conflict with minority holders and holders who voted against the resolution.
This was exactly the situation faced during the restructuring of UTair Finance issues, when TMF Group served as the bondholders’ representative. In this case, the issuer was interested in restructuring and avoiding bankruptcy, and adequate arrangements were agreed with key investors.
In dealing with the conflicts of interest, defined are the following main areas of work:
1) Additional informative role
Once the settlement agreement has been finalised, the BR functionality expands to informing bondholders and providing explanations. At public offering, both qualified investors and common people can become bondholders, and the latter often lack special knowledge in related areas of law and financial markets. In this situation, a BR is the party that explains the settlement, its consequences and the GBS’ resolution to all bondholders who requested respective information.
2) Working “under pressure”
A GBS resolution is compulsory for all bondholders and a BR. In the UTair case, there were many holders (mainly qualified ones) who disagreed with the resolution and utilised different ways to cancel it, including:
- initiation of a legal action for annulment of the settlement agreement
- actions for voidance of the GBS’ execution of the settlement agreement and BR appointment (for various reasons)
- numerous requests to a BR to provide statutorily required documents and explanations.
We also faced a situation where one of the bondholders requested the Bank of Russia to exclude the BR from the Central Bank’s registry. This resulted in preparing and submitting explanations to the regulator about the unlawfulness of such a request and the absence of any violations with regard to the BR’s actions.
3) Court litigation
Upon passing a resolution on the settlement and executing it, we faced many actions from bondholders who disagreed with it. In these litigations, a BR acted as a defendant and a third party. Taking into account the number of bondholders, the geographic reach of legal actions was quite wide. The work of participants within the project, including consultants who provided courtroom representation, was well coordinated. Until now, all rulings were made in favor of the issuer and confirm the legitimacy of the restructuring and the GBS’ resolutions.
From a BR point of view, the success in the restructuring is primarily based on the following principles:
- issuer’s commitment to prevent the company’s bankruptcy and the achieved agreement with key investors
- precise compliance and absence of even minor violations in the arranging of the GBS and the passing of its resolutions
- timely and exact disclosure of information by an issuer and a BR prior to the settlement being agreed, and in the process of restructuring
- attracting professional consultants who developed and negotiated the deal structure, arranged the settlement agreement and represented issuer’s and BR’s interests in regional courts of Russia
- strict compliance with requirements of the law when entering the Bank of Russia’s registry and requirements on information disclosure that helped to prevent the BR’s exclusion from the Central Banks list.
The GBS and BR presence in the Russian law positively influences the bond market; more efficiently protects bondholders’ interests, improves cooperation between issuers and investors, and increases the investment attractiveness of Russian bonds.