Restructuring corporate bonds during the crisis

A. The coronavirus crisis – risks for bond issuers

The negative impact of the worldwide pandemic caused by the new coronavirus ("Covid-19 pandemic") has also hit issuers of corporate bonds. In general, the terms and conditions of corporate bonds include extensive legal consequences for bond issuers that become financially distressed. These consequences are based on financial covenants and/or other obligations and warranties. An issuer's inability to comply with such obligations due to a crisis usually results in a termination right of the bondholder (see also financing guide – corona virus 2.4). Such termination rights can, in turn, result in an obligation of the issuer to repay the entire nominal value of all outstanding notes plus interest. This would further deepen the financial difficulties of the bond issuer. Another possible scenario is that notes become mature during the crisis. In this case, the bond issuers are obliged to repay the bonds, although they are particularly dependent on liquidity to maintain their business operations, especially in times of the current crisis.

B. Restructuring options outside of insolvency

In this context, bond issuers should now consider preventing possible breaches of the terms and conditions of the bond by restructuring the bond in advance or seeking a prolongation of the bond. In addition to the possibility of a public exchange or repurchase offer, the German Act on Debt Securities (Schuldverschreibungsgesetz – "SchVG") offers an opportunity for restructuring bonds outside insolvency. The SchVG provides for the possibility of a (comprehensive) amendment of the terms and conditions by a majority resolution of the bondholders.

A resolution of the bondholders passed with the required majority is equally binding for all bondholders, even if they did not participate in the resolution or voted against the proposed resolution. In addition to a waiver of claims, deferrals, interest rate adjustments, a replacement of the debtor or an exchange or release of collateral, a resolution can also be passed on the conversion of the bond into equity (debt-to-equity swap).

Such resolution of the bondholders can also be passed in a vote without a meeting. This offers a time and cost efficient way of holding a bondholder voting without a physical bondholder meeting. However, the hurdles for such a vote are high.

I. Vote without a meeting

In contrast to corporate law, the SchVG allows bondholders to pass resolutions by means of a vote without a meeting, i.e. without having to meet physically at a certain time and place. The government's draft of the SchVG already referred to a "virtual meeting" similar – if different in structure – to that which has now been included in stock corporation law as a result of the Covid-19 emergency legislation. A vote without a meeting is intended to avoid unnecessary effort for the bondholders and the bond issuer. Especially in times of the Covid-19 pandemic, a vote without a meeting therefore proves to be an effective way of restructuring bonds. In many cases, the terms and conditions already provide for a vote without a meeting as the preferred form of voting. However, the procedure often fails because of the high attendance requirements as at least half of the outstanding bonds must be represented in the vote without a meeting.
In addition, the procedure differs considerably from the "virtual general meeting" as provided for stock corporations in the recently passed "Act on Mitigation of the Consequences of the COVID 19 Pandemic in Civil, Insolvency and Criminal Procedure Law" (COVInsAG):

• Invitation to vote. A vote without a meeting is called by means of a so-called invitation to vote, which is usually published by the bond issuer in the German Federal Gazette. It typically contains preliminary remarks that outline the economic background of the bond restructuring and explain the proposed resolution as well as information on the legal basis and voting procedure.

• Invitation period and voting period. The invitation to vote must be published at least 14 days be-fore the start of the voting period. The voting period shall amount to at least 72 hours.

• Chair of the voting and casting of the votes. In general, a notary public appointed by the bond issuer is the chairman of the vote without a meeting. The notary is responsible for counting the votes cast and verifying the entitlement to vote. In addition, the notary prepares the list of participants and the minutes of the vote without a meeting. In general, bondholders must cast their votes in text form (Section 126b of the German Civil Code (Bürgerliches Gesetzbuch)) to the chairman within the voting period. Online voting via the clearing systems, which is already the standard procedure for votes in the Anglo-American legal system (so-called consent soliciations), is also possible, although it has only rarely been used in Germany.

• Quorum and majority requirements. A vote without a meeting requires a quorum of at least 50% of the nominal value of the outstanding notes. In addition, resolutions that change the material content of the terms and conditions of the bond require a majority of at least 75% of the votes cast (qualified majority).

• Implementation of the resolution. The resolution adopted must be announced before its implementation. The resolution can only be implemented after the end of a one-month rescission period following the announcement of the resolution.

II. Second bondholders' meeting

If the vote without a meeting fails to achieve the required quorum, the chairman of the vote and/or the bond issuer may invite to a second bondholders' meeting after having verified the lack of a quorum. This second bondholders' meeting must necessarily be a physical meeting of the bondholders. Such second meeting always has a quorum. However, for resolutions which require a qualified majority, at least 25% of the outstanding notes must be represented at the second meeting. The partly extensive simplifications for holding virtual general meetings in times of the Covid-19 pandemic have not yet been extended by the German legislator to second bondholders' meetings. This is unfortunate, as in practice the required quorum for bearer bonds is often not achieved at the first attempt. However, if a vote without a meeting does not have a quorum, the bond issuer is free to once again contact the bondholders, whose identities have now often become more transparent, and then, after a short time period, to once again put its intended resolution to a vote in the form of a vote without a meeting in accordance with the procedure described above.

C. Restructuring options in the event of insolvency

Whether the possibility of amending the terms and conditions of a bond by a majority resolution of the bondholders in accordance with the SchVG also exists after the opening of insolvency proceedings is unclear in legal literature and has not yet been clarified by the highest German court. In particular in the relevant case of a debt-to-equity swap, it must therefore be decided in each individual case, considering the advantages and disadvantages, whether a conversion of the claims arising from the bond into equity capital should take place in accordance with the provisions of the German Insolvency Act (Insolvenzordnung) or those of the SchVG. However, in particular in the context of insolvency plan proceedings, there are also opportunities for all parties to agree on a joint solution for restructuring the bond.

D. Conclusion

In a crisis, outside of insolvency, the SchVG offers bond issuers and bondholders the opportunity to agree quickly and efficiently on an adjustment of the terms and conditions in a vote without a meeting. In this way, foreseeable liquidity bottlenecks can be avoided and possible financial difficulties or even an insolvency can be avoided in advance. However, in order to take advantage of this opportunity, it is advisable to approach bondholders as soon as possible with a proposal that represents an acceptable compromise. Anticipatory planning makes it possible to explore the bond restructuring options available during the crisis.