New German Bonds Act: Options for Bondholders in case of issuer’s crisis
1. Starting point: Non-homogenous and non-transparent creditor structure
Corporate bonds, which are traded on the capital markets, typically have a non-homogenous and non-transparent creditor structure. If the company issuing the bond falls into an economic crisis which requires restructuring measures, this starting point can mean a serious risk for both bondholders and the company: individual bondholders do not have sufficient influence to assert their interests during the restructuring and the bond issuer sees itself confronted by a large number of creditors, whose identity is often unknown and therefore cannot even be invited to negotiations. For a long time there was only one way out of this dilemma: the initiation of court insolvency proceedings, which ultimately often did more damage than good.
2. The new German Bonds Act (Schuldverschreibungsgesetz – SchVG)
The legislator created a way out of this situation with the German Bonds Act (SchVG) which was enacted in 2009. This Act facilitates the consolidation of creditors’ interests by the creditors appointing a representative (referred to as the “joint representative”) equipped with comprehensive powers with regard to the bond issuer. The terms of a bond can also be changed by qualified majority with binding effect for all bondholders.
From the point of view of the bondholders, however, there is now also the risk that the company issuing the bond controls the course of events and exerts considerable influence e.g. by choosing a “joint representative” acceptable to it. Bondholders are therefore well advised to take action as early as possible in order to be involved in the restructuring process already at an early stage. In a first step, this requires that bondholders representing 5 % of the nominal value of the bond request that a creditors’ meeting be convened.
3. Creditors’ meeting: Approval of as few as 18.75 % may already suffice
The bondholders adopt their resolutions in the creditors’ meeting. The preparation and holding of these meetings is similar to the formal procedure for holding the general meetings of stock corporations. It will therefore often be the company which takes the initiative to invite bondholders to a creditors’ meeting in order to present a restructuring plan which has already been finalized. There is a risk that at this point in time no other alternatives exist or it can at any rate no longer be reviewed whether less drastic restructuring possibilities would be sufficient.
3.1 Majority and participation requirements
Changes to key bond terms require a qualified majority of 75 % of the voting rights participating in the meeting. In the first creditors’ meeting, however, a presence of 50% of all voting rights is sufficient for a quorum; in the second creditors’ a presence of only 25% of voting rights is sufficient for a quorum. Theoretically, a presence or representation of a mere 18.75 % of the nominal value of the bond can therefore be sufficient to adopt far-reaching changes such as deferrals and waivers, which become binding for all other bondholders.
3.2 Creditors’ initiative with 5 %
Creditors who together represent at least 5 % of the nominal value of the bond can demand that a creditors’ meeting is convened and stipulate its agenda. They can also demand that additional resolution proposals are put on the agenda of a meeting which has already been convened. As the “mildest means” at their disposal, bondholders can initially only select a “joint representative”, who identifies the information necessary for an assessment in the interest of the bondholders and is included in the development of a restructuring concept.
4. Joint representation of bondholders
Bondholders consolidate their interests by appointing a “joint representative”. A “joint representative” can already be appointed in the bond terms (contractual representative) or the bondholders can elect their “joint representative” in the creditors’ meeting (elected representative). The “joint representative” initially has far-reaching powers to obtain information from the bond issuer. He can also be authorized to negotiate with the bond issuer and to enter into agreements which are then binding for all bondholders. The “joint representative” is obliged to report to the bondholders on his activities and can convene creditors’ meeting himself if this appears necessary or expedient in order to agree on restructuring measures. The costs of the “joint representative” are borne by the bond issuer.
5. Conclusion: New German Bonds Act provides options for restructuring
The new German Bonds Act provides good options for restructuring a bond issuer outside insolvency proceedings. It is decisive for bondholders, however, that they present their interests early on in the restructuring process so that they do not have to accept the proposals of the company without having any alternatives simply due to a lack of information. The bondholders should appoint a “joint representative” who represents their interests with regard to the company when the first signs of a crisis become apparent. A creditors’ meeting for the election of a “joint representative” has to be convened if such is requested by 5 % of the voting rights.