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Exit Consents Killed in England?

posted by Anna Gelpern

The English High Court just ruled in Assenagon Asset Management S.A. v. Irish Bank Resolution Corporation Limited (formerly Anglo Irish Bank) that a popular technique used to pressure bondholders to participate in a debt restructuring, as deployed by Anglo Irish in late 2010, violated English law and the terms of the Trust Deed. I have not been able to find a link to the opinion yet, but there is some good reporting here and here, including links and block quotes. This is potentially huge for bank, sovereign, and all manner of other bond restructuring--plus competition among financial jurisdictions.

Exit consents are essentially votes by bondholders participating in a bond exchange to amend the old bonds on their way out, so as to make them unattractive to holdouts. The issuer typically asks participating holders to amend the old debt as part of the exchange offer. Knowing that exit consents are on the table makes creditors think twice before holding out: if participation is high enough for the exit vote to succeed, holdouts can see the value of their bonds evaporate, lose enforcement rights, or "merely" lose all liquidity in the remaining instruments. In the Anglo Irish case, non-participating sub debt was made subject to a call option at 1 cent on 1000 euros.

In 1986, the Delaware Chancery Court said in Katz v. Oak Industries Inc (508 A.2d 873) that exit consents were not a breach of good faith by the issuer. The English High Court said that they amount to an abuse of power by the majority, "oppressive and unfair" to the minority. Interestingly, it did not distinguish between the super-nasty exit consents of the sort used in Anglo Irish and the middling defensive sort used in the past by other debtors, such as Uruguay. The English court also ruled that the exiting votes should not have been counted because they were effectively cast on behalf of the debtor, Anglo Irish, and should have been ignored by the terms of the trust deed. Note that even though the English court ruled on grounds easily distinguishable from Katz,  it made a point of parting ways with Katz.

Here is why this is a really big deal:

1. The exit consent technique is *pervasive*. Tons of past and imminent restructurings (think Spanish banks) are at stake. Contrary to press reports, however, Greece did not use exit consents in its English law bond exchange, so that is in the clear.

2. Particularly for sovereigns and banks, where there is no bankruptcy or bankruptcy/resolution is fraught with systemic consequences, this decision takes away a major source of flexibility (bondhoders might say abuse). Bail-in just got harder when it might matter the most.

3. The contours of inter-creditor good faith duties just got broader and fuzzier (see also here). The operation of good faith in bondholder votes going forward could be a challenge. This could have particularly big implications for widespread adoption and use of Collective Action Clauses.

4. Now there is another big incentive for bondholders to use English law. People are already paying attention, after Greece ran roughshod over its local law debt but ended up paying on some English law bonds. This is another, potentially more broadly applicable reason to come to London.

5.The decision shows courts can and do rule on principle, market and policy consequences be darned. I might be tempted to temper my views on the Second Circuit pari passu argument as a result.

This will certainly be appealed and tested broadly. So much for a quiet August and beyond.


Hmm, I still wonder what effect that will have long term?

The decision in Assenagon is available from BAILII here:

"Greece did not use exit consents in its English law bond exchange."

What were the Consent Solicitations then for the English Law bonds if not "exit consents"?

Greece used majority amendment clauses, which are a subset of CACs. If the majoruty succeeds, everyone gets the same terms and there are no holdout bonds. Greece solicited consents to use CACs. It got enough in some bonds, but not all.

Exit Consents, in contrast, are a technique often used when it is impossible or impractical to use CACs: for example, when the bond requires unanimous or a very high supermajority agreement to change financal terms - but only a simple majority to change any other terms. Some old bonds will remain; the issuer seeks a simple majority to make them unattractive.

With both CACs and Exit Consents, the majority votes to make life unpleasant for the minority.

Thanks for the response, Anna.

I've read the judgement, where the judge found in favour of the holdouts on two out of three points:

1. The holdouts argued that a Resolution amounting to the complete exproriation of the bonds should not be allowed. The judge disagreed and said the Resolution was allowed by the terms of the bond.

2. The Bank essentially had a contract to exchange the old bonds of the majority, that meant the Notes were beneficially owned by the Bank (to some extent) and therefore those votes should be disregarded. The judge agreed.

3. The Resolution amounted to an unfair oppression by the majority of bondholders against a minority in the same class. The judge agreed.

It seems to me that point 3 is irrelevant to Greece, because the effect of the Greek Resolutions meant that holdouts received the same package as those voluntarily exchanged, so there is no question of oppression.

However, point 2 is interesting, and may be the point that has the widest implications in the marketplace, including perhaps for the recent Greek PSI, where similar arguments could perhaps be made.

Is it possible that it would come down to the wording specified in the relevant documents for each bond issue? The judge seemed to say that "held to the benefit of" had quite broad applicability (whereas in earlier precedents, the language was narrower - "held by the Issuer or subsidiary").

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