Exit Consents Killed in England?
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.