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Bypassing the Indenture Trustee?

posted by Mitu Gulati

Mark Weidemaier & Mitu Gulati

Earlier today we had a great time recording a Clauses and Controversies episode about the Province of Buenos Aires restructuring, which should post sometime next week. Our guest was Bloomberg reporter Scott Squires, who knows the Argentine context inside out and has also taken a deep dive into the mechanics and details of this restructuring. We got to talk about the PBA’s various shenanigans, and one aspect of our conversation continues to confuse us all. PBA offered to pay past due interest to creditors who consented to the restructuring; non-consenters did not receive the payment.

In the post linked above we wondered whether this payment, when added to PBA’s various threats, made the deal coercive. And we wondered why creditors, despite receiving fairly generous financial terms, were willing to accept this treatment. One answer we got from multiple sources is that it is simply too difficult and time consuming to deal with the trustee. Basically, it’s hard to get the trustee to act. First, holders of 25% in principal amount must instruct it to bring suit, then they have to negotiate the trustee’s indemnity, etc. And all this takes time. Meanwhile, the so-called “no action” clause in the indenture blocks individual bondholders from filing suit unless and until the trustee fails to act for 60 days. Perhaps any challenge the PBA’s conduct required quick, forceful legal action, but bondholders upset by the deal couldn’t muster the required 25% support or viewed the delay inherent in this process as a deal-breaker.

This would all make sense, were it not for the unusual drafting of another contract term. The clause played an important role in a lawsuit initially filed by Goldentree, one of PBA’s biggest creditors. Goldentree later changed course and were viewed as one of the drivers of the eventual deal. But the lawsuit was premised on the ability of individual bondholders to circumvent the trustee, found in this language (emphasis ours):

[E]ach Holder of Debt Securities shall have the right, which is absolute and unconditional, to receive payment of the principal of and interest on (including Additional Amounts) its Debt Security on the stated maturity date for such payment expressed in such Debt Security (as such Debt Security may be amended or modified pursuant to Article Eleven) and to institute suit for the enforcement of any such payment, and such right shall not be impaired without the consent of such Holder.

Our issuer-side friends have scoffed at this reading, telling us that the “no action” clause plainly requires all bondholder litigation to go through the trustee, at least until the bond has matured. That may be the common understanding. But that reading isn’t easy to square with the language above, which can plausibly be read to give individual investors the right to sue for missed coupon payments. Investors have a right to get “principal and interest on . . . the stated maturity date for such payment.” This is an unusual formulation. It is natural to say that principal comes due on the maturity date. But interest? Does interest “mature?” Our issuer-side friends would say, we assume, that the use of “stated maturity date” reinforces their understanding of the effect of the no action clause. But that reading seems to ignore the language “for such payment” (underlined above). This seems quite clearly to refer to individual payments, and the clause refers to both principal and interest. And it seems perfectly reasonable to interpret all of this to mean that, on the date when the interest is due, the interest obligation matures. Under this reading, investors can always sue for missed payments. It is other litigation—such as an acceleration in response to a cross-default trigger—that must go through the trustee.

Anyway, reading further, the clause says that an investor’s right to “such payment” – i.e., the interest that was due – and to institute suit” cannot be impaired “without the consent of such Holder.” That would at least arguably have enabled individual bondholder suits for past interest.

Again, many of our contacts in the market think this reading is nonsense and ignores the purpose and history of this clause. And we don’t really have a strong opinion as to which reading is correct. But we do think the reading above—which is presumably the reading underlying Goldentree’s suit—is plausible. Certainly there is a fairly straightforward argument to that effect based on the text of the clause, and text seems to matter quite a bit to judges applying New York law. It never ceases to amaze us how many seemingly settled questions—at least in the eyes of market participants—are not well reflected in contract language.

Comments

I think your reading is correct! But I don't know that this would have changed the analysis for bondholders upset with the coercion but not the economics. The holders weren't interested in suing for the money, they were interested in rejecting a bad precedent. And it seems (at least if you go by what the lawyers in the Contrarian case vs Ecuador concluded) that there was no way to sue on those coercion issues without going through the trustee.

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