The extent of bondholders’ rights in relation to a borrower has been an issue for some time, given these investors’ growing demands for minimum covenants, improved disclosure and more rigorous documentation standards.
For these reasons, the recent battle between MyTravel and its bondholders bore all the potential to serve as an important test case. However, while it brought the whole question of bondholder rights into the courtroom, it also served to emphasise how unclear we all still are over the ‘economic interests’ of bondholders when a borrower gets into trouble.
In the recent case, an initial ruling in the High Court that owners of MyTravel’s convertible bonds should not have a say in the tour operator’s restructuring of £800m of its unsecured debt was a severe blow to the investors who had demanded greater consultation on the restructuring and better terms. More importantly, the ruling that the subordinated bondholders did not have ‘sufficient economic interest’ to make them ‘a party to the scheme’ immediately raised serious concerns among the owners of bonds in general since it could seriously negate their negotiating power in similar, future cases.
However, this ruling was overturned only last month in the Court of Appeal and a consensus was subsequently reached with MyTravel and the committee representing the bondholders; the company also agreed to pay their legal costs in the case.
The end result has clearly indicated that there is no shortcut in a reorganisation, which completely bypasses bondholders’ interests, and that their voice should be sought in the event of a capital restructuring. As the court found, the subordinated debt holders’ rights may be different from those of other creditors, but this does not mean they can be ignored.
While the Court of Appeal did not rule that the bondholders ‘had no economic interest’ in organisations, it did not say that they did, again failing to clarify the status of bondholders.
For corporate treasurers the message is clear. Bondholders are important stakeholders in a company. They can be influential and should the company seek a restructuring, they can become even more powerful. Treasurers and their lawyers must remember this at the outset when negotiating bond terms and the rights and powers allowed to their bondholders.
LIZ SALECKA
Editor