On this quiet, Olympics Friday — some bank bail-in reading, courtesy of a judgement by the High Court of England and Wales.
It’s come down surprisingly hard on a small, but very important, weapon in the armoury of bailing-in bank bondholders: exit consents.
The case was brought by Assenagon, a German credit fund, against the nationalised remnants of Anglo Irish. Assenagon bought €17m of Anglo Irish subordinated bonds for around 42 cents on the euro between 2009 and 2010… before Anglo unveiled this exchange of sub debt later on in 2010, as a rather urgent need to raise capital emerged. The exchange asked holders to accept 20 cents in the euro. It also asked those who voted in favour to also vote to leave holders who rejected with one cent per €1,000 euros.
That’s the exit consent, which is probably better understood under the other name of “sweeper clauses”. It sweeps up creditors who might otherwise try to team up to block the overall exchange vote. It swept up Assenagon, who were left with €170 on their holdings.
All very prisoner’s dilemma. The point is that the notes owned by Assenagon were governed by English law, where exit consents haven’t really been tested.
The question is — do exit consent clauses induce holders to accept debt restructuring, or do they threaten holders against rejecting it?
Over to the Hon. Mr Justice Briggs for his judgement:
…[T]he challenge made in the present case to the exit consent technique is mainly based upon an alleged abuse by the majority bondholders of their power to bind the minority, albeit at the invitation of the issuer. The challenge is based upon the well recognised constraint upon the exercise of that power by a majority, namely that it must be exercised bona fide in the best interests of the class of bondholders as a whole, and not in a manner which is oppressive or otherwise unfair to the minority sought to be bound. Such limited published professional comment as there is upon the use of this technique within an English law context appears to assume that, provided the exchange offer and associated exit consent proposal is made and fairly disclosed to all relevant bondholders, no question of oppression or unfairness can arise. I was told (although it is impossible for the court to know for sure) that this technique has been put into significant, if not yet widespread, use within the context of bonds structured under English law, in particular in connection with the affairs of banks and other lending institutions requiring to be re-structured as a result of the 2008 credit crunch, so that a decision on this point of principle may be of much wider consequence than merely the amount at issue between the parties to this claim, which relates to subordinated notes in the company then known as Anglo Irish Bank Corporation Limited (“the Bank”) acquired by the claimant Assenagon Asset Management S.A. in tranches between September 2009 and April 2010, for an aggregate of just over €17m….
After some hesitation, I have concluded that Mr Snowden [for the claimant] arrived eventually at the correct question, which is whether it can be lawful for the majority to lend its aid to the coercion of a minority by voting for a resolution which expropriates the minority’s rights under their bonds for a nominal consideration. In my judgment the correct answer to it is in the negative. My reasons derive essentially from my understanding of the purpose of the exit consent technique, as described at the beginning of this judgment. It is not that the issuer positively wishes to obtain securities by expropriation, rather than by the contractual exchange for value which it invites the bondholders to agree. On the contrary, the higher percentage of those accepting, generally the happier the issuer will be. Furthermore, the operation of the exit consent (here the Bank’s new right to redeem for a nominal consideration) is not the method by which the issuer seeks to achieve the reconstruction constituted by the replacement of existing securities with new. The exit consent is, quite simply, a coercive threat which the issuer invites the majority to levy against the minority, nothing more or less. Its only function is the intimidation of a potential minority, based upon the fear of any individual member of the class that, by rejecting the exchange and voting against the resolution, he (or it) will be left out in the cold.
This form of coercion is in my judgment entirely at variance with the purposes for which majorities in a class are given power to bind minorities, and it is no answer for them to say that it is the issuer which has required or invited them to do so. True it is that, at the moment when any individual member of the class is required (by the imposition of the pre-meeting deadline) to make up his mind, there is at that point in time no defined minority against which the exit consent is aimed. But it is inevitable that there will be a defined (if any) minority by the time when the exit consent is implemented by being voted upon, and its only purpose is to prey upon the apprehension of each member of the class (aggravated by his relative inability to find out the views of his fellow class members in advance) that he will, if he decides to vote against, be part of that expropriated minority if the scheme goes ahead.
Putting it as succinctly as I can, oppression of a minority is of the essence of exit consents of this kind, and it is precisely that at which the principles restraining the abusive exercise of powers to bind minorities are aimed.
IFR reports that IBRC, the successor to Anglo Irish, is considering an appeal. The awarding of any damages is yet to come.
This will be one to watch. The judgement is limited to bank bonds issued under English law – but as bail-in principles spread across bailouts in general, this could get awkward.