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The effects of the COVID-19 pandemic are presenting challenges to issuers around the world. A difficult liquidity situation may raise question marks about planned interest and repayment deadlines. The occurrence of an event of default that triggers termination by the bondholder, such as the bond issuer struggling to make payments, can lead to premature repayment of the bonds at nominal value plus interest, which in turn increases the issuer’s liquidity problems or may even lead to its insolvency. Placing new issues is difficult due to the volatile capital markets and reticence by investors.
If a bond issuer is in payment difficulties, and runs the risk of being unable to its debts under the bond, it can be restructured, subject to certain conditions, even outside of insolvency proceedings. This may particularly be the case, when the bondholders represent the largest, or one of the largest groups of creditors.
Outside of insolvency, restructuring in particular is an option by means of majority decisions by the bondholders’ meeting. This is then binding on all bondholders. This option is available under the Debt Securities Act (SchVG).
The SchVG, dated 31 July 2009, provides the legal basis for all bonds issued under German law after 5 August 2009. For bonds issued previously, it can apply subject to an opt-in decision being taken in advance. Without recourse to the possibilities of the SchVG, adjustments are only possible by going down the rocky, and for publicly offered bonds, well-nigh impossible road of separate agreements with each individual bondholder. This would always require the bond-holder to have full knowledge of the bondholders’ identity, or being able to obtain this information. In the case of bearer bonds, this is a time-intensive and complex process in practice.
SchVG Section 5 (3) lists the individual restructuring measures that can be adopted at a bondholders' meeting. In particular, a reduction and a change in the maturity of the repayment of the principal amount and interest, or the swap of the bonds into/ company’s equity are envisaged. However, no additional obligations may be imposed on the bondholders.
A resolution of the bondholders’ meeting relating to individual restructuring measures generally requires a qualified majority of 75 percent of the voting rights present, unless a higher majority is required in the terms and conditions.
Calling a bondholders’ meeting requires publication of the invitation in the electronic German Federal Gazette at least 14 days before the date of the meeting. In practice, it is anything but certain especially in the case of bonds held by a large number of creditors, that any planned restructuring measures can be decided at the first bond-holders’ meeting. Resolutions that make changes to the essential content of the bond terms and conditions can only be passed by this meeting if those present represent at least half of the outstanding bonds by value. If it is determined that the quorum has not been reached, a second meeting can be convened. In this case, those present must represent at least 25 percent of the outstanding bonds. The route of holding two successive bondholders' meetings is more likely in practice.
The advantage of restructuring through a vote at the bondholders' meeting is that it is binding on all bondholders, i.e. it also applies to those who were outvoted or absent.
Like the resolutions at an annual general meeting of a stock corporation, the resolutions of the bondholders' meeting may be challenged by bondholders pursuant to Section 20 SchVG. However, the so-called approval process allows an accelerated execution of resolutions and valuable time to be gained.
Implementation also appears difficult given the likelihood of continuing restrictions on contacts and meetings due to the COVID-19 pandemic. The law to mitigate the consequences of the COVID-19 pandemic in civil, insolvency and criminal law proceedings (COVID-19 Act) provides specifically for virtual meetings or resolutions in text form or by written submission of votes, inter alia only within the context of the Annual General Meeting of a stock corporation or for resolutions by the shareholders of a limited liability company.
However, the SchVG has from the start offered the possibility of the bondholders’ meeting for voting without a meeting, which becomes even more important in the event of payment difficulties under unusual circumstances, such as the current COVID-19 pandemic. A vote without a meeting is understood as a vote without a physical meeting. In principle, the provisions concerning convening and holding the bondholders' meeting are to be applied mutatis mutandis to votes without meeting. During a voting period lasting at least 72 hours, the bondholders can submit their vote in text form to the vote coordinator, a notary appointed by the bond issuer. If no quorum is established for the vote without a meeting, the scrutineer can convene a bondholders' meeting; the meeting is then regarded as a second meeting.
Practice has shown that, due to the waiver of the physical presence of the bondholders at a meeting provided for by law, the first bondholders' meeting is usually held as a vote without a meeting, despite this leading to an extension of the time period due to the legally prescribed voting period.
A second bondholders' meeting always has to be held as a physical meeting, in order to protect the bond creditors. This can present an obstacle, if restrictions deriving from the COVID-19 pandemic continue.
Therefore, the SchVG offers issuers and bond-holders the possibility of amending the bond’s terms and conditions, especially under the effects of an ongoing crisis, to tackle the threat of financial difficulties or even insolvency for the bond issuer. Restructuring bond conditions can be implemented in approximately three months, taking advantage of all possibilities to manage the time-limits permitted. Careful planning is advised to avoid the risk of a legal challenge of such decisions.
Thomas Fräbel
Partner
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