In a challenging economic environment, bondholders may be wondering whether their bond investments remain sound, and should consider planning how they might approach adverse scenarios.
Bond investments are very different from bilateral lending arrangements – the covenants are typically less onerous, and the information flows are less fulsome. But it is still possible to actively monitor, and engage with, the issuer of the bond.
Here we provide our top tips and key considerations - to help bondholders navigate most scenarios they will encounter.
- Be proactive - understand your rights and how they may be enforced, in advance.
- Ask questions - ask the issuer for information relating to the bond.
- Engage with your representatives - investors will often be represented by a bond trustee
Notification of bond default
There will usually be an obligation on the bond issuer to advise you if the bond is in default. Other parties, such as the bond trustee and security trustee, will typically only have an obligation to advise you of a default if they have knowledge of its occurrence.
Issuers have an obligation to promptly provide information that a bondholder requests, unless disclosing such information would be illegal or the request is unreasonable. If you are concerned whether the information provided to you remains accurate (including as a result of COVID-19), then ask the issuer for further information. Most issuers will be happy to engage with diligent investors.
The issuer may also have an obligation to provide specified information to the trustees and bondholders (with or without a request). This could include financial statements or details of any material changes to the issuer's financial affairs. Accordingly, you should also check with the bond trustee and the security trustee and request what information they have available.
Discovering a problem
If you believe a default has occurred, you should notify the bond trustee and the security trustee as soon as you can in writing. You should try to provide as much information as you can of the events or circumstances constituting the default.
As a bondholder, you are usually not entitled to exercise a right or enforce a remedy directly against the issuer. The bond trustee will typically act on behalf of all bondholders, and will have mechanisms in place to engage directly with the issuer.
The role of different trustees
Bond trustee: The bond trustee acts as an intermediary between you (the bondholder) and the issuer. They will generally be required to act in accordance with specific instructions from bondholders in accordance with the bond documentation.
Security trustee: If your bond is secured (ie the payment obligations in respect of the bond are secured over the issuer's assets, such as through a real property mortgage or "all assets" security), then there will typically be a security trustee.
The security trustee will hold the security on trust for the bondholders and any other secured creditors (such as swap providers). Anything that is specific to the security will usually be done by the security trustee, again, usually after it has received instructions from the bondholders (via the bond trustee).
Bondholder relationship with trustees
The relationship between you and either trustee will be governed by a trust deed. If you want a bond trustee or security trustee to act a certain way and it is provided in the trust deed, then appropriate resolutions must be passed. Ordinary resolution usually requires 50% of the bondholders to approve.
More significant matters, such as declaring default or enforcing against security typically, typically have a required threshold of two-thirds.
Resolutions are usually passed at a meeting of bondholders, but the trust deed may also provide for bondholders to pass a written resolution instead of holding a meeting. The bond trustee will give instructions to the security trustee on bondholders' behalf.
Although the bond trustee acts as a 'middle-man' between the bondholder and the issuer or security trustee, there are also limits around the matters for which the bond trustee is responsible. Examples of things a bond trustee would not normally do include:
- investigating or monitoring the affairs of the issuer or any guarantor
- conducting an analysis and making decisions about whether or not to take action
- negotiating any documents on behalf of the bondholder.
Calling a bondholder meeting
Individual bondholders are not typically entitled to directly call a bondholder meeting. However, if you or another party have notified the trustee of a default, then:
- if there is a large enough group of bondholders wanting to call a meeting (typically 5% or 10% of outstanding bonds), then you (as a collective group) could request the issuer to convene a meeting
- the security trustee will usually be obliged to convene a meeting after being made aware of a default, so it can receive instructions as to actions it should take.
A bondholder can always request the bond trustee to convene a meeting, though the bond trustee has broad discretion as to whether it considers that to be appropriate.
Meeting structure and voting rights
The bond trustee and the security trustee typically only act on the instructions of the bondholders (and in the case of the security trustee, any other secured creditors). This will be done by way of passing a resolution which can be done at the bondholders’ meeting.
Before a resolution can be passed, there must be a quorum, which will be set out in the trust deed.
If you wish to take any other enforcement action, such as accelerating the debt or winding up the company, the bond trustee will need to receive instructions from the bondholders.
If a default has been declared and you would like to enforce against security, the security trustee will need to receive instructions, typically from the bond trustee.
Bonds are often issued in registered form through a clearing system called Austraclear, which electronically records ownership and entitlement to the securities. Users of Austraclear are called 'Participants' and your bond would be held through a Participant (or, possibly with a custodian, in which case the Participant would hold the bond on behalf of the custodian, who holds it on behalf of you).
This requires an extra step and party involved in the process, but the steps outlined above remain largely applicable.
Individual actions depend on the nature of your bond documentation, and the facts and circumstances specific to you. We can assist investors understand their rights, and how the transaction documents interact with their preferred course of action in the event of issuer distress. We can ensure you receive advice that is tailored to your particular circumstances.