The Eurobond market has existed for 45 years and its infrastructure reflects that. Bondholder trustees are gearing up to change one aspect that should improve their ability to obtain bondholder agreements. The present system – if it can be called a system – requires bondholders to receive 21 days’ notice of a meeting, which might or might not be quorate. If it is not quorate, another 14 days must elapse before another meeting can take place. The method through which bondholders are notified is equally antiquated. Investors are informed via newspaper adverts or through clearing agents.
"If the Eurobond markets were starting today the system would not operate as it does now. We are not saying it’s broken, we are saying it needs improving," says Olufemi Oye, director, Deutsche Bank, Trust & Securities services, and co-chair of the ESF trustee committee.
What is being proposed is complementary to what exists now in the trustee deed. The new idea would simply allow trustees to have an alternative method of notifying and voting that could be used in situations where there is a need to get bondholders’ opinions quickly.
"We’ve identified situations where a trustee needs quicker action than can currently be achieved," says Oye. "A good example is on a secured transaction, where there is a proposal to appoint an administrator. Under UK law there is a very narrow window to block that appointment and put in place an administrative receiver instead."
An administrative receiver enables the trustee, on behalf of the creditors, to enforce security on assets in a transaction/company to obtain repayment of secured debt.
The trustee of a secured structure would lose control of it as soon as an administrator is appointed – not an optimal outcome for bondholders in certain circumstances.
This is a serious problem for securitizations such as CDOs and SIVs but also an issue for senior secured bonds. It is not just the ponderous pace at which bondholder meetings take place but the system of voting which, through investors’ general inertia, can result in unnecessary delays.
Although the financial crisis might have made the need for change apparent, the trustee committee at the European Securitization Forum actually started working on this two years ago. For several years, corporate issuers working on a new corporate finance structure such as whole-business securitizations have struggled to work though the bondholder solicitation process.
Oye explains that the key proposal on this is for there to be a method of voting with a very low approval threshold – perhaps 25% – but with protections for the investors.
"We would like the market to decide whether the 25% number is an appropriate threshold," says Marco Angheben, director at the European Securitization Forum. "Among investors there may be different opinion as to what the right level might be."
At present, when bondholders vote not only is there a quorate threshold but also a requirement for a certain percentage of all those entitled to have a vote to be in favour. Under the new system, if the required number of bondholders approves a proposal it will go ahead – assuming that no one objects or requests a full bondholder meeting. "This new system would require bondholders to be more proactive to corporate actions," says Oye.
In addition to changing the way that voting takes place, speeding up communication is high up the agenda. The current system of notification via the clearing institutions and via the printed press outlets is deemed too longwinded. If the new approach is to succeed, the industry will also need to agree on introducing a new method of communicating announcements and voting. This could incorporate the use of real-time news outlets or the internet.
The ESF has joined with the International Capital Markets Services Association and the Association of Corporate Trustees, which are expected to consult members this autumn on the proposals, which would only apply to new bond transactions.