Restructuring listed debt – navigating the information barrier

In this article, the authors explore certain key issues creditors and debtors face when restructuring listed debt (referred herein as "bonds"). There are administrative problems that can arise when dealing with a large number of disparate bondholders and the complexities of dealing with material non public information ("MNPI") during restructuring negotiations. The authors consider the different parties involved in these restructurings and how advisors can assist those parties in navigating these hurdles.

This article first appeared in the January 2021 issue of Butterworth's Journal of International Banking and Financial Law

Key Points

• Debtors and creditors face certain key issues when attempting to restructure listed debt; in particular, identification of bondholders and handling material non public information.
• Ad Hoc Groups of Bondholders may streamline the restructuring of listed debt between a debtor and its numerous creditors.
• Legal and financial advisors can assist debtors and creditors in navigating the hurdles around material non public information that arises when restructuring listed debt.
• Bondholders will need to become "private" in order to negotiate with full information about the issuer; "private" bondholders will be able to trade again once the information is no longer material non public information either because it is public or no longer material; the key is to ensure bondholders are not restricted for longer than necessary.

Identifying bondholders – a unique challenge

The particular way bonds are held present unique challenges for a restructuring. Some of the hallmarks of bonds, for example, that: (i) they are freely tradeable (without consent); (ii) they are typically traded anonymously in electronic book entry form in clearing systems; and (iii) there is no available register of bondholders, can make the task of identifying bondholders challenging. Unless bondholders proactively identify themselves to an issuer, the issuer may not be aware of who its investors are. This results in a "catch 22 situation", with the issuer having important commercial points to discuss with its creditors but not knowing who those creditors are.

There are "push" and "pull" tools for this. A bondholder identification exercise can be undertaken by the issuer. This involves pushing a notice through the clearing systems, where the bonds electronically trade, to identify itself to the issuer. This is, however, purely voluntary on behalf of bondholders, and so the data provided is only as good as the responses received. The other method is to announce that the issuer is considering strategic alternatives and providing contact details for bondholders to contact. This provides an open platform to "pull" in responses from bondholders. More often than not, however, this is a spur for bondholders to organise themselves with advisors, and ultimately form a group of bondholders that is able to negotiate together with the issuer. Such a group is commonly referred to as an "Ad Hoc Group of Bondholders", or an "AHG".

Ad Hoc group of bondholders

An AHG often, because of its somewhat organic creation and the nuances in public debt restructuring processes, typically forms around financial and legal advisors. Those nuances are discussed below. The AHG acts as a sounding board for the debt restructuring negotiations/proposals between the issuer and the bondholders. Negotiations between the AHG and debtor may be around straightforward restructuring proposals such as amendments to covenants or waivers of events of default.

Negotiations can also concern more wholesale restructuring options such as debt haircuts, maturity extensions and debt for equity swaps. The use of the AHG allows for an orderly negotiation process between the debtor and its creditors.

The bondholders will form a group, which can represent the views of other bondholders, and, in turn, negotiate a transaction that is not only acceptable to the AHG, but is one the AHG believes will be acceptable to the wider group of bondholders. An AHG can be an effective mechanic, as a central entity, to address the administrative problems that debtors encounter whilst trying to start the negotiation process. Being able to deal with just an AHG can streamline the restructuring process. Equally, the AHG can form its own restructuring plan and present this to the issuer. This often forces bondholders to reconcile their different commercial interests into one plan that works for, if not all, at least a large majority of bondholders. An AHG can be formed by any of the holders and can either be a minority or majority group. Regardless of its size, the AHG provides a good starting platform for a restructuring process to begin. If agreement on a suitable restructuring strategy can be reached, other bondholders may be reluctant to frustrate these plans unless they have an alternative plan.

Advisors

As discussed, an AHG will typically be represented by financial and legal advisors. Each advisor will have its own specialist area of expertise and will focus on specific aspects of the restructuring negotiation and process. However, there can also be significant overlap of these areas in a restructuring, with advisers all working towards a common goal.

Advisors to the AHG can be very beneficial by assisting in the AHG's formation. Advisors connect investors and advise the group on restructuring strategies and solutions, which are likely to require complex implementation steps.

Importantly, advisors also play a key role between the AHG and the issuer/debtor in relation to the handling of material non public information. The issues surrounding inside information and how advisors can assist in mitigating these issues will now be examined.

Material non public information

During restructuring negotiations, creditors will need to have access to commercial information held by the debtor so they can make informed decisions about the restructuring proposal. However, given that this information is typically private, it may constitute material non public information. Possession of such information will restrict bondholders from trading in their securities. This is because trading securities whilst in receipt of MNPI concerning those securities is prohibited in practically all jurisdictions. Taking Europe as an example, the EU Market Abuse Regulation ("MAR") is a regime which regulates market abuse and the disclosure of inside information for securities listed on a stock exchange in the EEA. MAR applies to listed financial instruments, including listed bonds. Under Articles 8 and 14 of MAR, it is an offence to engage in or attempt to engage in insider dealing. Insider dealing is when an entity possesses inside information about a listed financial instrument and then trades in this financial instrument on their account. Under Article 7 of MAR, inside information is information that is precise and not yet public but relates to the issuer of the financial instrument, and if it were made public, it would likely have a significant effect on the price of the financial instrument. Private commercial information about an issuer's business, accounts and operations, etc., (especially during a period of financial distress) will undoubtedly constitute inside information. Heavy sanctions can be placed on organisations who commit an insider dealing offence. This includes significant fines and bans for individuals from holding managerial positions in the financial services industry.

An important distinction to note is the difference between confidential information and MNPI. All MNPI is likely to be confidential (until released) as it is non public. However, not all confidential information is MNPI. This is because it may not be "material" or it may not match the regulatory definition of being "sufficiently precise". This is an area where advisors can play a vital role in determining what information bondholders can receive whilst they remain on the public side and are trading. Often, stakeholders will look to advisors to help synthesise down MNPI to themes, which are no longer sufficiently precise, thereby allowing bondholders access to information before making the decision to go private.

As discussed, it is important for bondholders that they do not inadvertently receive inside information because this will prevent them from trading. However, bondholders may need to receive some inside information if they are to make informed decisions regarding the restructuring proposals and process. Getting the balance (and the timing) right for members of the AHG is a delicate undertaking. Advisors will need to ensure that the bondholders who are part of the AHG have not received any inside information that may, in turn, taint and thereby restrict the whole group. These bondholders are "public" bondholders and in order to negotiate with full information about the issuer, they will need to become "private" bondholders. The advisors to the AHG will be relied upon for determining the best time for the bondholders to become private.

Staying public or going private

Often, where an AHG has formulated its own restructuring plan, it will be the advisors who will approach the issuer/debtor to present and negotiate that proposal. In most scenarios, advisors will need to sign confidentiality agreements to receive private information. There is no worry about advisors being restricted as they are not bondholders and do not trade securities. The advisors will need to exercise professional judgment when carrying out the mandate of the AHG, or negotiating on their behalf, to ensure the AHG is not exposed to any inside information. As negotiations progress, the advisors will need to consider at what point in the negotiations it is appropriate for the AHG to be "taken private". Relevant factors to consider are:

• How far the negotiations have progressed
• The financial status of the debtor and whether new money from the bondholders will be required as part of the restructuring process
• The commercial benefits, or lack thereof, of the AHG remaining public and thereby not restricted

Following consideration of these factors, if it is determined that the AHG should be taken private, the advisors will need to construct effective cleansing arrangements. Cleansing is the process of publicly disclosing inside information that had been disseminated to the AHG. This will result in the information no longer being MNPI and, consequently, the AHG no longer being restricted (as the information is in the public realm). Advisors will draft these provisions into confidentiality agreements signed by the members of the AHG prior to those members becoming private. Advisors will need to ensure that these arrangements result in cleansing taking place at pre agreed points in the process, so as to prevent the AHG from being restricted for any longer than necessary. Advisors to the AHG may also draft contractual terms, which force the debtor to cleanse the information at a certain point. Advisors may even push self cleansing provisions that would allow the AHG to carry out the cleansing process itself if it feels the cleansing provided by the issuer was insufficient. However, the practical implication of such self cleansing provision is seldom tested. Typically, debtors will ensure compliance with their own cleansing obligations, given that it is a contractual requirement and that, if not, they are likely to cause significant issues for the bondholders with whom they still need to reach a resolution. Advisors play an important role in determining the adequacy and timing of the information cleansing exercise to ensure that an AHG is not restricted for longer than necessary as part of their negotiations.

Anthony Isichei (White & Case, Trainee Solicitor, London) & Hannah Langley (White & Case, Professional Support Lawyer, London) contributed to the development of this publication.

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