Bond holders and trustees of companies facing financial difficulties will appoint credit officers for negotiating settlements between companies and their bond holders. The three largest bond holders will represent all investors in the aforesaid settlement negotiations. The existing prohibition, applicable to reporting corporations, to coordinate policy in order to arrive at the settlement will be repealed.
The ISA initiated the creation of a mechanism facilitating management of difficulties pertaining to the restructuring of payments on bonds issued by public companies. The mechanism will be similar to the one accepted in the banking loan system – on the one hand, it will allow the trustees to act more effectively in returning the debt to bond holders, while on the other – it will aid companies in performing repeat fund raisings. The creation of the aforesaid mechanism is an important part of the plan published by the Finance Ministry and dealing with the credit crisis.
The aims of the settlement are as follows:
– To ease the pressure on the credit market and end the impasse on the non-banking credit market;
– To create a mechanism allowing companies to reach an effective settlement , while providing maximal protection to bond holders;
– To ease the pressure on the banking system, as well as to disperse and diverge credit sources;
– To offer protection to institutional bond holders (to encourage institutional activism).
The main points of the settlement are:
– Broadening the trustees’ authority to call a meeting of bond holders;
– Creation of bond holders’ representative entity allowing them to coordinate their positions, in accordance with the permit issued by the Antitrust Authority;
– Appointment of credit officers , who will act to settle the debt between a company and its bond holders;
– Allowing companies to maintain confidentiality vis-a-vis the debt settlement process, given that exposure of the aforesaid process might lead to attempts to jeopardize it, subject to the prohibition on carrying out securities’ transactions during the “information delay” period;
– Obligation to ratify the settlement at the general meeting of all bond holders, according to the law.
Existing difficulties:
During the last years extensive fund rising, by means of bond issuance, have been underway as a viable alternative to the banking credit. The current global credit crisis had created a situation whereby the issuing companies face difficulties in returning their debt to bond holders as well as in carrying out repeat fundraising. Hence, the ISA had formulated guidelines for dealing with difficulties pertaining to debt reorganization.
The ISA had identified a number of difficulties and limitations with regard to effective recycling of debt under the current circumstances. As a whole, bond holders are not sufficiently active in order to protect their interests as regards the trustee and the company. This is usually due to the wide dispersion of bonds among various holders and a range of legal limitations placed on their mutual cooperation, preventing them from maximizing their power and influence opposite the issuing company. At times the trustees themselves are not sufficiently active, whether due to the lack of appropriate professional qualifications or due to low recompense they receive for their work. Moreover, it appears that the existing security laws also limit the players in their ability to arrive at a confidential settlement for the return of the debt. The absence of confidentiality, during the negotiating process, makes companies want to avoid reaching a settlement with their bond holders, due to an apprehension that disclosure, concerning the aforesaid negotiations, will jeopardize any potential settlement for the recycling of the debt because of the existence of other creditors. The companies also maintain that they are apprehensive about discussing any settlement with their bond holders and getting their feedback prior to the settlements approval by the general meeting, since it might be regarded as the use of insider information. Thus, the issuing companies do not show enough initiative to recycle their debts until they become insolvent. In addition to the aforesaid, there are legal and procedural limitations to authorizing changes to the provisions of bonds’ issue.
Proposed solutions:
In order to contend with all the above mentioned problems the ISA, in cooperation with the Antitrust Authority and the Supervisor of the Capital Market, had formulated guidelines aimed at moderating these difficulties by means of a decision making mechanism for all bonds’ series, with the following characteristics:
– Convention of bond holders’ representatives, whose bonds are held by a trustee. In some cases, such as fear of non-repayment on bonds, the trustee will have to convene a meeting of the aforesaid representatives. The trustee will also convene a meeting of representatives if required to do so by the company or by a person holding a significant share of bonds under recycling. Under the guidelines the posts, the qualifications and the tools available to the trustees will be broadening, along with the provisions limiting their responsibility.
– Representatives of the bond holders. Maintaining negotiations between bond holders and the company requires, almost by definition, coordination of stance amongst the bond holders themselves. Currently, such a cooperation is viewed with suspicion due to the antitrust and insider trading regulations. However, regardless of the aforesaid misgivings, it was decided to allow the coordination of stance between the three entities holding the largest amount of bonds, excluding those who individually or by means of a controlling shareholder, in an entity, have a personal interest or are in a conflict of interest vis-a-vis the approval of the settlement. This stipulation will provide the trustees and the parties to the settlement, with the address for receiving “indications” prior to the final approval of the settlement.
– Credit officer. Currently, most trustees lack the professional qualifications necessary for formulating the settlement for returning the debt to the creditors. Such a professional function, a credit officer, will be established under the mechanism proposed by the ISA. After a trustee convinces the meeting of the representatives it will nominate its own person or a controlling shareholder in an entity, which doesn’t have a personal interest or is not affected by a conflict of interest vis-a-vis the approval of the settlement. The task of the credit officer is to examine the need to the settlement between a company and its bond holders. The credit officer will be authorized to conduct negotiations with the company interested in restructuring its debt, as well as with the company’s other creditors and potential investors. The credit officer will be authorized to pass company related information to credit officers appointed to other bond series issued by the same company (who are prevented from making securities transactions prior to the publication of the confidential information available to them or until the expiration of the stipulated time limit). The credit officer will consult with the appointed representatives as regards the emerging settlement. The credit officer will possess broad authority vis-?-vis the issuing companies, including the right to obtain information and documents from the aforesaid companies. The proposed amendment to the law stipulates that the company’s non-compliance with its obligations toward the credit officer is recognized as a sufficient reason for an immediate repayment demand by its bond holders. The trustee shall supply the credit officer with all the information available to him. With the completion of his activities, the credit officer will report to the representatives and to the trustee regarding the details of the settlement which he recommends to sign with the company.
– Confidentiality of the process. In order to allow the company to carry out effective negotiations with its bond holders, and to deal with the risk that certain entities will try to jeopardize these negotiations, the ISA shall permit the company to postpone reporting on the meeting of representatives, on the appointment of a credit officer and on the negotiations in accordance with the regulations – as long as the aforesaid information is not made public. The trustee will not be obligated to report the abovementioned details to the bond holders, with the exception of the chosen representatives.
– Meetings of the bond holders. Even though only a limited number of bond holders will participate in the formulation of the settlement, any settlement will have to be approved by the general meeting of bond holders. Thus, preserving the right of small bond holders to express their opinion regarding the proposed settlement.
– Prospectus publication. Special disclosure regulations will be stipulated regarding information to be included in the prospectus.
– Validity of guidelines. The guidelines will be adopted under the temporary provisions valid for a period of two years.
This decision has been approved by the plenum of the ISA and it will be published for public comments for a period of three weeks.
