Protection of bondholders’ rights: Bank of Russia’s consultation paper
The Bank of Russia proposes to adjust the mechanism for bond loan restructuring in order to ensure a better balance of issuers’ and their creditors’ interests, and the protection of bondholders’ rights equally with other creditors. The regulator’s initiatives are described in its consultation paper ‘On conceptual approaches to regulating the protection of bondholders’ rights’.
Since 2014, such institutes as a general meeting of bondholders and a bondholder representative have been operating in the market. They help investors protect their interests, including in the course of the restructuring of an issuer’s debt obligations. In challenging economic situations, issuers consider restructuring as a way to prevent their default or recover their solvency thereafter. Issuers may change the amount of rights granted to bondholders, or terminate their bond obligations completely or in exchange for new obligations not related to the issued bonds. Issuers may do this only upon consent of the majority of bondholders.
However, Russian laws do not oblige issuers to ensure equal and fair terms for restructuring their obligations in relation to all creditors. Consequently, a number of issuers may restructure their debt so that bondholders’ yield turns out to be considerably below that of other creditors of one and the same issuer. Generally, more advantageous conditions are offered to those creditors who are able to provide long-term funding to an issuer and maintain with it long-lasting relations and close business ties.
The authors of the consultation paper propose to discuss whether it is reasonable to establish the requirement for equivalent bond restructuring terms for all types of creditors, and to allow the option to conclude a single bond restructuring agreement with all creditors.
The paper emphasises the need to increase executives’ and business owners’ liability for their decisions. If restructuring is carried out appropriately, an issuer’s owners and executives shall do everything possible for the issuer to recover its solvency within a reasonable period of time and to avoid a material deterioration of creditors’ financial standing. Measures to be taken by the issuer in this case shall involve not only the development of financial models and bailout plans, but also real financial aid to the extent possible, including capital injections from business owners, the suspension of bonus payments to the management, etc.
As the bond market is growing, the Bank of Russia considers it essential that the regulation enables control of and support for the development of the new relationship model ‘investors — their common representative — issuer’. In this regard, the consultation paper also focuses on problem areas in the effective regulation, specifically the fulfilment and termination of obligations on corporate bonds, changes in the amount of bondholders’ rights and bondholders’ waiver of their rights, and a bondholder representative’s participation in these legal relations.
The Bank of Russia will accept your suggestions and feedback on the consultation paper, including answers to the questions therein, through 10 September 2020.