Neil Rabinovitch, partner in the FMC Toronto office, attended the 2012 International Bar Association Annual Conference where he spoke at the Securities Law Committee Session about the enforcement of bondholders' rights.

1. 1
Securities Law Committee Session
October 4, 2012 ‐ 9:30‐12:30
Presented by: Neil Rabinovitch, Partner
Enforcement of Bondholders’ Rights:
Why is bondholder activism so rare when issuers
default?

2. 2
Panel Introduction
2
Session Co‐chairs:
Judit Budai, Partner, Szecskay Attorneys at Law, Hungary, Securities Law Committee EMEA
Regional Rep.
David B. Rockwell, Partner, Sullivan & Cromwell LLP, US/UK, Securities Law Committee Co‐
Chair,
Panel members:
Juan Aguayo, Partner, Cuatrecasas, Gonçalves Pereira, Spain
Marcelo Armas, Partner, Philippi Yrarrázaval Pulido & Brunner Abogados,
Chile, Securities Law Committee Vice Chair
Orla Brennan, Partner, William Fry , Ireland
Joseph P. Davis III, Shareholder, Greenberg Traurig, LLP, USA
Miguel Lamo de Espinosa Abarca, Partner, Gómez‐Acebo & Pombo Abogados, S.L.P., Spain, UK
Sandrine Hirsch, Partner, Simont Braun , Brussels
Aline Poncelet, Partner, Paul Hastings LLP, France
Neil S. Rabinovitch, Partner, Fraser Milner Casgrain, Canada

3. 3
Introduction

4. 4
Bond Markets Overview – Issuers
• The market for debt instruments of all types – sovereign, corporate,
securitized, etc. – represents by far the largest and most important
type of financing by value worldwide.
• Stock of capital market debt instruments outstanding exceeds both
total stock market capitalization and total amount of bank loans (BIS,
SIFMA, S&P, Dealogic, McKinsey), (the ratio is around 3:1:1 taking a
roughly 300 trillion USD world market capitalization)
• The most important issuers of bonds in any market are the relevant
public authorities – i.e., the sovereign and quasi‐sovereign issuers,
especially the national government.
• Financial institutions tend to dominate the market's non‐sovereign
issues, followed by corporate issuers.
• Some markets also have a significant mortgage‐backed securities
sector (such as US Agency and German Pfandebriefe).
• Our session will focus on such bond markets and the behaviour of their
bondholders.
4

5. 5
Bond Markets Overview – Issuers, continued
• Generally, about 50% of the European bond market is
government debt, 50% is corporate out of which only 10% non
financial institutions and one third is asset‐backed, whereas in
the US 28% government, 9% municipality, 24% corporate, 26%
mortgage related (SIFMA).
• Government bonds have traditionally been seen as the most
risk‐free investment available in any market. This, combined
with the massive volume issued and the homogeneity of the
structure of government bonds has also led to them being the
most liquid. Recent events in the Eurozone have, however,
called these assumptions into question.
5

6. 6
Bond Market Overview – Investors
“Traditional” Investors
• Banks
• Pension Funds
• Insurance Companies
• Collective Funds/Investment
Funds (e.g. UCITS)/Mutual
Funds
• Limited number of family
offices, HNWI, other retail
investors (direct holding
typically not exceeding 10%)
• Hedge Funds
• Governments – Sovereign
Wealth Funds, Central Banks
(geographically for the US,
e.g. China)
• Municipalities
6
“New” Investor Classes

7. 7
Bond Markets / US‐specific Features
• The U.S. Market is overwhelmingly institutional. Very little retail‐
oriented debt offerings. Mostly OTC trades. Documentation is based
on statutory requirements and market standards.
• The US Trust Indenture Act of 1939 requires that all public issuances
of corporate debt securities have a trustee to act on behalf of
bondholders. The powers the trustee must have are specified in the
individual indenture applicable to the issue of securities, and by
mandatory provisions of the Trust Indenture Act. Indentures
generally provide that, in the event of a default, trustee has 60 days
in which to act. Bondholders generally must wait until this period
has expired. If the trustee does not act, bondholders may generally
deliver letter declaring an event of default, but only if representing
25% or more of the debt outstanding. Costs of acquiring this stake
can be substantial.
7

8. 8
Bond Markets / US‐specific Features, continued
• Standard corporate debt is generally aimed at the “traditional”
investor class. Lower rated high‐yield debt is rather targeted
to hedge funds. Repackaging high‐yield bonds into CDOs may
improve rating, but without real liquidity may turn into toxic
assets, endangering the financial institutions that hold them to
“zombies”. To improve the bondholders protection, industry
association, The Credit Roundtable in 2007 worked out
suggestions to improve bondholder covenants.
• On the secondary market hedge funds are the usual buyers of
distressed bonds.

9. 9
Bond Markets – European specific Features
• Issuances by Dutch, German and Spanish financial institutions
have generally dominated the debt instrument issuance
market during the past two years. Due to their experience in
the sub‐prime crisis, many financial institutions from Spain,
France, Italy, UK and Switzerland have shifted their attention
to the covered bond market, where they have been the
strongest issuers. In much of Europe, individual retail
bondholders are relatively more important than in the US.
9

10. 10
Bond Markets – European specifics, continued
• A further trend is the continued growth of the corporate bonds
market because of the needs for new financings due to credit
crunch.
– Sustainability of this tendency can be expected, as requirements of
Bazel III limits the participation of credit institution in the financing of
corporations.
– Another reason is that there is a development of an emerging new
market for SMEs. We can see:
• Proposal from the European Commission to create a « SME growth
market »;
• Development of specific platforms by European stocks markets (LES: MTS
Credit; Stuttgart: Bond, Borsa italiana);
• Setting up of a new specific platform (France);
• Flexible access to the bond market for SME (ex: grouped issuings, mini
bonds in UK).

11. 11
Bond Markets – European specifics, continued
• Apart from the rules on public issue of securities (Prospectus Directive
and implementing regulations as well as market protection rules to
secure transparency, such as MiFID(MiFID II, MAD/MAR, Takeover
Directive, etc.), there is no unified European legislation on bond
documents.
• Protective covenants and remedies are developed via industry
standards that are very much driven by the LMA documentation in its
various versions.
• In Europe in 2010 The Bond Covenant Group (UK, German industry
associations) prepared suggestions to improve model bond covenants
in the interest of protection of bondholders. Nevertheless, action by
holder representing a majority of a series of bonds is generally
necessary to instruct the bond trustee or agent to act in the event of
default of the issuer.
11

12. 12
Bond Markets – European specifics, continued
• On the enforcement side Council Regulation (EC) 1346/2000 on
insolvency proceedings aimed (i) to establish common rules
regarding courts competency, applicable law and the recognition of
the court’s decisions, and (ii) at dissuading the debtor from doing
“forum shopping”.
– Law and jurisdiction of courts of center of main interest (COMI)
member state (MS) and secondary proceedings in other MSs where
the debtor has a place of operation (limited in scope to the debtor’s
assets in this MS and are only winding‐up proceedings).
– Specific provision related to bondholders’s rights in Art. 5 state, that
„The opening of insolvency proceedings shall not affect the rights in
rem of creditors in respect of tangible or intangible, moveable or
immoveable assets belonging to the debtor which are situated within
the territory of another Member State at the time of the opening of
proceedings.”

13. 13
Bond Markets – Latin America specifics
• In the past 2 years highly rated investment grade bonds have tended
to dominate the issuance in Latin America. In this region, the main
investors are pension funds (like AFP) and insurance companies.
• Lack of activism characterizes the market. Although issuance deeds
ordinarily contain protective covenants, any bondholders’ action can
only be decided in a bondholders’ meeting, which can only be
summoned by the bondholders’ representative. Obtaining the
necessary majorities, as elsewhere, may be very difficult.
• Some bondholders (such as the AFPs) may also have an equity
interest in the company, and therefore they may decide not to take
an action as bondholders in order to protect their interests as
shareholders.
• Judicial procedures tend not to be expedient or fast.
13

14. 14
Bondholder activism in Chile
• Bondholder activism is extremely infrequent in the Chilean market
• Chilean capital market is influenced by large institutional investors,
pension fund administrators (“AFPs”) and insurance companies.
• AFPs have become the principal investors in the capital market system.
Investments permitted to AFPs include both equity and debt
instruments issued by large local corporations that comply with certain
corporate governance and financial standards set forth by the
regulators.
• AFPs are relevant buyers of debt instruments issued in the local debt
markets, as they are required to invest part of the funds they manage in
local fixed income instruments.
• Insurance companies are also relevant players in the Chilean capital
market, but unlike the AFPs, they invest primary in fixed income
instruments and have a very small presence as equity holders.
14

15. 15
Bond Markets – Latin America specifics
Other possible investors?
• Foreign investors: no relevant interest in investing in debt instruments
has been demonstrated by foreign entities, possible causes:
• no market for the Chilean currency outside of Chile.
• 35% withholding tax rate on any interest payments by Chilean bond issuers,
tax exemption only for foreign institutional investors in have respect of
interest payments made;
• Local investors: family offices appear to be the most relevant new
players in the capital market. They have experienced considerable
growth in the past ten years, and currently there are more than 40 of
them, which manage assets in the aggregate amount of USD 40,000
million, compared to the USD 150,000 million in assets controlled by
the AFPs. Future role is still unclear.
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16. 16
Composition of the Chilean debt market
– In terms of issuers’ rating (local rating):
• AAA : 14.8%
• AA : 45.6%
• A : 36.7%
• BB+ : 2.9%
• More than 97% of the issuances are by issuers with a rating of A or higher;
this could explain that the cases of default in the bond market are almost
nonexistent.
– In terms of investors:
• AFPs : 41.3%
• Insurance companies : 47.2%
• Mutual funds : 6.5%
• Others : 5.1%
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17. 17
Bond Markets – Other regions
• Generally, Asian bond markets are booming! This is due to:
– A good default track record at high yields;
– A slowing in the availability of bank credit locally means that Asian
companies are increasingly turning to capital market debt instruments as
an important source of finance;
– Lower yields available in the US;
• Borrowing from Middle East and Africa during the past two years
via international securities issuances reached the highest
amount ever raised (almost equal to the combined total Europe
and Asia‐Pacific together) (BIS March 2012 quarterly)
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18. 18
Typical contractual rights of bondholders
• Typical bondholder rights include the core rights of the right to interest
payment at designated dates, if any, plus the right to receive principal upon
maturity or early‐redemption. There may also be a range of covenants,
such as:
– Restrictions on disposition of assets and distribution of dividends
– Negative pledge (restriction on further encumbrance – lien or pledge, etc.)
– Restriction on related party transactions
– Restriction on transactions out of the core business or out of the business plan
– Change of Control restrictions
– Information requirements
– Financial covenants, e.g.:
• Debt/equity ratio
• debt‐to‐asset ratio or interest coverage ratio
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19. 19
Typical contractual rights of bondholders,
continued
• All these may bring up conflicts as well as help to solve
conflicts with shareholders of the issuer or other, primarily
senior creditors.
• But how predictable is enforcement of bondholder rights:
– against the issuer;
– under the applicable law;
– at the place of issue;
– the speed and reliability of dispute resolution systems; and
– the degree of protection of investor’s rights pre and post insolvency.
19

20. 20
So? What is bondholder activism exactly?
Is it the simple enforcement of contractual rights?
OR
Do bondholders need to engage in more creative recovery
strategies to be considered activists?

21. 21
What drives bondholder activism?
• The nature of bond investors may influence the prevalence of
bondholder activism:
– Activism by traditional institutions is generally only incidental to their
investment activities.
– Pension funds and similar investors tend to become active only when
an investment they hold for independent reasons suffers or may suffer
a significant decline in value. This may happen when there may be a
threat to non‐payment of interest on a bond acquired by e.g. at the
primary market.
21

22. 22
What drives bondholder activism? continued
• Hedge Funds on the other hand have contributed to an
increase in bondholder activism:
– During the past decade cases show evidence that hedge funds are at
the forefront of bondholder activism, even though traditional
institutions remain the owners of the bulk of outstanding corporate
bonds; and
– Moreover, several hedge funds specialize in pursuing bondholder
activist strategies (and they are not the same ones who are also
shareholder activists);
– Such strategies involve various actions in case of breach of bond
covenants (e.g. change of control, compliance with information
obligation or sale of assets) and provoking e.g. early redemption and
conversion into different higher yield or higher priority or shorter
maturity bond, better conversion rates, acceleration.
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23. 23
What drives bondholder activism? continued
• Bondholders often may not be aware of a violation when it occurs, if
the information covenant is not properly enforced.
• Bondholders face significant barriers if they want to enforce their
rights without the cooperation of each other, due to the difficulties
of assembling the percentage needed to instruct the trustee.
• The trustee itself has limited incentives to enforce bondholder rights
vigorously, due to lack of financial reward for doing so and concerns
about potential liability from acting improperly. Does the trustee
have a fiduciary duty to act in the interest of the bondholders
without specific instruction?
• Are other creditors in the mix and active? How tempting is it for
bondholders to free‐ride off their efforts?
• But what may be the ultimate goal of bondholders activism?
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24. 24
Activist Strategic Options
• Loan to Own Investments
– Distressed companies
– Capturing enterprise value
• Conversion of Debt to Equity
• Aggressive Enforcement of Contractual Rights
– Technical Default Provisions
– Acceleration of Debt
– Default Interest
– Consent and Other Default Waiver Fees
– Restrictive Covenants
• DIP and Exit Finance Lending
• Control of Restructuring Process
– Out of Court
– Formal Court Proceedings
24

25. 25
Question Marks Surrounding
Bondholder Activism
• Insider trading concerns and coordinated bondholder action
• No‐action clauses and the difficulties of collective action
– No action clauses used by companies to impede bondholder activism
– In order to commence proceedings to enforce rights under the trust
indenture, bondholders typically must:
• Give trustee notice of a continuing event of default
• Hold at least 25% of principal and make a written request to the trustee to
pursue a remedy
• Provide an indemnity acceptable to the trustee
• Trustee does not comply with request within 60 days of notice and offer of
indemnity
• During 60 day period, holders of a majority in value do not provide
inconsistent direction to the trustee
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26. 26
Question Marks Surrounding
Bondholder Activism, continued
– Reluctance of indenture trustees to take activist positions
– Difficulties negotiating indemnities with indenture trustee
– AbitibiBowater – example of impediment posed by no action clause
• Duties and liability of the bond trustee or agent
• The cost and financing of bondholder activism
– Incentives to free ride
• Fear of Foreign Insolvency Proceedings
– Uncertainty as to Due Process and Protection of Contractual Rights
– Chapter 15 Proceedings in US
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27. 27
The Dilemma of Enforcement of
Bondholders Rights
Issues to be assessed before making decision on enforcement:
i.Can the debt be accelerated at all? Or does applicable law (or
the contract) impose limitations?
ii.Is it value deteriorating?
iii.Can the security be easily enforced?
iv.Will acceleration make the debtor face a long enforcement
procedure and/or create conflicts with other creditors?
v.Is insolvency inevitable in an acceleration?
vi.What alternatives are available to avoid enforcement ?
27

28. 28
Belgian Case Study
• Bondholders actions to postpone the maturity date of EUR 2 billion
MCS (mandatory convertible securities) issued in December 2007 by
the former entities of Fortis group
– complex issue subject to English law but annex of Trust Deed relating to
bondholders meeting governed by Belgian law
• After collapse of Fortis group in 2008, drastic decline in MCS value
• At request of Trustee – instructed by a group of hedge funds –
bondholders meeting voted in November 2010 to extend maturity of
MCS for 20 years
– issuers tried to prevent holding of the meeting through summary proceedings
– issuers then considered the decision of the meeting as non binding and
converted the MCS on their original maturity date in December 2010
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29. 29
Belgian Case Study
• Certain of the hedge funds together with other investors filed a
litigation before the Brussels Commercial Court seeking cancellation
of the conversion and alternatively damages
– judgment (March 23, 2012) rejected the claims
– proceedings in appeal are pending
• Main issues at stake:
‐ collective action
‐ attitude of the Trustee – no action clause
‐ financing concern
‐ role of the bondholders meeting
‐ proper interpretation of provisions in trust deeds on bondholders rights (here,
combined with specific Belgian legal text)
‐ limits to the right to amend a contract by unilateral decision
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30. 30
French Example
• France has developed several tools to prevent insolvency such
as the Governmental Credit Mediator and the two new
safeguard procedures
• Heart of Defense case law supreme court decision March 8,
2011 confirmation of the risk of acceleration for creditors in
France
30

31. 31
The Case
Summary of Facts
• 24 May 2006: Issuing of a the €375 Million floating rate notes (“FRN”) due
in 2013 under NY law
• As of 31 December 2007: acceleration of FRN due to breach of the buy‐
back authorization
• June 2008: Noteholders confirmed their intention to initiate the
acceleration of payment of the entire loan
• 16 July 2008: Opening of the safeguard proceeding for Belvedere SA and
7 subsidiaries (France and Poland)
• 10 November 2009: 1st Safeguard Plan for Belvédère SA and 7 subsidiaries
• 4 April 2011: Annulment of the Plan
• 16 June 2011: Opening of a safeguard proceeding for French subsidiary
Moncigale, then extended to Belvedere SA
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32. 32
Summary of Facts, continued
• 13 September 2011: French Supreme Court rules that a trustee is
entitled to file receivables on behalf of the bondholders and
recognizes the mechanism of parallel debt.
• 20 September 2011: Conversion of the safeguard proceedings into a
judicial restructuring for Moncigale and Belvédère.
• 20 August 2012: Proposal by Belvedere of settlement of liabilities to
noteholders and creditors
• 20 September 2012: Approval by the creditor committees and the
general assembly of bondholders.
• Prior to 31 March 2013: General shareholders assembly convened
to approve the plan
The Case

33. 33
The Case (continued)
Towards debt equity swap in France?
Proposal for the settlement of liabilities in September 2012
• 2 step process:
i. Disposal step : disposal of one or several assets by March, 20, 2013;
ii. Conversion into equity step: the remaining part not covered by the net disposal
proceeds shall be converted into equity after March 2013
33

34. 34
Alternative solutions for enforcement –
Irish examples
• Independent News & Media plc – Bondholders swapped €123
million of €200 million bond (overdue for repayment) for a 46
per cent. equity stake. There was a rights issue for the balance
fully underwritten by the bondholders.
• eircom Group (former State telecommunications company) ‐
Pre‐agreed restructuring led by first lien lenders effected
through examinership (equivalent to Chapter 11). Reduced
eircom Group debt to €2.3 billion from €4.1 billion.
Subordinated lenders (including bondholders) wiped out.
Under an examinership scheme the approval of one class of
creditors can bind other classes unless those other classes can
prove that the proposed scheme would be unfairly prejudicial.
34

35. 35
Government/legislative intervention –
Irish examples, continued
• Irish State bank guarantee schemes
– 2008 CIFs Scheme ‐ Implemented a State guarantee scheme for
“covered liabilities” (deposits and other liabilities) of “covered
institutions” (who paid State a fee for the guarantee)
– 2009 Eligible Liabilities Guarantee (ELG) Scheme ‐ Covers senior
unsecured certificates of deposit, senior unsecured commercial paper
and other senior unsecured bonds and notes
• Eligibility criteria – debt security must be incurred during the period from
the date the relevant participating institution joined the ELG Scheme up to
and including 31 December 2012, have a maturity of less than 5 years, not
contain an event of default constituted by cross default or cross
acceleration
• As at July 2012 €30 billion of issued bonds were guaranteed under the ELG
Scheme and programmes greatly in excess of that figure are guaranteed
35

36. 36
Government/legislative intervention –
Irish examples, continued
– Guaranteed Irish credit institutions have paid in excess of €106 billion
to bondholders since 2008
– Subordinated Liabilities Orders (SLO)
• An SLO allows Minister for Finance change terms, conditions and maturity
dates on bonds and lift restrictions on buybacks
• SLOs have been introduced in conjunction with the affected institution
carrying out a liability management exercise (LME) in respect of
subordinated bonds. Arising out of LMEs institutions have launched debt
buyback programmes. Bonds held by non‐participating bondholders are
subject to SLOs which vary bond terms

37. 37
Government/legislative intervention –
Irish examples, continued
– Aurelius Capital Master ‐v‐ Minister for Finance
• Allied Irish Banks, p.l.c. announced the commencement of an LME. Aurelius
(and other hedge funds) purchased subordinated bonds after that date
• Aurelius challenged the SLO (constitutionality, contractual amendments
and fair procedures). Coupon payable during the trial and AIB set aside the
coupon pending the outcome of the challenge
• Aurelius withdrew claim after 10 days in court
• Terms of settlement confidential
– Abadi ‐v‐ Minister for Finance
• Abadi launched a challenge in respect of the same bonds and withdrew it
on day 2
37

38. 38
Government/legislative intervention –
Irish examples, continued
– Assenagon ‐v‐ Irish Bank Resolution Corporation Limited
• English case which considered the legality of an exit consent arising out of
an LME process – trust deed governed by English law. Court upheld the
principle that the majority power must be exercised bona fide in the best
interests of all bondholders and not in a manner which is oppressive to the
minority.
38

39. 39
Enforcement of bondholders’ rights
during Insolvency – Other Issues
• Does the lack of an efficient proper restructuring process (pre
and/or post insolvency) in your jurisdiction affect the appetite
for hedge funds activism?
• Impact of hedge funds on enforcement and work outs.
• Can creditors and equity holders be cramed down such that
the company can restart once it is deleveraged?
39

40. 40
The Spanish Example
Why is it so difficult?
1. Enforcement of bondholder rights is reasonably simple in Spain from a
contractual perspective but becomes problematic when the issuer
becomes insolvent.
2. Not al EoDs are sufficient for acceleration ‐ restrictive court resolutions.
3. Acceleration leads almost inevitably to insolvency unless a restructuring
is consensually agreed in short timeframes.
4. Insolvency process is value‐destructive and difficult to overcome due to:
i. No cram‐down before insolvency unless by court homologation and only for
unsecured financial entities.
ii. No „where the value brakes principle” and no equity cram‐down at
anytime.
iii. The stigma of becoming insolvent.
40

41. 41
The Spanish Example
Why is it so difficult?, continued
5. Security enforcement is easy, but may be too late ‐ 1 year stay on some
occasions.
6. Spain has improved its regulatory framework significantly, but still
insufficient for proper creditor activism.
7. Some stakeholders look for a UK Scheme of Arrangement: the cases of
Metrovacesa and La Seda de Barcelona.
8. Hedge Funds are reshaping the restructuring space in Spain: looking for
more sophisticated ways to change the capital structure.

42. 42
Cross border enforcement issues
• Limitations in the enforcement of the bondholders’ rights;
• Limitation in the enforcement of securities;
• Analysis of foreign issuances vs. local issuances in terms of
enforcement against a local issuer; and
• Limitation of enforcement of collateral and restrictions
thereon that may arise in bankruptcy scenario.
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43. 43
Lessons for the Issuer side
• Consult corporate/restructuring and tax colleagues when
drafting the terms of the bond to assess risks of possibly
changing composition of bond holders on a broader scale and
warn the issuer to assess risks not only for the short term
benefits of the bond issue!
• Do not rely entirely on common combined knowledge of
standard documentation !
• Read the bond covenants, particularly the non‐financial
covenants carefully and with critical eye – it will not hurt !
43

44. 44
Questions?
Neil Rabinovitch
416 863 4656
neil.rabinovitch@fmc‐law.com
Fraser Milner Casgrain LLP
77 King Street West, Suite 400,
Toronto‐Dominion Centre
Toronto, Ontario M5K 0A1

45. The preceding presentation contains examples of the
kinds of issues companies dealing with securities could
face. If you are faced with one of these issues, please
retain professional assistance as each situation is
unique.