DOCSLIB.ORG

Holdout Litigation and Sovereign Debt Enforcement

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Holdout Litigation and Sovereign Debt Enforcement Holdout litigation and sovereign debt enforcement Kartik Ananda and Prasanna Gaib aDeutsche Bundesbank, Wilhelm-Epstein-Strasse 14, 60431 Frankfurt am Main, Germany bUniversity of Auckland, 12 Grafton Road, Auckland 1142, New Zealand Abstract We present a model that characterises the ex ante and ex post implications of holdout litigation, and which highlights the importance of debt ownership and ju- risdictional competition in determining the efficacy of the legal threat to sovereign debt enforcement. Our optimal contracting framework allows a role for secondary markets to mitigate liquidity risk and a role for bankruptcy courts to adjudicate disputes. We endogenise the extent to which the bankruptcy regime is based on judge-made law and identify conditions under which the disciplining effect of hold- out creditors prevails. Our model contributes to the policy debate on sovereign debt restructuring by formalising some of the insights in Bolton and Skeel's(2004) proposal for a sovereign bankruptcy framework. Keywords: Sovereign debt restructuring, holdout creditors, bankruptcy procedures, forum shopping, enabling law JEL classification codes: F34, F55, G33, K4 ∗We thank Jonathan Thomas and Di Li and seminar participants at the Workshop on Sovereign Debt Re- structuring, Glasgow, and Twelfth Annual FIRS Finance Conference, Hong Kong for helpful comments. We wish to acknowledge the generous support of the Institute for New Economic Thinking (INET Grant INO1400004). Gai is extremely grateful to the Warden and Fellows of All Souls College, Oxford, and colleagues at INET@Oxford for their warm support and hospitality during the preparation of this paper. The views in this paper are those of the authors and do not necessarily reflect the views of Deutsche Bundesbank. ∗∗E-mails: [email protected], [email protected]. 1. Introduction The messy legal disputes surrounding Argentina's recent default and the Eu- ropean debt crisis of 2012 have rekindled interest in frameworks for sovereign bankruptcy. Increased globalisation has meant that sovereign debt contracts now allow for the attachment of of collateralised assets under court procedure and, in recent years, nearly 50% of debt crises have involved litigation, compared with less than 10% in the 1980s and 1990s (Schumacher et al., 2014; Miller and Thomas, 2007). The high profile of hedge fund managers such as Paul Singer and US Dis- trict Court Judge Thomas Griesa has also cast a spotlight on the role of holdout creditors and courts in the enforcement of sovereign debt contracts. A commonplace perspective on holdout creditors is that they interfere with orderly debt restructuring, justifying reforms to bankruptcy procedures. Krueger (2002) suggests, for instance, that their presence increases concerns among other debt holders that the court will grant the holdouts a claim on the sovereign with a higher priority than their own. And Buchheit et al.(2013) express concern that countries may be less disposed to imposing haircuts on creditors for fear of be- ing entangled in a prolonged and costly legal dispute. But others (e.g. Dooley, 2000; Shleifer, 2003; Fisch and Gentile, 2004; and Scott, 2006) counter that the threat of successful litigation helps maintain the viability of sovereign debt mar- kets, making for cheaper sovereign lending and reinforced creditor rights. Shleifer (2003) contends, moreover, that sovereign bankruptcy reform will \...only work if counterbalanced by...the presence of a court with...a duty to find solutions that best serve the interests of creditors." In an important contribution to the debate, Bolton and Skeel(2004) propose a framework where, instead of a supranational tribunal, sovereigns in difficulty are free to file for bankruptcy in a court of a jurisdiction in which they have issued bonds. They argue that competition between bankruptcy courts makes for better 2 decision making and more speedy resolution of restructuring. The proposal also eschews the idea of a mandatory set of provisions governing bankruptcy in favour of a degree of opt-out that would enhance efficiency by enabling a country to best tailor provisions to their own circumstances. While recognising that sovereigns may have an incentive to select overly hard provisions to maximise access to credit, Bolton and Skeel point to the vital and delicate role of the court in precluding such outcomes. The renewed importance of holdout litigation in sovereign debt restructuring raises some important questions. First, what are the consequences of vesting over- sight for sovereign debt restructuring with the bankruptcy court of a jurisdiction where the sovereign has issued bonds? Second, should the bankruptcy framework be based on a mandatory set of provisions established by statute or should it be more \enabling", thereby permitting countries to seek exemptions and granting individual judges the discretion to make law? And third, what is the impact of such choices on lending to sovereigns? This paper explores these questions in the context of a canonical model of sovereign debt. In our optimal contracting framework, the secondary market al- lows creditors who initially lend to the borrower to manage their liquidity risk. An increased incidence of liquidity shocks has two effects { it increases the expected liquidation cost for the original creditors, making it less attractive for them to lend. And it also opens up the possibility that debt securities are purchased by secondary market investors who are more litigious than the initial creditors. Shifts in the composition of the creditor base are thus crucial to debt enforcement, and we identify conditions under which the market discipline of holdout creditors promotes ex ante capital inflows. We also allow troubled debtors to file for bankruptcy and, moreover, choose the bankruptcy court in which their case is heard. We model judicial competition 3 explicitly and examine its implications for the holdout effect. If there is significant judicial emphasis on the fiduciary duty of the debtor to its creditors, then it induces more creditors to consider litigation and sharpens holdout discipline. But counter to this, as the emphasis on judge-made law increases, it improves the efficiency of the court and lowers the cost of filing for the debtor. The holdout effect is more prevalent in situations where court adjudication speed is low, or where lobbying by bankruptcy professionals stymies legal reform and prevents a reduction in filing costs. Secondary markets and jurisdictional competition thus have an important bear- ing on whether control rights over collateral in bankruptcy should be vested with individual judges or determined via mandatory statutes. Since specific skills are required to run projects, placing collateral under creditor management opens the door to dead weight costs. These costs do not feature in the optimal contract, and so the social planner must allocate ex ante lawmaking rights in a way that takes these into account. Our results show that as the underlying creditor pool shifts in favour of investors with low litigation costs, the holdout effect dominates over higher expected liquidation costs for the original creditors and prevails even when courts are very efficient. Equilibrium bankruptcy law is more enabling under these conditions. Only in circumstances where court efficiency dominates the holdout effect does the planner opt for a mandatory framework. Our findings are broadly supportive of the Bolton-Skeel perspective, although the effects of creditor composition and judicial competition suggest more nuanced conclusions. In particular, the idea of permitting sovereigns to have the choice of opting out from some provisions of the bankruptcy framework and allowing judges the latitude to grant or deny those exemptions is consistent with our findings. A \one size fits all" approach, where a uniform and mandatory set of provisions is applied to all debtors would seem to work best when there is a very high degree of judicial efficiency and limits to legal lobbying. Unlike Bolton and Skeel, however, 4 we suggest that the gains from ex post forum shopping by debtor stems more from the benefits of the holdout effect than from judicial competition. The literature on creditor litigation in sovereign debt includes Haldane et al. (2005), Engelen and Lambsdorff(2009), Pitchford and Wright(2012), Bai and Zhang(2012). and Schumacher et al.(2015). But these papers focus on the ex post debt renegotiation stage rather than the ex ante implications for sovereign borrowing and the design of the bankruptcy framework considered here.1 Recent work has also highlighted the importance of the composition of the creditor base in sovereign debt enforcement. Broner et al.(2010) develop a model in which once it becomes apparent that default is looming and penalties are insufficient, foreign creditors are able to sell debt securities on the secondary market to domestic residents. Since domestic residents expect the government to enforce domestic debts, they purchase the securities at face value. Trading in the secondary market thus allows foreign creditors to circumvent default.2 The secondary market channel through which debt is enforced in our model is very different, however. The links between sovereign debt and judicial activism are yet to be fully ex- plored. Miller and Thomas(2007) note that judicial activism is made possible due to the lack of statutory regulation of sovereign debt and highlight the lack of attention paid to common law traditions in sovereign debt litigation. The role of common and civil law in shaping bankruptcy has, however, been examined ex- tensively in the corporate finance literature. On one perspective (La Porta et al., 2008), common law systems are better at promoting credit markets and the use 1Contributions that examine how policy intervention in sovereign lending influences both ex ante and ex post efficiency include Ghosal and Miller(2003), Gai et al.(2004) and Bolton and Jeanne(2007). 2Two recent papers provide evidence in support of Broner et al's thesis. Using data from the euro area, Brutti and Saur´e(2012) point to a reallocation of debt positions from foreign creditors to domestic banks following the recent debt crisis.
Load more

Recommended publications
  • Lessons from the Sovereign Debt Market
    The Market Reaction to Legal Shocks and Their Antidotes: Lessons from the Sovereign Debt Market Michael Bradley, James D. Cox, and Mitu Gulati ABSTRACT In September 2000, a Brussels court ruled in favor of a hedge fund that held an unpaid debt claim against the Republic of Peru. The decision was based on a novel interpretation of the common pari passu clause. Policy makers and practitioners suggested that this decision sig- naled a paradigm shift that caused a significant increase in the risk of holdout litigation faced by sovereign debtors. Over the ensuing years, multiple reform solutions were imple- mented including the revision of certain contractual terms, the filing of amicus briefs in a key New York case, and the passage of legislation in Belgium. This article investigates whether the markets perceived an increase in risk in sovereign debt in the wake of the Brussels court decision. And, to the extent the markets reacted to the increase in legal risk, did any of the antidotes that were implemented to reduce the supposed increased holdout risk work? 1. INTRODUCTION This article examines the market reaction to a series of legal events concerning the judicial interpretation of the pari passu clause in sov- MICHAEL BRADLEY is the F.M. Kirby Professor of Law and Finance at Duke University. JAMES D. COX is the Brainerd Currie Professor of Law at Duke University. MITU GULATI is Professor of Law at Duke University. Thanks to Stephen Choi, Anna Gelpern, Lee Buch- heit, Marcel Kahan, Kim Krawiec, Tom Miles, Eric Posner, Mark Ramseyer, Barak Rich- man, Robert Scott, and workshop participants at the Institute for Law and Finance (Uni- versity of Frankfurt) for comments and conversations about this project.
    [Show full text]
  • An Experimental Study of the Holdout Problem in a Multilateral Bargaining Game John J
    Economics Faculty Publications Economics 10-2009 An Experimental Study of the Holdout Problem in a Multilateral Bargaining Game John J. Cadigan Gettysburg College Pamela Schmitt U.S. Naval Academy Robert Shupp Michigan State University See next page for additional authors Follow this and additional works at: https://cupola.gettysburg.edu/econfac Part of the Economics Commons Share feedback about the accessibility of this item. Cadigan, John J., Pamela Schmitt, Robert Shupp and Kurtis Swope. "An Experimental Study of the Holdout Problem in a Multilateral Bargaining Game." Southern Economic Journal 76.2 (October 2009), 444-457. This is the publisher's version of the work. This publication appears in Gettysburg College's institutional repository by permission of the copyright owner for personal use, not for redistribution. Cupola permanent link: https://cupola.gettysburg.edu/econfac/10 This open access article is brought to you by The uC pola: Scholarship at Gettysburg College. It has been accepted for inclusion by an authorized administrator of The uC pola. For more information, please contact [email protected]. An Experimental Study of the Holdout Problem in a Multilateral Bargaining Game Abstract When an economic exchange requires agreement by multiple independent parties, the potential exists for an individual to strategically delay agreement in an attempt to capture a greater share of the surplus created by the exchange. This "holdout problem" is a common feature of the land-assembly literature because development frequently requires the assembly of multiple parcels of land. We use experimental methods to examine holdout behavior in a laboratory bargaining game that involves multi-person groups, complementary exchanges, and holdout externalities.
    [Show full text]
  • Paper: Improving the Sovereign Debt Restructuring Process
    Improving the Sovereign Debt Restructuring Process: Problems in Restructuring, Proposed Solutions, and a Roadmap for Reform Nouriel Roubini and Brad Setser Paper prepared for the conference on “Improving the Sovereign Debt Restructuring Process” co-hosted by the Institute for International Economics and Institut Français des Relations Internationales, Paris, March 9, 2003. We thank Fred Bergsten, Ted Truman, Bill Cline, Anna Gelpern, and Jean Pisani-Ferry for useful comments and suggestions. The usual disclaimer applies with force: the opinions expressed in this paper are strictly those of the authors and not of any other institution or organization. Nouriel Roubini Brad Setser Stern School of Business Council on Foreign Relations New York University [email protected] [email protected] Introduction The recent debate on reforming the international financial system has focused on the need to improve the sovereign debt restructuring process, and in particular on steps that could limit the risk that litigation could disrupt or delay a sovereign debt restructuring. This debate increasingly has focused on the debt restructuring process in those cases where debt reduction is needed to produce a sustainable debt profile. Less attention has been given to those cases where a sovereign lacks the reserves needed to cover its near-term obligations and, absent international support, has a clear need for debt rescheduling to push out near-term maturities. There is a strong case for seeking to make the sovereign debt restructuring process more orderly, more predictable, and more rapid. There is also a strong case that steps to address collective action problems created by the threat of holdout litigation could help to improve the restructuring process, and give all parties more confidence that there is path that can lead a sovereign from the decision that a restructuring is necessary to its successful conclusion.
    [Show full text]
  • Troubled Debt Restructurings
    Journal of Financial Economics 27 (1990) 315-353. North-Holland Troubled debt restructurings An empirical study of private reorganization of firms in default* Stuart C. Gilson The Unicersity of Texas at Austin, Austin, TX 78712, USA Kose John and Larry H.P. Lang New York University, New York, NY 10003, USA Received November 1989, final version received May 1990 This study investigates the incentives of financially distressed firms to restructure their debt privately rather than through formal bankruptcy. In a sample of 169 financially distressed companies, about half successfully restructure their debt outside of Chapter 11. Firms more likely fo restructure their debt privately have more intangible assets, owe more of their debt to banks, and owe fewer lenders. Analysis of stock returns suggests that the market is also able to discriminate er ante between the two sets of firms, and that stockholders are systematically better off when debt is restructured privately. 1. Introduction With, the proliferation of leveraged buyouts (LBOs) and other highly leveraged transactions, there has been growing popular concern that the corporate sector is being burdened with too much debt. Much of this concern *We would like to thank Edward Altman. Yakov Amihud, Sugato Bhattacharya, Keith Brown, Robert Bruner, T. Ronald Casper, Charles D’Ambrosio, Larry Dann, Oliver Hart, Gailen Hite, Max Holmes, Scott Lee, Gershon Mandelker. Scott Mason, Robert Merton, Wayne Mikkelson, Megan Partch, Ramesh Rao, Roy Smith, Chester Spatt, Gopala Vasudevan, and Richard West for their helpful comments. We are especially grateful to Michael Jensen (the editor) and Karen Wruck (the referee) for their many detailed and thoughtful suggestions.
    [Show full text]
  • Commentary the Trust Indenture Act of 1939 in Congress and the Courts in 2016: Bringing the Sec to the Table
    COMMENTARY THE TRUST INDENTURE ACT OF 1939 IN CONGRESS AND THE COURTS IN 2016: BRINGING THE SEC TO THE TABLE Mark J. Roe∗ Distressed firms with publicly issued bonds often seek to restructure the bonds’ payment terms to better reflect the firm’s weakened repayment capabilities and thereby avoid a bankruptcy. But Depression-era securities law bars the bondholders from agreeing via a binding out-of-bankruptcy vote to new payment terms, thus requiring individualized consent to the new payment terms, despite that such binding votes are commonplace now in bankruptcy and elsewhere. Recent judicial application of this securities law rule to bond recapitalizations has been more consistent than it had previously been, with courts striking down restructuring deals that twisted bondholders’ arms into consenting to unwanted deals. These coercive bond exchanges first became common in the 1980s, when many hostile tender offers for public companies had a similarly coercive deal structure. The coercive deal structure in these takeover offers was brought forward then to justify wide managerial countermeasures, but this structure disappeared in takeovers. However, it persisted in bond exchange offers. While these court decisions striking down the coercive bond exchanges faithfully apply Depression-era securities law to thwart issuers from twisting bondholders’ arms into exchanging, the bond market and distressed firms would be better served by exempting fair votes that bind all bondholders to new payment terms. The Securities and Exchange Commission now has authority to exempt fair restructuring votes from this now out-of-date securities law. CONTENTS INTRODUCTION ............................................................................................................................ 361 I. THE HOLDOUT PROBLEM ................................................................................................. 363 II. THE EXIT-CONSENT PROBLEM ......................................................................................
    [Show full text]
  • Vulture Funds” and the Risks Posed to Developing Economies
    Class, Race and Corporate Power Volume 2 Issue 3 Article 7 2014 The Argentine Dilemma: “Vulture Funds” and the Risks Posed to Developing Economies Mine Doyran CUNY Lehman College, [email protected] Follow this and additional works at: https://digitalcommons.fiu.edu/classracecorporatepower Part of the Political Economy Commons, and the Political Science Commons Recommended Citation Doyran, Mine (2014) "The Argentine Dilemma: “Vulture Funds” and the Risks Posed to Developing Economies," Class, Race and Corporate Power: Vol. 2 : Iss. 3 , Article 7. DOI: 10.25148/CRCP.2.3.16092120 Available at: https://digitalcommons.fiu.edu/classracecorporatepower/vol2/iss3/7 This work is brought to you for free and open access by the College of Arts, Sciences & Education at FIU Digital Commons. It has been accepted for inclusion in Class, Race and Corporate Power by an authorized administrator of FIU Digital Commons. For more information, please contact [email protected]. The Argentine Dilemma: “Vulture Funds” and the Risks Posed to Developing Economies Abstract Post-crisis Argentina is a case study of crisis management through debt restructuring. This article examines how Argentina negotiated the external debt in the wake of the sovereign default in December 2001 and now confronts challenges posed by holdout creditors—the so called “vulture funds”. It argues that debt restructuring has put a straitjacket on the national economy, making it virtually impossible for healthy growth short of a break with the international economic order. While Argentina has successfully restructured a $95 billion debt with an unprecedented “hair cut” (around 70% reduction in “net value of debt”), a sustainable growth appears out of reach as long as reliance on the government debt market prevails.
    [Show full text]
  • Preserving Value by Restructuring Debt
    VOLUME 24 | NUMBER 4 | FALL 2012 In This Issue: Preserving Value by Restructuring Debt Seven Ways to Deal with a Financial Crisis: 8 Charles W. Calomiris, Columbia University, Cross-Country Experience and Policy Implications Daniela Klingebiel, World Bank, and Luc Laeven, International Monetary Fund Coming Through in a Crisis: How Chapter 11 and the Debt Restructuring Industry 23 Stuart Gilson, Harvard Business School Are Helping to Revive the U.S. Economy International Propagation of the Credit Crisis: 36 Richard A. Brealey, Ian A. Cooper, and Evi Kaplanis, Lessons for Bank Regulation London Business School A Proposal to Improve U.S. Housing Market Incentives: 46 Michael A. Ehrlich and Ronald Sverdlove, New Jersey Insti- A Response to the Federal Reserve White Paper of January 2012 tute of Technology, Charles F. Beauchamp, Middle Tennessee State University, Rawley Thomas, LifeCycle Returns, and Michael G. Stockman, MG Stockman Advisors LLC A Primer on Distressed Investing: 59 Stephen G. Moyer, Distressed Debt Alpha, David Martin, Buying Companies by Acquiring Their Debt Orix Corp., and John Martin, Baylor University Are Too Many Private Equity Funds Top Quartile? 77 Robert Harris, University of Virginia, Tim Jenkinson and Rüdiger Stucke, University of Oxford What Happens During the Private Period?: 90 Sudip Datta, Wayne State University, Mark Gruskin, Evidence from Public-to-Private Reverse LBOs Penn State-Lehigh Valley, and Mai Iskandar-Datta, Wayne State University The Case for Secondary Buyouts as Exit Channel 102 Ann-Kristin Achleitner, Oliver Bauer, Christian Figge, and Eva Lutz, Technische Universität München (TUM School of Management) Do Private Equity Funds Increase Firm Value? 112 Tsung-ming Yeh, Akita International University Evidence from Japanese Leveraged Buyouts CDS and the Resolution of Financial Distress 129 Stephen J.
    [Show full text]
  • Distorted Choice in Corporate Bankruptcy Abstract
    D AVID A . S KEEL, J R . Distorted Choice in Corporate Bankruptcy abstract. We ordinarily assume that a central objective of every voting process is ensuring an undistorted vote. Recent developments in corporate bankruptcy, which culminates with an elaborate vote, are quite puzzling from this perspective. Two strategies now routinely used in big cases are intended to distort, and clearly do distort, the voting process. Restructuring support agreements (RSAs) and “deathtrap” provisions remove creditors’ ability to vote for or against a proposed reorganization simply on the merits. This Article offers the first comprehensive analysis of these new distortive techniques. One possible solution is simply to ban distortive techniques, as several scholars advocate with RSAs that offer joinder bonuses. Although an antidistortion rule would be straightforward to imple- ment, I argue this would be a mistake. The distortive techniques respond to developments that have made reorganization difficult, such as claims trading and a greater need for speed. Further, Chapter 11’s baseline was never intended to be neutral: it nudges the parties toward confirming a reorganization plan. There also are independent justifications for some distortive techniques, and the alternative to using them might be even worse—possibly leading to more fire sales of debt- ors’ assets. How can legitimate use of the new distortive techniques be distinguished from more perni- cious practices? To answer this question, I outline four rules of thumb to assist the scrutiny. Courts should consider whether holdouts are a serious threat, the magnitude of the coercion, the significance of any independent justifications, and whether the holdout threat is an intentional feature of the parties’ contracts.
    [Show full text]
  • The Role of Litigation in Sovereign Debt Restructuring
    University of Pennsylvania Carey Law School Penn Law: Legal Scholarship Repository Faculty Scholarship at Penn Law 2004 Vultures or Vanguards?: The Role of Litigation in Sovereign Debt Restructuring Jill E. Fisch University of Pennsylvania Carey Law School Caroline M. Gentile Follow this and additional works at: https://scholarship.law.upenn.edu/faculty_scholarship Part of the Banking and Finance Law Commons, Business Law, Public Responsibility, and Ethics Commons, Business Organizations Law Commons, Corporate Finance Commons, Economic Policy Commons, International Business Commons, International Economics Commons, International Law Commons, International Relations Commons, International Trade Law Commons, Law and Economics Commons, Legal Studies Commons, Litigation Commons, and the Work, Economy and Organizations Commons Repository Citation Fisch, Jill E. and Gentile, Caroline M., "Vultures or Vanguards?: The Role of Litigation in Sovereign Debt Restructuring" (2004). Faculty Scholarship at Penn Law. 1051. https://scholarship.law.upenn.edu/faculty_scholarship/1051 This Article is brought to you for free and open access by Penn Law: Legal Scholarship Repository. It has been accepted for inclusion in Faculty Scholarship at Penn Law by an authorized administrator of Penn Law: Legal Scholarship Repository. For more information, please contact [email protected]. VULTURES OR VANGUARDS?: THE ROLE OF LITIGATION IN SOVEREIGN DEBT RESTRUCTURING Jill E. Fisch* Caroline M. Gentile** ABSTRACT The market for sovereign debt differs from the market for corporate debt in several important ways including the risk of opportunistic default by sovereign debtors, the importance of political pressures, and the presence of international development organizations. Moreover, countries are subject to neither liquidation nor standardized processes of debt reorganization. Instead, negotiations between a sovereign debtor and its creditors lead to a voluntary restructuring of the sovereign’s debt.
    [Show full text]
  • The New Bond Workouts
    University of Pennsylvania Carey Law School Penn Law: Legal Scholarship Repository Faculty Scholarship at Penn Law 2018 The New Bond Workouts William W. Bratton University of Pennsylvania Carey Law School Adam J. Levitin Georgetown University Follow this and additional works at: https://scholarship.law.upenn.edu/faculty_scholarship Part of the Banking and Finance Law Commons, Bankruptcy Law Commons, Business Organizations Law Commons, Corporate Finance Commons, Dispute Resolution and Arbitration Commons, Finance and Financial Management Commons, Law and Economics Commons, and the Securities Law Commons Repository Citation Bratton, William W. and Levitin, Adam J., "The New Bond Workouts" (2018). Faculty Scholarship at Penn Law. 1732. https://scholarship.law.upenn.edu/faculty_scholarship/1732 This Article is brought to you for free and open access by Penn Law: Legal Scholarship Repository. It has been accepted for inclusion in Faculty Scholarship at Penn Law by an authorized administrator of Penn Law: Legal Scholarship Repository. For more information, please contact [email protected]. ARTICLE THE NEW BOND WORKOUTS WILLIAM W. BRATTON† & ADAM J. LEVITIN‡ Bond workouts are a famously dysfunctional method of debt restructuring. The process is so ridden with opportunistic and coercive behavior by both bondholders and bond issuers as to make success intrinsically unlikely. Yet since 2008 bond workouts have quietly started to work. A segment of the restructuring market has shifted from bankruptcy court to out-of-court workouts by way of exchange offers made only to large institutional investors. The new workouts feature a battery of strong-arm tactics by bond issuers, and aggrieved bondholders have complained in court. There resulted a new, broad reading of the primary law governing workouts, section 316(b) of the Trust Indenture Act of 1939 (TIA), which prohibits majority-vote amendments of bond payment terms and forces bond issuers seeking to restructure to resort to exchange offers.
    [Show full text]
  • Sovereign Piracy G. Mitu Gulati and Kenneth N. Klee
    ,w^: ~_~ INTERNATIONAL INSOLVENCY INSTITUTE Sovereign Piracy G. Mitu Gulati and Kenneth N. Klee From The Kenneth N. Klee Collection in The International Insolvency Institute Academic Forum Collection http://www.iiiglobal.org/component/jdozunloads/viezucategori~/650.11tn~il International Insolvency Institute PMB 112 10332 Main Street Fairfax, Virginia 22030-2410 USA Email: [email protected] OO International Insolvency Institute 2011. All rights reserved. Admin`1584723.1 ~, y ~ ~~ ~ __. ~- ~s ~ x~ yr y , . `~ >(^ter£.'"~Y, -:S. ~E ~-rr er ';~ N. r _X ___—_._'_ ~_ :i,....3 s_:.,,,^ ~¢~i t +~ s '~---4 ?F ~ -`o~'a S'~ 5;?~~ ~ i f,,~: ~ '~'kae ~~ercY~~~~e~ Coy°~~rsc~.t~ F'i~~~ace ~x~~X~rrtt~~x~ ~ Lr~cima l~r~~e I3e1~L~lzirk <c~~d Daz~r'd I. I~l~celke~~ '~"~a~ ~:~e~~n~a~,~~~fcf~r T~~~~~~~ty ~~ t~aa~ "1'~'~~~~.1 I)~.~~~~ l~o~~Y ~ ~a~a~~lo~~~ ~b~ ~~~ix~~~ff~ g~ ~~ca~ritxe~ Cla~~ Acti.o~ ~,a~r~~~~~ I~ ~ Robe~~t rl. Alessi E Irn~nt~d ~~~l~u~a9.~ C~~pa~ne~ Aga the ~~cade o~th~ 19~~~e € ' I,e~~.~l~~:~~e ~~~ C~.~~ I,~.v~ ~e~e~og~~a~n~~ ~aaei '~'~aei~~ G'harles I~V. illac~~doc~, ~ i t~ ~~~~~°o~.a~~~ e~f~h~ t~l~~~.l~~~.~~~~a P~r~~e~~s T'~ne k~i~~ :~~~ .%ose 1-~h .~" ~~i~orfora a~td Clt~~isto1 Sher D. OliUe '~. -~~ Smv~~ea~a ~au•~.ey j ~'°== G. ~~Iitza C~t~lata road Bennet{t ,J1C Klee ~ ~e~axl~.~o~~ C~tt~ap~~x~~~a~ a~ ~nt~~xA~f~o~i~al ~ecuan~ae~ I$~~,8°~~~~: f , Hoze-ell E.fackson crud E7zc J Para I 4 - Q~~~xn~ '~'~~~;~~•~r ~e~s~ ~~a~tstxlz~~.~e ~.
    [Show full text]
  • Facing the Debt Challenge of Countries That Are “Too Big to Fail”
    7/02/10 Draft [Forthcoming chapter in SOVEREIGN DEBT: FROM SAFETY TO DEFAULT (Robert W. Kolb, ed. 2010-11)] Facing the Debt Challenge of Countries That Are “Too Big To Fail” Steven L. Schwarcz1 The recent financial woes of Greece and other nations have reinvigorated the debate over whether to bail out defaulting countries or, instead, restructure their debt. Bailouts are expensive, in the case of Greece costing potentially hundreds of billions of euros. Although the European Union and the International Monetary Fund (IMF) are underwriting the Greek bailout, the IMF’s payment is funded by all IMF member nations—the U.S., for example, provides 17% of IMF funding—so we all share in the burden.2 In the case of Greece, a bailout was virtually inevitable because a default on Greek debt was believed to have the potential to bring down the world financial system, whereas an orderly debt restructuring was impractical. This is a growing problem. As global capital markets increasingly (and inevitably) embrace sovereign bonds, the potential for a country’s debt default to trigger a larger systemic collapse becomes even more tightly linked. 1 Copyright © 2010 by Steven L. Schwarcz, Stanley A. Star Professor of Law & Business, Duke University School of Law, and author of Sovereign Debt Restructuring: A Bankruptcy Reorganization Approach, 85 CORNELL LAW REVIEW 956, and Systemic Risk, 97 GEORGETOWN LAW JOURNAL 193. 2 Nor are IMF payments made to bail out sovereign countries necessarily profitable investments for the member nations. Member nations earn interest on their deposits in the IMF, but repayment by the IMF, although anticipated, is not assured.
    [Show full text]