Protection of the rights of the bond owners: the Advisory report of the controller

The Bank of Russia proposes to change the mechanism for the restructuring of bonded debt to a greater extent to balance the interests of the Issuer and its creditors, and protection of the rights of bondholders along with other creditors. Regulatory initiatives contained in the Advisory report “On conceptual approaches to regulating issues to ensure the rights of bond owners”.

In 2014 there were such institutions as the General meeting of bondholders and the bondholders ‘ representative. They allow investors to protect their interests including the restructuring of debt obligations of the Issuer. Restructuring in difficult economic situations is considered by the Issuer as a way to prevent a default or to restore solvency after him. He may propose to change the scope of rights under the bonds or to terminate their obligations thereunder in full or in exchange for new obligations that are not related to issued bonds. Such actions of the Issuer can be implemented only with the consent of majority of bondholders.

However, Russian legislation does not establish the obligation of the Issuer to provide to all creditors an equal and fair debt restructuring. This allows some issuers to restructure in such a way that the return on investment for owners of bonds is much lower than other creditors of the same Issuer. As a rule, more favorable conditions are seeking lenders who can provide the Issuer with long-term funding support with long-term relationships and close business ties.

The authors of the report propose to discuss the feasibility of introducing requirements on the comparability of the terms of the restructuring liabilities for all classes of creditors, as well as the possibility of concluding of a unified agreement on debt restructuring with all creditors.

The report raises the question of the need to strengthen liability management and business owners for their decisions. During the “good” of restructuring the owners and management of the Issuer needs to take all possible measures to restore the solvency of the Issuer within a reasonable time, without significant deterioration in the financial position of the creditors. Such measures should not be limited to developing financial models and plans for exit from the crisis, and should include actual financial assistance: additional contributions to the capital of the owners, refusal of bonus payments to management and so on.

In terms of growth of the bond market, the Bank of Russia sees the need to control and support the development of a new model of relations “investor — common representative the Issuer” from regulation. In this regard, the report also covers the problematic issues of the current regulation associated with performance and termination of obligations for corporate bonds, the change in volume and a waiver of the rights of the bond owners, participation in these legal representative of bond holders.

Suggestions and comments to the report, including answers to its questions, will be accepted until September 10, 2020.

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