Default and Restructuring of Bonds - Detailed Explanation

Bond = Debt security issued by company / sovereign under Trust Deed / Indenture - promise to pay principal + coupon.

Default = Failure to pay principal or coupon on due date, breach of covenant (negative pledge, leverage ratio), cross-default.

Restructuring = Changing terms - maturity extension, coupon cut, haircut, debt-for-equity - via consent solicitation or Exchange Offer.

I. Legal Framework - Spain / EU / US

1. Spanish Law 6/2023 LMVSI + RD 814/2023 + LMA Bond Terms:

• Bondholders are syndicate (Sindicato de Obligacionistas) - Art 419-429 LSC - Must be formed for listed bonds, with Commissioner (Comisario) representing holders.
• Default = Commissioner calls meeting, declares acceleration if majority (usually 75%) approves.
• No individual bondholder can sue alone if Trust Deed has no-action clause - must act through Commissioner / Trustee.

2. EU - Collective Action Clauses (CACs) - Since 2013 mandatory for Euro area sovereign bonds >1yr:

• Single-limb CAC: 75% of aggregated principal can bind all holders to restructure
• Prevents holdout (vulture fund blocking)

3. US - Trust Indenture Act 1939 Sec 316(b): Right to receive payment cannot be impaired without individual holder consent - makes restructuring hard - requires Exchange Offer.

4. Spanish Insolvency - TRLC Book II - Restructuring Plans can include bonds:

Bondholders are separate class, can be crammed down via cross-class cram-down.

II. Types of Bond Default

1. Payment Default: Missed coupon / principal - triggers acceleration
2. Covenant Default: Breach leverage >4x, failure to report, change of control
3. Cross-Default: Default on other debt > threshold triggers bond default
4. Technical Default: Failure to maintain listing, insurance

Grace Period: Usually 5-30 days for payment default.

III. Restructuring Tools

IV. Case Laws - Landmark Bond Default & Restructuring

A. Corporate Bonds

1. Spanish - Pescanova / Nueva Pescanova - Juzgado Mercantil Pontevedra 2014-2017 - Largest Spanish Bond Restructuring
€2B bonds defaulted. Bondholders (Sindicato) forced to accept 70% haircut, debt-for-equity swap, maturity 10y extension via restructuring plan. Some retail bondholders challenged as abusive. Court upheld - best interest test met - liquidation would give 0. Established Sindicato can bind minority under LSC Art 425 if 75% approve.

2. Abengoa - 2015-2021 - 2 Restructurings - Juzgado Mercantil Sevilla
€1.2B green bonds defaulted. First restructuring: extension + new money. Second: liquidation. Bondholders who did not provide new money subordinated. Litigation: Bondholders claimed unfair treatment vs banks. Court held new money priority under Art 242 TRLC legitimate.

3. DIA - 2019 - Bond Exchange
DIA €300M bonds 2021 maturity - consent solicitation to extend to 2023 + coupon increase 1%. 78% approved. Holdouts sued claiming coercion. AP Madrid held valid if transparent, no exit consent that strips guarantees unfairly.

4. US - Board of Education vs. Victor - Trust Indenture Act Sec 316(b)
Second Circuit: Exchange Offer + Exit Consent that strips collateral and guarantees violates Sec 316(b) - impairs right to payment without individual consent. Important - cannot coerce bondholders by stripping guarantees.

5. US - Caesars Entertainment - 2015 - Coercive Exchange
Caesars offered new bonds with lower principal but removed guarantee of parent. Holdouts sued. SDNY held stripping guarantee violates 316(b). Led to settlement. Shows limit of exchange offers.

6. US - EMC / Frazer - Marblegate - 2017 - Second Circuit Narrows 316(b)
Second Circuit reversed broad reading - 316(b) only protects formal right to receive payment, not practical ability. Allows coercive exchange if issuer does not formally amend payment terms but makes it economically worthless. Controversial, allows more aggressive restructuring.

B. Sovereign Bonds - CACs & Holdouts

7. Greece 2012 - Private Sector Involvement (PSI) - Retroactive CACs
Greece retroactively inserted CACs into Greek law bonds, forced 53.5% haircut with 83% vote. Holdouts sued in Greek courts + ECHR + ICSID.

Case: Mamatas and Others v Greece - ECHR 2016
ECHR held retroactive CAC insertion not violation of property rights - public interest, financial crisis justified.

8. Argentina - NML Capital Ltd v Republic of Argentina - US Supreme Court 2014 - Vulture Fund Case - LEADING CASE
Argentina restructured 2001 bonds 93% accepted haircut 70%, 7% holdouts (NML - Paul Singer) refused. NML sued in SDNY under pari passu clause - argued Argentina cannot pay restructured bondholders without paying holdouts ratably.

US District Judge Griesa + 2nd Circuit + Supreme Court: Upheld injunction - Argentina must pay holdouts pro rata if pays restructured holders. Forced Argentina to default again 2014. Led to reform of pari passu clause + introduction of single-limb CACs.

Rule: Holdout can block sovereign restructuring if old CACs with 75% per series. New ICMA CACs 2014 fix.

9. Spain - European Stability Mechanism (ESM) - CAC Mandatory
All Spanish sovereign bonds since 2013 include CACs - single limb 75% aggregated. Prevents Argentina-style holdout.

C. Default Interest & Enforcement

10. Spanish - STS 22 April 2015 + LCCI 5/2019 Applied to Bonds
If bond prospectus sets default interest 20% on missed coupon - for retail bondholders, considered unfair if > ordinary +3% - clause void under Directive 93/13.

11. CSDR - Bond Settlement Fails
If bond default causes settlement fails at Iberclear, CSDR cash penalties apply - as discussed in De-Duplication case.

V. Bondholder Rights in Default - What to Do

If you hold defaulted bond:

1. Check Prospectus: What is Event of Default, grace period, acceleration threshold (25%? 50%?)
2. Contact Commissioner (Comisario): Request call of Sindicato meeting - Art 422 LSC - 5% of holders can request
3. Do not sue individually if no-action clause: Your suit will be dismissed - must go through Commissioner
4. In TRLC Restructuring: You are class - vote, check best interest test - you must get at least liquidation value (usually 0-10% for unsecured bonds)
5. In Sovereign: Check CAC - if single-limb, 75% can force you

Defenses for Issuer:

• Force Majeure not defense for payment default
• Can seek homologation of restructuring plan under TRLC to cram down dissenting bondholders - needs 75% of bond class

VI. Current Spanish Practice 2024-2026

• Most high-yield bonds issued under English law - Trustee + CACs
• Spanish-law bonds require Sindicato - Commissioner usually corporate - e.g. Intermoney, Beka Finance
• CNMV requires prospectus to disclose restructuring risk + CACs + no-action clause
• Retail bondholders protection: MiFID - must assess suitability, if complex bond sold to retail without test, bank liable - many Pescanova retail cases bank ordered to compensate.

Bottom Line: Bond restructuring = negotiation + vote. Holdout has power unless CACs or cross-class cram-down. Sovereign holdout risk largely fixed after Argentina case by new CACs. Corporate holdout risk fixed by TRLC homologation.