I. The main remedies after a bond default
"Default" in "contract" represents a contract or contract, "default" is the behavior of the parties to the contract to violate the obligations agreed upon in the contract. "is the behavior of the parties to the contract to violate the obligations agreed upon in the contract. Extended to the bond market, the broader "bond default" encompasses the issuer's breach of any terms of the agreement between the issuer and the investor, in addition to the common issuer failed to pay the principal and interest of the bond, but also may include the issuer to increase external guarantees, the transfer of major assets or the overall size of the liabilities of the over-limit, and other breaches of contractual agreements. Of course, the most common or the focus of this article is the narrow sense of the "bond default", that is, due to the credit risk caused by the issuer failed to pay the principal and interest of the bond, including before the maturity of the bond dissolution, bankruptcy and reorganization or liquidation of the bond, and other obvious loss of the ability to pay the principal and interest of the bond.
After a default occurs, depending on the degree of default, the debtor's financial condition, the creditor's right status and other factors, bondholders have three main ways of relief:
One is independent negotiation. Generally speaking, if the creditor expects the debtor's business situation is only a temporary problem, the possibility of ultimate debt repayment is high, and resort to judicial cost is relatively high, at the same time in the absence of credit enhancement measures under the conditions of the judicial process does not necessarily bring the disposal of the advantages of the creditors in a variety of trade-offs tend to choose the independent negotiation mode, to give the debtor a certain period of grace. In the process of autonomous negotiation, the debtor may reach agreement with the creditors on the subsequent debt repayment arrangements, including the formulation of a specific debt restructuring plan. If a guarantee is set for the bonds, investors may settle the matter by way of guarantee in lieu of repayment. From a practical point of view, the holders of JIAO's overseas bonds have mainly adopted the above approach after its default, with both parties negotiating on their own to determine the debt restructuring plan.
The second is the default litigation. Under the default litigation, the creditor expects that the debtor's business situation has deteriorated and there is a continuing trend, but when the debt is due, the debtor still has a certain solvency, does not meet the insolvency and other conditions of the bankruptcy petition, so the creditor can file a default litigation against the creditor, requiring the debtor to repay the principal and interest within the deadline, but also require the debtor to bear the default penalty, the amount of compensation for damages, late interest, and so on. Interest and so on.
Third, bankruptcy proceedings. If the negotiation is unsuccessful, the debtor has been insolvent, then the bondholders can only offer bankruptcy litigation of the death knell. In the bankruptcy litigation, the debtor and the creditor can file a bankruptcy application, usually by the creditor to file a bankruptcy application and ultimately enter the bankruptcy program for the secured creditors, this is mainly due to this kind of creditor in the order of the property in the order of liquidation of the more front, there is a stronger right to speak, the rate of reimbursement is dominant. Under the bankruptcy litigation route, bondholders can apply for reorganization or bankruptcy liquidation or participate in the settlement procedure applied for by the debtor. Among the above three remedies, default claim litigation and bankruptcy litigation are judicial proceedings, once the relevant process is initiated, there are usually clear judicial procedures and requirements, and the role that investors can play is mainly to actively participate and express their claims, and the rest depends on the actual situation of the debtor, and the time of disposal is also longer, usually calculated in terms of years.
From the point of view of the bond market risk events that have occurred in China, Dijie Communications, Changzhou Yongtaifeng, Tongjie Science and Technology, Sinovel and so on are resolved by negotiation, the first two by the guarantee on behalf of the repayment, Tongjie Science and Technology to raise funds through the placement of shares to pay, Sinovel wind power through the conversion of capital to capital, by the introduction of the strategic investor to contribute to the repayment of the; Xiang'e debt holders have been filed a lawsuit for breach of contract claims, and at the same time, apply for property preservation; Shanghai Chaori after bankruptcy, the bankruptcy, and the application for property preservation. The holders of Xiang'e bonds have filed a lawsuit to claim compensation for default and applied for property preservation at the same time; Shanghai Chaori has realized full repayment after bankruptcy and reorganization.
The main ways and tools of bond default disposal
Summarizing the cases of bond default disposal at home and abroad, bondholders can choose different debt guarantee tools based on the remedies, which include the following categories:
(1) Exercise of the security right
Guarantees include the security of right in rem (physical security) and the guarantee of right in person (personal security). The form of security in rem used in bonds mainly includes mortgages and pledges, and the guarantees used mainly include forms such as large enterprises, professional guarantee companies, and unlimited joint and several liability of individuals. When the bond defaults, the bondholder who has set up the security right is entitled to exercise the right of priority compensation for the collateral and pledge. However, before that, bondholders should be careful to measure the value of the collateral (right) to avoid insufficient value of the collateral. The bondholders who have set up the guarantee clause are entitled to exercise the right of claim in a timely manner in accordance with the agreement on the form of liability, scope of guarantee and guarantee period in the guarantee clause in the offering prospectus, subscription agreement or guarantee letter. In practice, Dijie Communication and Changzhou Yongtaifeng resolved the payment crisis by adopting the guarantee in lieu of compensation. In the subsequent study, we will further discuss the details of the establishment and effectiveness of the security right, the management of the collateral or the collateral right and the disposal of the collateral, etc., which investors need to pay attention to when exercising the security right or the additional security in the actual operation in the light of the specific cases.
(B) the application of debt service protection provisions
At present, the bond prospectus common debt service protection provisions can be divided into two categories: one around the debt repayment itself designed, such as early payment or exercise of the right to sell back provisions. Under normal circumstances, bondholders can request early payment or request to exercise the right of resale, mainly depending on the prospectus, subscription agreement and other documents agreed. In addition to the triggering conditions agreed by both parties, bondholders need to pay attention to whether the statutory conditions for early payment are met. Under such circumstances, according to the Contract Law of China, if the issuer has serious deterioration in its business condition; transfers property or evades funds in order to avoid debts; loses its business reputation; or has lost or has other circumstances that may cause it to lose the ability to fulfill its debts, the bondholders may request the issuer to pay the principal and interest of the bonds in advance. However, it should be noted that, if the bondholders request the issuer to pay the principal and interest in advance according to this provision, there should be precise evidence to prove that the issuer has serious deterioration of business conditions. Specifically how the above circumstances are recognized in practice, to be further explored.
Another type of debt service protection clause indirectly protects bondholders' claims by intervening in the company's operational governance. For long-term debts, investors are not satisfied with post-default remedies in the form of uncertain collateral assets, but rather intervene in the company's day-to-day business practices, capital operations and other major decisions of the management to prevent bondholders from being disadvantaged at the source. Such clauses mainly include restrictions on refinancing activities, restrictions on capital expenditures, restrictions on investment and asset sale behaviors, and maintenance of financial indicators at a certain level. From the viewpoint of foreign countries, the use of the above clauses, especially the restriction on financing activities, investment activities and asset sale restriction clauses, is more common.
(C) Conducting Debt Restructuring
Debt restructuring may be involved in the process of autonomous negotiation or bankruptcy litigation, and is generally the main way for debtors and creditors to reach an agreement. Debt reorganization is essentially the two sides in the negotiations on the basis of the establishment of new rights and obligations, specifically, debt reorganization mainly involves the financing and debt repayment negotiation of two links, for bondholders, the financing link mainly affects the source of debt repayment funds, debt repayment negotiation link mainly affects the repayment of the mode and proportion of the problem.
In terms of financing, debtors are faced with choices such as asset sale, introduction of strategic investors, and obtaining support from original shareholders. Generally speaking, in the case of a payment crisis or has defaulted on the financing is not easy, the debtor according to the different financial situation can choose different ways:
First of all, the sale of assets will be other assets of the enterprise, such as equipment, operating rights, leasing rights, and other assets through the bidding and auction and other means of transfer, to obtain the price of the creditors to pay off the creditors. This method is simpler, but raising funds in this way may be constrained by the availability of a satisfactory valuation and the danger that it may further trigger a default.
Secondly, strategic investors are introduced in the form of capitalization of capital reserves. The general operation process is to capitalize on the capital reserve and transfer the shares to the investors, as the consideration for the investors' capital injection, the investors' capital injection is usually dedicated to the repayment of principal and interest and related expenses, Sinovel is responding to the 11 Sinovel debt 01 payment crisis that is to take the above program.
Finally, to obtain the support of the original shareholders, including share placement and stock reduction. Share financing is in the conditions allow, the enterprise to the original shareholders of equity financing, fund-raising, for example, Shanghai Tongjie science and technology to solve the 11 Yangpu SMECN1 payment crisis is the way for the original shareholders of the share financing. Reduction of shares is also a way for original shareholders to provide financial support, for example, Xiang E bonds. In the process of debt restructuring, bondholders should be aware of the financing measures and alternatives that the debtor can take in order to improve the initiative in the process of claiming compensation.
In terms of debt repayment methods, creditors are faced with choices such as rollover, interest rate or principal reduction, discount trading, debt-to-equity conversion and so on. Adjustments to the original terms of the debt (including adjustments to the term, interest rate, principal, etc.) are a common form of debt restructuring. For example, the debt restructuring proposal put forward by Glorious Property to overseas bondholders adjusts the term and interest rate in the hope of lowering the debt burden through rollover and interest rate cuts. Discounted transactions allow creditors to recover debt at a low price, while debt-to-equity conversions convert debt into equity. In an actual debt restructuring program, the above tools can be used either individually or in combination. Previously, LDK adopted diversified treatment methods, such as cash redemption, debt-to-equity conversion and conversion to convertible bonds, in restructuring the debt of its overseas-issued high-yield notes. Bondholders need to carefully consider the debt restructuring options proposed by debtors and make rational decisions so as not to easily miss the opportunity to obtain a higher repayment rate. The debt restructuring process often involves multi-interest games, especially in the case of a large number of subjects involved, what kind of choices bondholders will face and how to make rational decisions are worth further exploration under the debt restructuring approach.
(4) Apply for property preservation
Default litigation is mainly applicable to the debtor still has a certain solvency at the time of maturity of the bond, and does not meet the conditions of bankruptcy litigation. Generally, the creditor who takes the default action has an earlier debt maturity date compared with other creditors, and therefore, under the condition that the debtor still has a certain solvency, it is possible to improve the creditor's payout rate by only filing the default action. Before or during the lawsuit, may be due to the debtor's behavior or other reasons make it difficult to execute the judgment or make the creditor suffers other damage, the creditor can file a lawsuit before the preservation of property or in the lawsuit property preservation, including seizure, impoundment, freezing of creditor's property, to restrict the party's behavior, to prevent the loss of property.
(V) Compulsory Liquidation of Assets
The insolvency liquidation system achieves a fairer liquidation of the debtor's property by liquidating the debtor's property in a legal proceeding and realizing a more equitable liquidation of the distributable property among the relevant right holders (mainly creditors), and thus there are no more measures to be adopted. In terms of the order of distribution of property, the bankruptcy estate shall, after giving priority to the liquidation of bankruptcy expenses and ****beneficial debts, be liquidated in accordance with the following order: (1) the wages and medical treatment, disability benefits and pension costs owed to the employees by the bankrupt, and the costs of basic old-age pension insurance and basic medical insurance owed to the employees that should be transferred to their individual accounts, as well as the compensations that should be paid to the employees as stipulated by the laws and administrative regulations; (2) social insurance costs other than those stipulated in the preceding paragraph that are owed to the bankrupts; and social insurance costs other than those provided for in the preceding subparagraph and taxes owed by the bankrupt; (3) ordinary bankruptcy claims. If the bankruptcy property is insufficient to satisfy the claims of the same order, it shall be distributed in proportion.
Third, the main institutions involved in the disposal of bond default
After the bond default, investors in the recovery process may deal with all kinds of institutions, but also need to participate in some of the institutions to express their own claims. In general, under different remedies, bond default disposal mainly includes the following three types of institutions:
One is the concerted action coordination organization. Bondholders are generally numerous and dispersed, and in the bond default disposal need to coordinate the concerted action to unify the views of the holders, to express their demands. Common coordinating bodies for concerted action include bondholder committees and bank debenture committees. In the case of JASL, for example, the overseas bondholders set up an ad hoc committee and hired a law firm to participate in the negotiation with the JASL side to centralize the expression of bondholders' opinions.
The second is an advisory body. In bond default disposal, debtors and creditors need the participation and cooperation of multiple intermediaries. In the process of bond default disposal, especially in debt restructuring, bondholders and debtors may hire different financial advisors, auditors, legal advisors and so on. The more complex the debt restructuring, such as the debtor is a multinational conglomerate, the more consultants need to be engaged, for example, in the debt restructuring process of Guangdong Sea at the turn of the century, nearly 100 intermediaries participated.
Third, the judiciary and its appointing authority. The court is an important participant in the disposal of defaults by way of judicial remedies, and it usually appoints the administrator in bankruptcy proceedings. The administrator by the relevant departments and institutions of the liquidation group or law firms, accounting firms, bankruptcy liquidation firms and other social intermediaries set up by law as a liquidation group. The administrator assumes the main responsibilities of taking over the debtor's property, investigating the status of the debtor's property, deciding on the debtor's internal management affairs, and managing and disposing of the debtor's property. This type of participating institutions is characterized by statutory duties and the need to follow a number of hard and fast rules. In practice, the degree of participation of the various types of participating organizations, whether or not to achieve the initial design of the role, function, in assisting investors to deal with default matters to play a function, etc. is also closely related to the investors.
Fourth, the bond default disposal rely on the realization mechanism
From the perspective of the bondholders, in the process of bond default in the self-interest protection of the main rely on the realization of the mechanism, including the bondholders meeting system and fiduciary administrator system.
The bondholders' meeting is a collective deliberative body with resolution function and supervision function, which is an important realization mechanism for bondholders to protect their own interests. From the viewpoint of foreign countries, it is a common practice to give the debenture holders' group a statutory status and power, and the nature, status, duties, convening, and effectiveness of resolutions of the bondholders' meeting will be stipulated in the relevant norms. With regard to the effectiveness of resolutions, some countries or regions provide that resolutions need to be endorsed by the court in order to have legal effect. From the point of view of the domestic regulation of the system, the main reasons for the convening of the bondholders' meeting to do the mandatory provisions, while the meeting of the specific convening, process, voting and other details are left to the parties to freely agree.
The key issue that determines the extent to which the holders' meeting system protects the interests of investors is the validity of the resolutions adopted by the general meeting. However, the existing domestic normative system does not specify the effect of the resolution of the general meeting of the holders, resulting in practice the resolution of the general meeting is not necessarily realized, such as the issuer may use the existing agreement in the prospectus against the resolution. Therefore, unless a clear agreement is made in the relevant documents or there is an express provision in the law as the basis, even if the general meeting makes a resolution after a lot of efforts, it will not necessarily be implemented. In addition, in terms of procedures, the holders' meeting system also has problems in practice, such as difficulty in summoning holders and poor conduct. According to the current status of the holders' meeting system, investors should pay more attention to the agreed terms of the holders' meeting system in the relevant documents, so as to provide sufficient basis for the implementation of the resolutions made at the holders' meeting and to pave the way for the implementation of the resolutions.
The trustee-manager system is an integral part of bond management, which is conducive to reducing the cost of unanimous action of bondholders and forming certain supervision and constraints on the issuer, thus safeguarding the rights and interests of bondholders. From the perspective of foreign countries, the bond trustee-manager system in the United States, the United Kingdom, Japan and other countries is more mature, with more detailed provisions on the qualifications, rights and obligations, and legal liabilities of the trustee-manager, etc. The revised Measures for the Administration of the Issuance and Transaction of Corporate Bonds of 2014 stipulates that: "If a corporate bond is issued, the issuer shall engage a bond trustee-manager for the benefit of the bondholders, and the bond trustee-manager shall be appointed to the bondholders and the bondholders shall be responsible for the issuance of the bond. employ a bond trustee and enter into a bond trustee management agreement; during the term of the bonds, the bond trustee shall maintain the interests of the bondholders in accordance with the provisions or the agreement."
From the implementation of the status quo, China's bond trustee-manager is more to play the role of organizer, coordinator, and implementer of the resolution of the meeting of holders, especially in undertaking risk management duties, the trustee-manager is more passive, on the one hand, due to the coordination problems with the system of the meeting of bond holders, on the other hand, there is no clear responsibility constraints on the trustee-manager, and its legal relationship with the bondholders Its legal relationship with the bondholders should be identified, on the basis of which the rights and obligations of both parties should be clarified and the legal responsibility of the trustee should be defined.