Book contents
- Frontmatter
- Contents
- List of tables and figures
- Foreword by the HONORABLE RICHARD A. POSNER
- Preface
- Part I The role of credit
- Part II Bankruptcy as a reflection of the creditors' implicit bargain
- Part III Beyond the basic creditors' bargain
- Part IV Workouts or bargaining in the shadow of bankruptcy
- Part V Alternatives to bankruptcy and the creditors' bargain
- 21 Corporate control and the politics of finance
- 22 The uneasy case for corporate reorganizations
- 23 Bankruptcy and debt: A new model for corporate reorganization
- 24 A new approach to corporate reorganizations
- 25 Debtor's choice: A menu approach to corporate bankruptcy
- 26 Is corporate bankruptcy efficient?
- 27 The voting prohibition in bond workouts
- 28 Financial and political theories of American corporate bankruptcy
- Part VI Experience of other countries
- Index
27 - The voting prohibition in bond workouts
Published online by Cambridge University Press: 10 December 2009
- Frontmatter
- Contents
- List of tables and figures
- Foreword by the HONORABLE RICHARD A. POSNER
- Preface
- Part I The role of credit
- Part II Bankruptcy as a reflection of the creditors' implicit bargain
- Part III Beyond the basic creditors' bargain
- Part IV Workouts or bargaining in the shadow of bankruptcy
- Part V Alternatives to bankruptcy and the creditors' bargain
- 21 Corporate control and the politics of finance
- 22 The uneasy case for corporate reorganizations
- 23 Bankruptcy and debt: A new model for corporate reorganization
- 24 A new approach to corporate reorganizations
- 25 Debtor's choice: A menu approach to corporate bankruptcy
- 26 Is corporate bankruptcy efficient?
- 27 The voting prohibition in bond workouts
- 28 Financial and political theories of American corporate bankruptcy
- Part VI Experience of other countries
- Index
Summary
Fifty years ago, Congress prohibited all binding bondholder votes that would modify any core term – principal amount, interest rate, and maturity date – of a bond indenture. As a result, firms in financial distress may now successfully recapitalize their outstanding bond obligations outside of bankruptcy only if enough bondholders individually consent.
The 1980s explosive use of junk bonds makes timely a reexamination of this longstanding congressional prohibition. In a future economic recession, some issuers of junk bonds will be forced to seek financial reorganization; similarly, some issuers of investment grade bonds will experience severe reverses and also seek reorganization. A workout, in which the unserviceable debt is exchanged for stock or in which payments are stretched out, would then be necessary. If a workout fails, bankruptcy may ensue.
Against this backdrop, I examine in this chapter whether and how current bond regulation of workouts could be reformed to reduce the costs of financial collapse. In Section I, we see how financial stress creates problems that current bond regulation exacerbates. Creditors that refuse to participate in the workout will benefit, because the firm more easily can pay residual creditors in full after (and if) the recapitalization succeeds.
In Section II, I critically examine the Trust Indenture Act's prohibition of a bondholder vote in a workout. By prohibiting a binding vote among bond-holders, the Trust Indenture Act makes a deal and recapitalization more likely to fail than it would otherwise be.
- Type
- Chapter
- Information
- Corporate BankruptcyEconomic and Legal Perspectives, pp. 415 - 433Publisher: Cambridge University PressPrint publication year: 1996