3.A. The exercise of the rights of bondholders of publicly traded companies and issuers of listed bonds should be facilitated.
Consistent with Sub-Principle VI.D.6 of the Principles, “[t]he exercise of the rights of bondholders of publicly traded companies should be facilitated”. The guidelines in this section are complementary to the Principles for publicly traded companies and directly applicable to issuers of listed bonds.
3.B. The corporate governance framework should facilitate and support institutional investors’ engagement with their investee listed bond issuers.
Institutional investors acting in a fiduciary capacity, such as pension funds and asset managers, should disclose their policies for corporate governance and voting with respect to their investments, including the procedures that they have in place for engaging with listed bond issuers. Such engagement is different from the typical engagement conducted by shareholders, and may take place, for instance, at the issuance of high-yield bonds or during bond restructuring negotiations.
3.C. Communication between listed bond issuers and bondholders should be facilitated to enable bondholders to exercise their rights.
Policymakers should consider making bondholder identification easier so that issuers of listed bonds can quickly and easily find bondholders, for example for debt restructuring negotiations, consent solicitations, bondholder meetings, and covenant waivers. Bondholder identification could be enhanced to bring it closer to the processes and systems used to identify shareholders, including with the support of brokers, central depositories, registrars, and bond trustees.
For example, a register or system could be required to identify bondholders. However, this is subject to special legislation, such as the resolution and restructuring regime applicable to banks and credit institutions in several jurisdictions. Likewise, new technology may be utilised where possible to expedite the communication between listed bond issuers and bondholders, for example, with the use of distributed ledger technology that allows for instant notification of corporate actions and announcements to all bondholders simultaneously.
Where bonds are held by retail investors, engagement during restructuring or default scenarios may be particularly challenging given the dispersion of the investor base and reliance on intermediaries. In such cases, industry or regulatory guidance on the roles of trustees and other advisors, processes for identifying and soliciting instructions from retail bondholders, and mechanisms for co-ordinating collective action may be beneficial.
3.D. Bondholders should have the opportunity to participate effectively and vote in bondholder meetings, and should be informed of the rules, including voting procedures, that govern bondholder meetings.
Bondholders should be furnished with sufficient and timely information concerning the date, format, location and agenda of bondholder meetings, as well as fully detailed and timely information regarding the issues to be decided at the meeting. Notice periods should be sufficient to enable meaningful participation, with all relevant materials disclosed in an accessible manner ahead of the meeting.
Processes, format and procedures for bondholder meetings should consider allowing for equitable treatment of all bondholders. Company procedures should not make it unduly difficult or expensive to cast votes. Impediments to cross-border voting should be eliminated.
Bondholders should be able to vote in person or in absentia, and equal effect should be given to votes whether cast in person or in absentia. Bondholder meetings allowing for remote bondholder participation may be permitted by jurisdictions as a means to facilitate and reduce the costs to bondholders of participation and engagement. Such meetings should be conducted in a manner that ensures equal access to information and opportunities for participation of all bondholders.
3.E. The appointment of a corporate bond trustee may be an important mechanism for monitoring the listed bond issuer, including during insolvency and restructuring, and for protecting and enforcing bondholder rights.
Corporate bond contracts can be complex, and information pertaining to covenant maintenance, especially in scenarios of likely default, is often difficult for investors and supervisory authorities to obtain and assess. Trustees may carry out this monitoring role, while the specifics of how the trustee will perform this duty can vary according to the individual contract and the specific requirements in a jurisdiction.
Engaging a trustee or another service provider with similar responsibilities, such as a bondholder representative, can be an efficient way to monitor a company’s compliance with the listed bond contract, especially when the issuance is to a dispersed group of bondholders, including retail investors. Trustees are also likely to be important during insolvency and bankruptcy circumstances to facilitate the co-ordination and engagement of bondholders and the enforcement of their rights, notably where communication between bond issuers and bondholders is not fluid. In default or potential default scenarios, bondholders may benefit from having the right to appoint or replace the trustee to ensure that a trustee with appropriate expertise in managing such situations is in place.
3.E.1. If a trustee is appointed, the trustee should be independent, competent and meet eligibility requirements to provide high-quality services.
A trustee should be independent, professional and registered or approved in the applicable jurisdiction. Trustees are usually appointed by the listed bond issuing company at the moment of the offering but can be replaced by the bondholder meeting. The laws or regulations in a jurisdiction may set out the role and responsibilities of the trustee for listed bonds. The duties and functions of trustees vary and may include the following: (i) to prepare an annual report to the bondholders on any material developments, the fulfilment of the bond covenants and any material deviations from the intended use of proceeds as set out in the bond contract; (ii) to review the descriptions of the collateral in the bond contract and, at least once a year, the validity of the collateral; (iii) to decide whether a default event has occurred and notify bondholders within a set timeframe about any non‑compliance by the issuer with the bond covenants; (iv) to call a bondholder meeting, provide any information requested by the bondholders and implement the resolutions of the bondholder meeting; (v) to protect the interests or engage third parties to negotiate on behalf of bondholders in debt restructuring and insolvency proceedings, in-court and out-of-court.
To effectively carry out their role, trustees should have access to the information necessary to perform their functions subject to applicable confidentiality and legal requirements. Trustees should abide by the relevant framework for insolvency, bankruptcy, and creditor protection. To facilitate the trustees carrying out their role, they should be adequately remunerated. For retail bond issuances in particular, issuers may consider establishing pre-funding arrangements to ensure trustees have sufficient resources to fulfil their obligations upon the occurrence of triggering events such as a default or potential default.
3.E.2. Trustees should be accountable to the bondholders of the company and owe a duty to exercise due professional care, avoid conflicts of interest, and disclose to bondholders any actual or potential conflicts of interest.
Trustees have a fiduciary duty to act on behalf of bondholders by law in some jurisdictions and in accordance with the terms of the bond contract. Trustees who have a conflict of interest should not be appointed, or they should be replaced if a conflict arises after they have been appointed. For instance, a related party to the issuer or the underwriter of the offering should not be permitted to be the trustee of the bond issuance. The same impediment should apply to any creditor of the issuer and, more broadly, anyone who would face a conflict in representing the interests of the bondholders.
Trustees should also have procedures in place to identify, manage and disclose to bondholders any actual or potential conflicts of interest arising during the life of the bond. To support transparency, trustees may disclose their remuneration arrangements and any material commercial relationships with the issuer, and may report periodically on whether conflicts arose during the life of the bond and how these were managed.
3.F. Entities and professionals that provide analysis or advice relevant to bondholder decisions should disclose and minimise conflicts of interest that might compromise the integrity of their analysis or advice, and ensure that their methodologies are transparent and publicly available.
The corporate governance framework should promote the integrity of regulated entities and professionals that provide analysis or advice relevant to decisions by bondholders, such as credit rating agencies and index providers. In addition to trustees, these service providers can have significant impact on companies’ governance and strategy given their rating methodologies and index inclusion criteria. Therefore, the methodologies used by regulated service providers that produce ratings, indices and data should be transparent and publicly available to clients and market participants.
At the same time, conflicts of interest may arise and affect judgement, such as when the provider of advice, rating or data is also seeking to provide other services to the listed bond issuer in question, or when the provider or its owner have a direct material interest in the issuer or its competitors. Many jurisdictions have adopted regulations or voluntary codes of conduct or have encouraged the implementation of self-regulatory codes designed to mitigate such conflicts of interest or other risks related to integrity, and have provided for private and/or public monitoring arrangements.
3.G. Listed bond contract templates may be considered by policymakers, regulatory authorities, and industry bodies to assist in making investment decisions more straightforward and facilitate the exercise of bondholder rights.
While preserving contractual freedom, non-binding contract models or templates developed by industry associations or standard setters may help clarify key aspects that could be included in listed bond contracts, including indentures and trust deeds. For instance, the adoption of models or templates may incentivise a reduction in the use of adjustable financial metrics that leave issuers the discretion to define whether they comply with covenants.
3.H. Out-of-court corporate debt restructuring should be encouraged and facilitated by regulatory frameworks where appropriate.
Out-of-court debt restructuring, such as a distressed debt exchange or a debt arrangement, is often more cost‑effective than formal bankruptcy proceedings and may be particularly effective when the debtor’s financial distress is not yet severe. Consistent with Sub-Principle VI.D.6 of the Principles, jurisdictions should adhere to internationally recognised benchmarks for creditor rights and insolvency frameworks. Rules and guidance to facilitate out-of-court workouts in jurisdictions and enhance bondholders’ participation could be developed, or further developed, to address specific issues that may impede this process. For instance, clear guidance on how insider trading rules may apply during a debt restructuring or a covenant waiver negotiation could provide more comfort for bondholders to take part in such processes.
Debt restructuring frameworks should facilitate the negotiations between the company and the holders of its bonds, encouraging early dialogue and co-operative engagement. These frameworks may establish disclosure expectations, negotiation timelines and define the roles of trustees and creditor committees in the negotiations, leaving the ultimate decision over the adoption of debt restructuring agreements to the bondholder meeting.
3.H.1. The corporate bond framework should consider the equitable treatment of all bondholders.
When changes to bond contract terms or covenant waiver negotiations do not require approval from all bondholders, as is the case in some jurisdictions for changes to principal or interest, there is a risk of unequal treatment among them. For instance, an issuer of a listed bond may offer a fee to a majority of bondholders in exchange for their consent to a bond contract amendment or covenant waiver. This could effectively pressure them into accepting changes in the bond contract terms or a restructuring that may not serve the interests of all bondholders and result in a transfer of wealth from the minority to the majority.
One approach with respect to consent solicitation fees would be to ensure that all bondholders who respond to or vote on the issuer’s solicitation—whether in favour or against—have an equal opportunity to receive consent fees or similar forms of compensation related to a corporate debt restructuring. Furthermore, if the timeframe for bondholders to respond is insufficient, or if retail investors hold the bonds, it may be appropriate to require that consent fees and similar compensation be extended to all bondholders, including those who did not respond or vote on the issuer’s solicitation.
In so-called “position enhancing transactions”, where a majority of bondholders are offered a new, superior senior class of debt in exchange for agreeing to changes in bond contract terms, policy solutions may be more complex. These include, for instance, ensuring transparency regarding the position enhancing transactions under negotiation, extending the same offer to all bondholders, or requiring the majority to exercise their power to bind the minority in good faith.