Holdout problem

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In finance, a holdout problem occurs when a bond issuer is in default or nears default, and launches an exchange offer in an attempt to restructure debt held by existing bond holders. Such exchange offers typically require the consent of holders of some minimum portion of the total outstanding debt, often in excess of 90%, because, unless the terms of the bond provide otherwise, non-consenting bondholders will retain their legal right to demand repayment of their bonds at par (the full face amount). Bondholders who withhold their consent and retain their right to seek the full repayment of original bonds, may disrupt the restructuring process, creating a situation known as the holdout problem.

The "holdouts" gamble that the restructuring will take place despite the lack of their consent, potentially leading to full repayment of their bonds, while other bondholders receive reduced payments according to the terms of the restructuring. If the restructuring does not take place, they gain nothing.

The claims of the holdouts may be insignificant enough, and bothersome enough, that the issuer may satisfy them in whole simply not to be bothered.

Where bondholders are widely dispersed, as is often the case, it can be difficult to contact many holders. Further, many holders of small amounts of bonds have little incentive to invest the time and energy in evaluating the terms of the exchange offer. These factors represent substantial difficulties in obtaining the minimum consent levels.

Recent examples

Successful litigations were undertaken by some holdouts in Peru (1996).

A similar dispute between Argentina and holdouts has been ongoing since at least the 2005 Argentine debt restructuring.^[1] Bondholders that accepted the 2005 swap (two out of three did so) saw the value of their bonds rise 90% by 2012,^[2] and these continued to rise strongly during 2013.^[3]

An August 2013 appeals court ruling in Argentina v. NML Capital, 12-1494, determined that holdouts should be repaid the full face value,^[4] but on highly unequal terms to the 93% who had accepted the 2005 and 2010 swaps at a 70%-75% discount.^[1] In October 2013 the Supreme Court affirmed the decision without comment. A second decision of the 2nd Circuit which prohibits payments to creditors who did accept the swap if holdouts are not paid was on appeal to the full panel as of October 2013. This case may also be appealed to the Supreme Court. Enforcement of the decisions is stayed pending a final Supreme Court decision.^[5] Courts in Belgium, France, and Germany have backed Argentina on the basis of the equal terms clause, however.^[6][7][8] The lack of legal certainty is U.S. courts prompted Argentine officials to propose placing the restructured bonds in question under Argentine law, while concurrently announcing a renewed bond swap offer.^[3]

The possibility that holdout creditors can attach future payments on restructured debt and receive better treatment than cooperating creditors distorts incentives and can derail efforts for a cooperative restructuring.^[1] It is likely to be of particular importance in cases in which the creditors are being asked to accept substantial debt and debt service reduction. However, it is unclear given the special circumstances of the Elliot case whether it will be broadly applicable to holdouts in other restructurings.^[9]

External links

• The problem of sovereign debt restructuring (PDF) by Kentaro Tamura
• Proposals for a sovereign debt restructuring mechanism (SDRM) International Monetary Fund

References