Friday, January 27, 2012

Not all bond holders can be found. Really?

One difference between a loan and a bond is that a loan is a private agreement between lender and borrower and the borrower knows who his lenders are, and a bond is a public debt instrument which is meant to be sold in the market and where the buyers/owners of the bond are not officially known.

When a debt restructuring becomes necessary, it is very easy to get all bank lenders to the negotiation table because one knows who they are. The bondholders can legally claim anonymity. And they will do that as long as they can because as long as they are not agreeing to any renogotiation, the original terms of the bond will continue to apply. Collective action clauses (CAC) alleviate that problem a bit.

A recent article stated that about 80 BN EUR of Greece's sovereign bonds are held by owners who cannot be identified and who, therefore, cannot be involved in any renegotiation.

Of course one can identify all owners of all bonds! Prima facie it may not be legal (because of violation of banking secrecy) but smart lawyers can find ways around that. The agent of a bond must distribute the interest to all bondholders, so the agent does know the names of the accounts to which interest is to be transferred. Just follow the cash.

Now in all likelihood, many of the account holders are companies, trusts, foundations, etc. However, every bank is required to know the name(s) of the natural person(s) who are the ultimate beneficial owners of those accounts. They are not allowed to pass this information on but, again, there are smart lawyers.

And, finally, there is the instrument of making public announcements in major financial newspapers addressed to all holders of a certain bond. Again, smart lawyers know how to do that.

All in all, it may be not be easy to get a hold on all bondholders but one has to try it because one can only renegotiate with one's creditors if one knows who they are.

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