Abstract
Besides syndicate loans, the other private channel of sovereign finance is constituted by the issuance of sovereign bonds on the international markets. This particular form of sovereign indebtedness, widely resorted to until the first third of the twentieth century, currently constitutes the major source of sovereign financing. As compared to bank loans, this particular type of indebtedness has some advantages: it is intrinsically more tradable, it possesses longer maturities, and it involves many fewer restrictive covenants. Nevertheless, there are some disadvantages as well: refinancing is not available, there is no interest in maintaining a long-term relationship with the borrower, and bonds are rapidly disinvested at the least perception of difficulty in payments.
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Notes
- 1.
The phenomenon is assuming a growing importance: in 2008, the volume of international issuances (both corporate and sovereign) amounted to US$2,500 billion, Carreau and Julliard (2010), p. 699; the sole amount of sovereign issue had already risen from US$20 billion in 1980 to US$225 billion in 1993, Morais (1998), pp. 323–324.
- 2.
- 3.
See Cline (1995), p. 426, and Rieffel (2003), pp. 190–192. Commercial banks seem to have definitively abandoned the policy of financing the deficits of developing countries, which had characterised the international financial scene in the 1970s; this practice is now seen as an anomaly, Santos (1991), p. 84. However, even countries with a dubious financial reputation currently tend to have recourse to this particular source of financing, e.g. Congo (Brazzaville), Gabon, Georgia, Ghana, Kazakhstan, Lebanon, and Pakistan, although low-investment grade issuers have taken this route, Gelpern and Gulati (2009). The Craxi Report on External Debt Crisis and Development endorsed the recourse to this type of financial channel as based on more objective indicators, A/45/380 of 8 October 1990, point 133.
- 4.
See Fisch and Gentile (2004), p. 1068.
- 5.
Group of Ten, The Resolution of Sovereign Liquidity Crises, 1996, point 15, available at www.bis.org. An international bond issuance is Janus-headed: when it takes place in a scenario of fiscal sustainability, it augments the amounts of domestic savings available to growth and prosperity; when fiscal sustainability policies fail, then country creditworthiness suffers and investors’ confidence disappears; see Das et al. (2009).
- 6.
In the eighteenth century, Emperor Karl VI von Habsburg, during the War of the Polish Succession (1733–1735), asked King George II of Great Britain for permission to raise loans from British subjects, Satow (1915), p. 1.
- 7.
See Wuarin (1907), pp. 40–45, and Renouvin and Duroselle (1966), pp. 138–139. The point was that in London, Amsterdam, Brussels, and Frankfurt, the stock exchange was entirely independent of the government, while in Paris and Berlin there was a heavy governmental control over foreign loan issuing, Jenks (1963), pp. 283–284. However, a milder form of control on foreign loans was introduced even in the United States: in March 1922, the federal government announced that all issuers of foreign securities to be sold to the public should have asked for the view of the State Department before concluding the transaction, Feis (1950), p. 11.
- 8.
This occurred through arbitrage by international bankers, Jenks (1963), p. 279.
- 9.
- 10.
Tennekoon (1991), p. 145, in describing issue procedures, does not draw a clear line between corporate issuers and sovereign issuers.
- 11.
See Oppetit (1972), pp. 68–69.
- 12.
See Jacquemont (1976), p. 28. Amplius, Tennekoon (1991), pp. 3, 148, specifies that the key features of an international bond issue are the currency of the bond, which is not to coincide with the domestic currency of the place of issue; the distribution of the bonds, which must not be confined to the market of a sole country; the subscribing banks, which have to belong to different countries; and the issuer of the bonds, who must be a foreigner with respect to the place of issuance.
- 13.
- 14.
- 15.
If this offer is made “subject to contract”, the terms may still vary until the relevant documents have been signed, Tennekoon (1991), p. 152.
- 16.
A letter of intent does not have the same effect as a definitive contract, but some legal consequences do still arise. Being an obligation de negotiando and not de contrahendo, the parties are subject to the general obligation not to impair the conclusion of the contract. Sometimes, the lead manager may require from the issuer a temporary exclusive dealing clause, Jacquemont (1976), pp. 63–69. The practice of reproducing in the loan contract all the terms contained in the letter of intent reflects to the importance of this document, which goes far beyond its purely preliminary character, Carreau and Julliard (2010), p. 701.
- 17.
The first examples of loan syndicates were arranged in connection with the Egyptian loan of 1868 and with the Turkish loan of 1869, Caincross (1953), pp. 92–93.
- 18.
When bonds are offered not only to institutional investors but also to retail investors, a selling group is formed; Tennekoon (1991), p. 152.
- 19.
The content of these documents has been standardised by the recommendations of the International Primary Markets Association, from which it emerges that withdrawal is possible solely in connection with subsequent material changes, Tennekoon (1991), p. 153.
- 20.
See Jacquemont (1976), pp. 77–78.
- 21.
- 22.
- 23.
Selling bonds in the grey market normally has the effect of lowering their trading price below their face value. When the market dealers believe that the price or the interest of the bonds is unattractive, they start “short selling” the bonds, expecting a fall in the price below the face value, so that they can buy the same bonds at a price lower than the sale price. It goes without saying that, in this context, it may become difficult for the lead manager to place the bonds at the announced price, especially when these transactions are effected by prospective members of the syndicate. In this case, the lead manager would intervene through stabilisation transactions. See Tennekoon (1991), pp. 155–56. According to Jacquemont (1976), p. 135, this stabilisation intervention, although not expressly provided for in the underwriting agreement, is a duty of the lead manager.
- 24.
In this phase, the lead manager may decide to adopt punitive measures against those dealers who, having short sold the bonds on the grey market, have contributed to lowering the price below the face value. Those dealers may be excluded from the allotment of the securities or may receive a number of bonds smaller than that formerly agreed. As a result, those dealers would have not sufficient bonds to meet their short sales and could be obliged to buy bonds from the lead manager at a higher price. See Tennekoon (1991), pp. 157–158.
- 25.
Under English law, the offer contained in an allotment document is accepted when the dealers transfer the funds to the lead manager at the closing date, Tennekoon (1991), p. 157.
- 26.
The additional bonds needed are bought on the secondary market following their issuance. This financial technique, originating from the US practice, has the function of regularising the secondary market by enlarging the primary market; Jacquemont (1976), pp. 82–83.
- 27.
- 28.
See McKnight (2008), pp. 500, 528. This is the result of the dematerialisation and the immobilisation processes. Under the former, the securities are not materially issued and the investor simply receives a communication from the agent of the issuer. Under the latter, the securities—even though concretely issued—are not delivered to the investors but held by a custodian. The common feature of the two systems is constituted by the fact that all the transfers of the securities are annotated on an electronic register (book entry) held by the clearing houses. See Goode (1996), pp. 110–112.
- 29.
See Carreau and Julliard (2010), p. 702.
- 30.
See Tennekoon (1991), p. 158.
- 31.
The main rating agencies are Standard & Poor’s, Moody’s, and Fitch’s, Wood (2007), pp. 206–207. The rating is the result of the analysis of the capacity of the borrowing country to repay the debt: in this analysis, the political stability of the government is taken into account, but not its democratic character, Archer et al. (2007).
- 32.
See Tennekoon (1991), p. 178.
- 33.
See Carreau and Julliard (2010), p. 704.
- 34.
However, the document style of the continental banks is not always clear: sometimes the obligations assumed qualify as garantie, while substantively they are prise ferme, Jacquemont (1976), pp. 112–115.
- 35.
Under the English practice, the liability of the managers is joint and several, while under the US practice it is simply several, Wood (2007), p. 200.
- 36.
If one of these conditions is not satisfied, the lead manager is entitled to terminate the distribution of the bonds and the managers may ask for recovery of loss or damages incurred, Tennekoon (1991), pp. 180–181.
- 37.
The validity will mainly focus on the competence of the signatory organ and the respect for the legal procedures for the authorisation of the loan. In the process, the lead manager will rely upon the legal opinions of domestic lawyers and representations and warranties provided by the issuer, Hyde (1922), pp. 525–526.
- 38.
“[U]nderwriters are not underwriting exceptional risks but merely temporary aberrations within the market”, Wilson (1984), pp. 195–197.
- 39.
The concrete appreciation of these events is left to the discretion of the lead manager, or of the majority of the subscribers, in accordance with what was established in the subscription agreement. However, the exercise of this discretion is linked to specific parameters, such as the occurrence of adverse circumstances. In certain contracts, it may be laid down that in this eventuality the parties will try to find an agreed solution. See Jacquemont (1976), pp. 122–128.
- 40.
See Watkins (1985b), pp. 188–190.
- 41.
The delictual liability of the lead manager remains in case of failure to comply with the securities laws of the countries where the bonds are offered or listed, Carreau and Julliard (2010), p. 706.
- 42.
“To the extent that the underwriters function, among other things, as expert advisors to their clients on market conditions, a fiduciary duty may exist. We stress, however, that the fiduciary duty we recognise is limited to the underwriter’s role as advisor. We do not suggest that underwriters are fiduciaries when they are engaged in activities other than rendering export advice”, EBC I Inc v. Goldman Sachs & C (eToys) 799 NYS 2d 170, 176 (Ct App 2005); see Ze (2007).
- 43.
See Tennekoon (1991), p. 184.
- 44.
Once constituted, the underwriting group is directly responsible to the issuer for the subscription of a quota of 30–40 % of the subscription price of the bonds, leaving the residual quota to the primary underwriting group. In this connection, it is worth emphasising that even though the underwriting agreement is not protected by any condition precedent, the termination of the subscription agreement entails a termination of underwriting agreement. See Tennekoon (1991), pp. 184–185.
- 45.
This is what occurs under English practice, see Tennekoon (1991), pp. 185–186.
- 46.
The terms of the underwriting agreement may be activated by each manager, even though this right is usually attributed to the lead manager. As, according to the ordinary rules of agency, this power is reserved to the issuer, it is necessary to draft the subscription agreement in a manner that authorises the managers to exercise this right on behalf of the issuer, Tennekoon (1991), p. 186.
- 47.
- 48.
See Carreau and Julliard (2010), p. 708.
- 49.
The selling group is composed of banks and securities dealers, in addition to the members of the managing group and the members of the underwriting group (if any), Tennekoon (1991), p. 189.
- 50.
Following the signing of the subscription agreement, the lead manager, on behalf of the issuer, sends an allotment document to the members of the selling group on the basis of the terms contained in the invitation to join the group (supra, § 7.2). The contract is concluded when the offer is accepted by the members of the selling group. However, the obligation to sell the bonds to the members of the selling group is made subject to the condition subsequent of the termination of the subscription agreement. See Tennekoon (1991), pp. 189–190.
- 51.
- 52.
The members of the selling group may be regarded as agents of the issuer and the managers, Tennekoon (1991), pp. 191–192.
- 53.
This constitutes the distinguishing character of a bond issue in comparison to a bank loan, Buchheit (1995), p. 54.
- 54.
European Parliament and Council Directive 2003/71/EC of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC, [2003] OJ L 345/64. The Directive is inspired by market integration and maximum harmonisation, as well as by investor protection; see van Gerven (2008), and Moloney (2008), pp. 103–170. On the English legislation, see Hudson (2008), pp. 323–375.
- 55.
Non-equity securities issued by a member State or international bodies of which member States are members are not included in the scope of the Directive (even though their prospectus can be drawn up in accordance with the provisions of the Directive, cf. the Recital No 11), but this exemption does not cover securities issued by third States [Art 1(2)(b)]. However, in the aftermath of the Greek crisis (cf. supra, § 2.4.6.2), some commentators have argued in favour of the loss of this privilege for EU sovereigns, Young (2010).
- 56.
The prospectus is accompanied by a summary containing all the characteristics and the risks associated with the issuer, the guarantor (if any), and the securities [Art 5(2)]. In the event of misstatement, the liability, in the absence of a choice of law clause, is assessed on the basis of Art 4 of Rome II Regulation (European Parliament and Council Regulation (EC) 864/2007 of 11 July 2007 on the Law Applicable to Non-contractual Obligations (Rome II) [2007] OJ L 199/4), which indicates the law of the country where the damage occurs [Art 4(1)]; however, this rule may be replaced by the law of the country to which the tort/delict is manifestly more connected [Art 4(3)]. The connecting factor may be constituted by the market where the investor purchases the securities. As this criterion may turn out to be not entirely satisfying, the alternative route is to take into consideration the place of incorporation of the issuer, Ringe and Hellgard (2011), pp. 43, 53–55, which in sovereign loans would lead to the law of the issuer, FC Villata (2013), pp. 341– 345.
- 57.
Commission Regulation (EC) 809/2004 of 29 April 2004 implementing Directive 2003/71/EC, [2004] OJ L 149/1. The minimum disclosure requirements laid down in Annex XVI include the indication of the persons responsible for the information, the risk factors concerning the capacity of the issuer to fulfil its obligations, the information about the issuer (solvency, economic situation, political system, and government), public finance and trade, legal arbitration and proceedings capable of affecting the financial position of the issuer, and statements by experts.
- 58.
This is the origin of the distinction between Eurobonds and global bonds, supra, § 7.1.
- 59.
The Securities Act (1933) is codified at 15 USCA § 77 et seq., and the Securities Exchange Act (1934) is codified at 15 USCA § 78 et seq.
- 60.
Before the prohibitions of the Glass–Steagall Act (1933), commercial banks were competing with investment banks for the underwriting of foreign bonds, and in some cases they floated loans while being perfectly aware of the high risk involved, Lissakers (1991), pp. 170–171.
- 61.
See Loss and Seligman (1998), p. 200.
- 62.
69 Am Jur 2d, Securities Regulation – Federal § 236.
- 63.
Schedule B is attached to the Securities Act of 1933, 69 Am Jur 2d, Securities Regulation – Federal § 234; however, the SEC may call for additional data, Loss and Seligman (1999), pp. 787–788. This non-statutory information generally covers information on the political, economic, and financial situation of the borrower, including balance of payments, exchange rate, and debt service statistics, Buchheit (1992).
- 64.
17 CFR § 230.902–904. See 69 Am Jur 2d, Securities Regulation – Federal §§ 174–190.
- 65.
17 CFR § 230.903; Wolff (1992), p. 106.
- 66.
15 USCA § 77(d)(3)(A).
- 67.
17 CFR § 230.144A. See 69 Am Jur 2d, Securities Regulation – Federal §§ 205–209.
- 68.
- 69.
Cf. supra, § 6.4.5.
- 70.
This qualification of the bonded loan as a loan agreement sounds more reasonable than that of a sale of credits; see van Hecke (1964), pp. 9–10.
- 71.
They are also reproduced in the trust deed/indenture or in the fiscal agency agreements, McKnight (2008), p. 529.
- 72.
Floating interest rates constitute a better protection against risk, Walmsley (1998), p. 253.
- 73.
See Wood (2007), p. 193.
- 74.
See Mann (1992), pp. 217–218.
- 75.
Nevertheless, the obligations denominated in a sole currency, even though payable in different places, did not afford sufficient protection to the holder from the perils of a depreciation if the amount concretely due was liquidated at the time of the payment, Borchard (1951), p. 29. In this regard, Nussbaum (1950), pp. 389–390, suggested qualifying these clauses as “multiple collection clauses”.
- 76.
Although the distinction between the two hypotheses, from a theoretical point of view, was sufficiently clear, the bondholders have sometimes attempted to transform the place clause option into a currency clause option, Mann (1992), pp. 211.
- 77.
On the gold clause, see, generally, Nussbaum (1933).
- 78.
The gold clause is not much to be intended as a modality of execution of the obligation but rather to be intended as referring to the substance of the obligation; as a matter of fact, its purpose is to link the debt to a stable parameter—gold—so as to avoid the perils of monetary fluctuation, and not to indicate a modality of payment (gold coins). See Domke (1937), pp. 51–52, and Borchard (1951), pp. 30–33.
- 79.
The gold clause has given birth to considerable disputes between foreign bondholders (and their national States) and the borrowing States, as reflected in the twin judgments on the Serbian and Brazilian loans (1929) PCIJ Series A, No 20 and No 21, where the Permanent Court of International Justice confirmed the operation of the gold clause. A particular problem arose in connection with loans including a dollar–gold clause as the US Joint Resolution of 5 June 1933, to assure that there was a uniform value for the coins and currencies in the United States (Statutes at Large, Vol XLVIII, part 1, 112), had imposed payment in dollar–dollar for all loans denominated in gold–dollar. In this regard, the Court of Appeal of Stockholm, in a judgment of 1935, held the validity of a gold clause for a loan in gold–dollars issued in 1924 by Sweden, arguing that the applicable law was that of the borrowing country and that the US Joint Resolution had been adopted after the issuance of the loan; see Jèze (1935), pp. 421–424. In Rex v. International Trustee [1937] AC 500, the House of Lords in 1937, ruling on the validity of an English war loan issued in 1917 on the US markets, came to the opposite conclusion, relying on the fact that the applicable law was not that of the debtor country but that of the locus contractus and the locus solutionis (i.e. New York); see Schmitthoff (1988), pp. 481–482. Along the same lines, see the judgment of the Swedish Supreme Court, Insurance Company Limited v. Swedish National Debt Office of 30 January 1937, 8 AD 20, and the judgment of the Norwegian Supreme Court of 8 December 1937, Insurance Companies Minerva and Viking and Stavanger Savings Bank v. The Norwegian Government, 8 AD 21. Significantly, in 1962 the Norwegian Supreme Court, ruling on a claim filed by the Associaton des Porteurs Français de Valeurs Mobilièrs—after the unsuccessful attempt made by France acting in diplomatic protection to bring an action against Norway before the International Court of Justice (Case of Certain Norwegian Loans (France v. Norway) [1957] ICJ Rep 9)—held that the gold clause contained in the bonded loan was to be construed in the sense that the Norwegian crown (the currency of payment) was based on gold and not that the payment itself was based on gold; see Bahr (1963).
- 80.
A currency board is a mechanism by which the external value of a currency is fixed in relation to the value of another currency and is backed by reserves of foreign currency, Lastra (2006), pp. 73–83.
- 81.
As long as the financial instruments are perpetual bonds, no repayment is expected, Watkins (1985a), pp. 111–112.
- 82.
See Tennekoon (1991), pp. 195–196.
- 83.
The main difference between the sinking funds and the purchase funds is that, in the first case, the bondholders have a duty and a right to have their bonds redeemed, while, in the second case, the issuer is obliged to redeem the bonds when their market price falls below a certain level, Tennekoon (1991), pp. 196–197. The sinking funds were devised in 1786 by William Pitt the Younger to reduce the burden of the British national debt. This mechanism consisted of a fixed annual sum to be paid to a body of Commissioners and used by them to purchase government stock; the stock was not cancelled, and its proceeds were used to purchase additional government stock; Morgan and Thomas (1962), p. 54. This system is based on an idea of Richard Price, an eminent moral philosopher, in whose view a sinking fund “becomes a fund always increasing itself”, Price (1773), p. 3; cf. O’Brian (2006), p. 183. The British-style sinking funds were used in sovereign foreign loans for the first time in connection with the Prussian loan issued by the house of Rothschilds in 1818, denominated in sterling and payable in London, Ferguson (2005), pp. 319–320.
- 84.
The sharing clauses usually do not appear in bonded loans, Morais (1985), pp. 324–325.
- 85.
Cf. supra, § 6.4.3. The practice of not including standard protection clauses in domestic issuances, such as negative pledge, pari passu, or cross-default, involves a significant disadvantage for the holders as, although domestically issued, bonds are sold everywhere; see Gulati and Zettelmeyer (2012), pp. 174–177.
- 86.
The clause is intended to prevent the earmarking of the revenues in favour of some of the creditors, the disposition of the foreign currency reserves, and similar measures. The point is vividly illustrated by the case of the Norwegian loans, where Norway abrogated the gold clause and paid the bonds in depreciated currency but made a discrimination in favour of Danish and Swedish holders to the detriment of French holders (supra, note 79), Tudor John (1983), p. 96. However, under certain circumstances, it may be justifiable to grant priority in favour of some credits: the post-war loans issued under the auspices of the League of Nations, for instance, enjoyed a priority on other loans, Borchard (1951), pp. 341–342. However, the clause does not operate in relation to sinking funds or purchase funds, Tennekoon (1991), p. 199. Although this clause has passed into bond issuance documentation from corporate syndicated loan agreements through simple plagiarism (Buchheit 1990, p. 10), its presence serves the aim of avoiding the risks of priority to credits upon a notary deed in Spain and the Philippines (cf. supra, Chap. 6, note 112).
- 87.
These are the two elements of the clause: in relation to other holders, the formulation of the clause (“bonds rank pari passu with each other and without any preference among themselves”) may be construed as a pro rata provision, while the second element (“bond rank pari passu with other unsecured indebtedness of the issuer”) should be construed on a pure pro ordine basis; cf. Financial Markets Law Committee, Pari Passu Clauses (2005) Issue 79, 21, available at www.fmlc.org. The clause may be completed by an equal payment obligation, Weidemaier (2013), pp. 129–130. The pro ordine construction appears more correct (supra, Chap. 6, note 114), as “[t]he decisive purpose of a pari passu clause (…) is to guarantee a specific, an equal ranking for loans furnished with such a clause”, Young Loan Arbitration (1980) 59 ILR 495, 539.
- 88.
- 89.
As compared to bank loans, the negative pledge clause in bonded loans is more circumscribed, being limited to other bond issues or public indebtedness, Wilson (1984), pp. 197–198, and Tennekoon (1991), p. 200.
- 90.
- 91.
They are drafted in a similar manner to the corresponding clauses in syndicated loan agreements, Wood (2007), p. 241.
- 92.
The cross-default clause is drafted in broad terms so as to embrace events that are simply capable of causing an acceleration of other indebtedness; the broad terms of the clause constitute a counterbalance to the absence of protection machinery for the loan, Tennekoon (1991), p. 202.
- 93.
Cf. infra, § 13.2.
- 94.
Cf. infra, § 17.2.
- 95.
Cf. infra, § 7.7.
- 96.
See McKnight (2008), pp. 531–532.
- 97.
The terms of the trust deed or indenture and the terms of the fiscal agency agreement are incorporated by reference in the bond instrument and are binding for all successive bondholders, Tennekoon (1991), pp. 205–206 and 222.
- 98.
- 99.
- 100.
“When a person has rights which he is bound to exercise upon behalf of another or for the accomplished of some particular purpose he is said to have those rights in trust for that or for that purpose and he is called a trustee”, Maitland (1936), p. 44. In this regard, it is worth emphasising that the trust, being a peculiar hallmark of the common law jurisdictions, is unknown to the civil law legal systems. This legal vacuum was then filled by other comparable institutes, such as the société civile (France) or the Treuhand (Germany), Zahn (1932) and Rich (1981). However, these difficulties are now vanishing as, on one hand, the Hague Convention of 1985 on the applicable trusts and their recognition (cf. infra, § 7.7.3) permits the recognition of common law trusts in civil law jurisdictions and, on the other hand, certain civil law countries have recently adopted a domestic trust, such as the French “fiducie”, Gdanski and Picardo-Agandi (2007).
- 101.
On the nature and classification of trusts under the law of equity, see Martin (2009), pp. 49–76.
- 102.
- 103.
- 104.
- 105.
Halsbury’s Statutes of England and Wales vol 48 (4th edn, Butterworths, London (2001) Reissue) 619.
- 106.
15 USCA § 77aaa et seq. This statute constitutes an amendment to the Securities Act of 1933, 69 Am Jur 2d, Securities Regulation – Federal § 872 et seq.
- 107.
See Tennekoon (1991), p. 248.
- 108.
See Pergam (1985), p. 338.
- 109.
- 110.
As compared to agents under bank syndicates, these corporate entities are less likely to find themselves in conflict of interests situations as they do not carry on other business, Wood (2007), pp. 312–313.
- 111.
The solution consists of avoiding being a representative of two or more issues of different class (i.e. secured and unsecured loans), Wood (2007), p. 314.
- 112.
In the scenario in which the role of trustee is played by a bank, in the event of default, the bank may be tempted to secure its loan to the prejudice of the bond issue; in practice, the reverse occurs as the banks prefer to restrict their action as lenders because of fear of lawsuits by the bondholders; Wood (2007), p. 314.
- 113.
See Wood (2007), p. 315.
- 114.
Pub Law N 101–550, in Statutes at Large, vol 104, 2721.
- 115.
See Wood (2007), pp. 315–316.
- 116.
In such an event, the trustee is called to waive its function within 90 days of the default; this waiver operates when the trustee is replaced by a new trustee; 69 Am Jur 2d, Securities Regulation – Federal § 878.
- 117.
See Pergam (1985), p. 337.
- 118.
- 119.
The issuer is bound to communicate to the trustee any information concerning his situation; in particular, he is obliged to give notice to him in writing of any event of default, as well of any event capable of constituting an event of default, Tennekoon (1991), pp. 229–231.
- 120.
These remedies can essentially be identified with the right to accelerate the payments and to bring an action before the court, Tennekoon (1991), pp. 206–207.
- 121.
The courts are not particularly inclined to interfere with the discretionality of the trustee, unless in extreme cases, such as when the discretionality is wholly “unreasonable or commercially unrealistic”, Tennekoon (1991), pp. 209–210. In Re Hastings-Bass [1974] 2 All ER 193, 203, the Court of Appeal held that the judge may interfere with the exercise of the discretion by the trustee insofar as he would not have acted as he did had he taken into account all the considerations he ought to, or if he took into account consideration he ought not to; see McKnight (2008), p. 557. In this connection, it is significant to highlight that once the trustee has failed to exercise an express duty, he is liable for breach of trust, while if he fails to exercise a discretionary power, he is liable for absence of due diligence, Wood (2007), p. 320.
- 122.
- 123.
See Tennekoon (1991), p. 239.
- 124.
However, in consideration of the time required to convene a bondholders’ meeting, this option is not viable; Tennekoon (1991), p. 231. The introduction of a new documentation permitting the passing of an extraordinary resolution by bondholders in an electronic form through the relevant clearing systems has been suggested to overcome this problem, Hill and Beech (2010), pp. 19–20.
- 125.
However, this decision is subject to a reverse deliberation by the bondholders, Wood (2007), p. 305.
- 126.
The decision of the trustee may be challenged not so much because it is materially prejudicial for the bondholders but rather because it was not honestly delivered, Tennekoon (1991), pp. 231–232.
- 127.
This duty, arising in equity, corresponds to the duty of care in the tort of negligence in common law, McKnight (2008), p. 545.
- 128.
“[A] professional corporate trustee is liable for breach of trust if loss is caused to the trust fund because it neglects to use the special care and skill it professes to have”, Brightman J in Bartlett v. Barclay’s Bank Trust Co. Ltd [1980] Ch D 515, 534.
- 129.
Although not intended to be exhaustive, the list has contributed to highlighting the nature of the obligation of loyalty, Bristol & West Building Society v. Mothew [1998] Ch 1, 18, per Millet LJ.
- 130.
See sec 750 of Companies Act 2006, in Halsbury’s Statutes of England and Wales, vol 8 (4th edn, LexisNexis, 2009 Reissue) [1255]. This provision is formally tailored to trustees of corporate issues but could constitute a benchmark even in this context. In Armitage v. Nurse [1997] 2 All ER 705, 715 (CA), Millet LJ held that “trustees who charge for their professional services and who, as professional men, would not dream of excluding liability for ordinary professional negligence, should not be able to rely on the trustee exemption clause excluding liability for gross negligence”.
- 131.
69 Am Jur 2d, Securities Regulation – Federal § 884.
- 132.
Clauses providing for a high level of responsibility for the trustee in connection with a default are not included in sovereign bonded loan issued under New York law, Buchheit and Gulati (2009), p. 25.
- 133.
See Tennekoon (1991), p. 242.
- 134.
As long as the trust deed or the trust indenture were drafted in a manner that eliminates any form of trustee liability, the issue would be unacceptable to the investing community, Pergam (1985), p. 339. However, an exemption clause would not relieve the trustees of breach of trust “even if committed in the genuine belief that the course taken by them was in the interests of the beneficiaries, if such belief was so unreasonable”, Walker and others v. Stones and another [2001] QB 902, 941 (CA), per Sir Slade.
- 135.
In the Standard and Poor’s categorisation, the lowest investment grade is BBB, McKnight (2008), p. 494.
- 136.
See Rawlings (2007), p. 51.
- 137.
See Wood (2007), p. 288. The preference for the fiscal agent is ascribable to the fact that competition between the subscribers to the sovereign bonds tends to reduce the costs, and a fiscal agent is definitively less expensive than a trustee, Gray (2004), p. 705. Moreover, there is no unanimous assent on the preference to be given to a trustee as this is seen to restrict too far the sphere of action of the single bondholders, Koch (2004), p. 681. Further, in choosing a fiscal agent, borrowers signal to the markets that they do not need to effectuate the minor adjustments possible under a trustee, Buchheit (2007), p. 21. In this vein, the EU Common Terms of Reference for CAC do not impose the inclusion of a trustee in the issue documents; cf. http://europa.eu/efc/sub_committee/cac/index_en.htm; see Tirado (2013), p. 310.
- 138.
Cf. supra, § 7.2.
- 139.
In this regard, it is necessary to emphasise that the paying agents do not depend upon the fiscal agent but upon the issuer, who becomes the sole party responsible for their appointment, Wood (2007), p. 290.
- 140.
In practice, the fiscal agent advances the sums that are subsequently reimbursed by the issuer; before advancing the sums, the fiscal agent is usually instructed accordingly by the issuer, Tennekoon (1991), p. 219.
- 141.
- 142.
To circumscribe the free action by the holders, some fiscal agency agreements set forth that non-payment defaults, such as defaults on covenants, may qualify as defaults solely as long as a certain percentage of the holders give notice to the issuer and the fiscal agent, Pergam (1985), p. 336.
- 143.
In the absence of a trustee, the issuer is likely to encounter problems: any holder may put the issuer in default for breach of the terms of the loan, a negotiated solution is difficult to reach, and any modification of the terms of the loan is subject to the meeting of the bondholders; Tennekoon (1991), p. 221.
- 144.
See Tennekoon (1991), pp. 222–223. Usually, the English practice for sovereign issuances tends to insert voting clauses in the fiscal agency agreement, Wood (2007), p. 299.
- 145.
One of the reasons that in previous times led most frequently to a depeçage of the legal picture of the loan was the fact that civil law systems could not recognise the trust, which then had to be subject to a common law legal system, Oppetit (1972), pp. 78–79.
- 146.
See Horn (1977), p. 770.
- 147.
See Koch (2004), p. 669.
- 148.
With this perspective, a stabilisation clause may be usefully resorted to in order to shield the creditors from the risks deriving from modifications of the law of the borrower; cf. supra, § 6.4.6.2. Instead, domestic bonds are governed by the law of the issuer, although the Greek domestic bonds issued under the exchange offer of early spring 2012 were placed under the reassuring umbrella of English law to prevent legislative interference in the terms of the loan, like the introduction of CACs by law, Zettelmeyer et al. (2013), pp. 26–27.
- 149.
Only Austria, Hungary, Italy, Poland, and Sweden submit a significant volume of bonds to New York law, Das et al. (2012), pp. 42–43.
- 150.
This outcome may depend upon the reluctance by the issuing government to submit to the law of a foreign country; this reluctance is amplified by the fact that a bond issue normally receives more publicity than a bank loan, Sommers et al. (1956), p. 472.
- 151.
See Jacquemont (1976), pp. 173–174.
- 152.
- 153.
See van Hecke (1964), pp. 71–72.
- 154.
In the case of the Serbian and Brazilian loans, the Permanent Court of International Justice had tipped the scales in favour of the lex creditoris as “[o]nly the individuality of the borrower is fixed”, Case Concerning Various Serbian Loans 42 and Case Concerning Various Brazilian Loans 121 (n. 79). As a matter of fact, the Court came to this conclusion by relying on the principle of the certainty of the law, Schwarzenberger (1942), p. 97. Nevertheless, “[t]o infer from this that governmental bonds should be governed by the law of the borrower, in the absence of express agreement to the contrary, would be to place undue weight to upon the governmental charter of the borrower, and attribute to the parties an intention which, in most cases, they did not have”, Delaume (1967), p. 102.
- 155.
Cf. supra, note 148.
- 156.
See Jacquemont (1976), p. 175.
- 157.
- 158.
See van Hecke (1964), p. 74.
- 159.
[2008] OJ L 177/6; cf. supra, § 6.4.6.1.
- 160.
Cf. supra, § 6.4.6.3.
- 161.
See Stoufflet (1966–1969), p. 95.
- 162.
See Jacquemont (1976), pp. 175–176.
- 163.
Cf. supra, § 6.4.6.4.
- 164.
On this point, see Kahn (1973), pp. 218–220, who highlighted how, with reference to the Eurobond markets, the conflict-of-laws system is insufficient to determine the public policy rules of the market where the loan is launched. In fact, nowadays, the international market does not have a specific geographical location and consists of a network of banks placed in the major financial centres operating through electronic communication networks, Mugasha (2007), p. 79.
- 165.
See Oppetit (1972), p. 85. See also the ICMA Primary Market Handbook.
- 166.
See Taylor (1999), pp. 223–232, and Blair and Walker (2007), pp. 468–490. See also the website www.iosco.org.
- 167.
See Gulati and Scott (2013), pp. 24–30.
- 168.
See Oppetit (1972), p. 86.
- 169.
- 170.
“[N]either the contracts pursuant to which such instruments are issued nor contracts for the purchase and sale of the such instruments are excluded” from the domain of the Convention; see the Giuliano-Lagarde Explanatory Report to the Rome Convention on the Law Applicable on Contractual Obligations [1980] OJ C 282/1, 11. Cf. Tennekoon (1991), p. 19, and Weber (1999), p. 30. It is necessary to bear in mind that rights and obligations that constitute a financial instrument and rights and obligations constituting the terms and conditions of the issuance or offer to the public are excluded from the protective umbrella designed for consumer transactions under Rome I Regulation [Art 6(4(d)] to avoid a fragmentation in the governing rules affecting their trading and offering (Recital No 28).
- 171.
Cf. infra, § 12.5.1.
- 172.
Under Rome I Regulation, the notion of “overriding mandatory provisions” indicates those provisions considered of crucial character by a country (i.e., concerning its political, social, or economic organisation) to be applied irrespective of the governing law [Art 9(1)]; cf. supra, Chap. 6, note 177.
- 173.
This is the approach emerging from the Giuliano-Lagarde Report (n. 170) 11.
- 174.
See Collins (2012), pp. 2099–2100. As to the statutes, these bonds do not fall into the category of financial instruments covered by sec 3 of the Bill of Exchange Act of 1882 (Halsbury’s Statutes of England and Wales, vol 5(2) (4th edn, LexisNexis/Butterworths, 2007 Reissue) [7]) as they do not contain an unconditional promise of payment. As to mercantile practice, it is worth emphasising that the sole practice to be taken into account is the English practice as the practice of the place where the bonds are traded, putting aside the qualification given in the place of issuance, Picker v. The London and County Banking Co [1887] 18 QBD 515 (CA). In this respect, Lord Bingham, in Edelstein v. Schuler, held that two elements should be taken into consideration: the number of transactions and the period of time over which they are effected, with the stipulation that the first element prevails over the second since “nowadays there are more business transactions in an hour than there were in a week a century ago” [1902] 2 KB 144, 154. For a historical overview of the negotiable instruments in England, see Holden (1955).
- 175.
From the beginning of the nineteenth century, Prussian bonds were exchanged on the London market, Gorgier v. Mieville (1824) 3 B & C 45, 107 ER 651, as much as Danish, Russian, and Dutch bonds, Attorney-General v. Bouwens (1838) 4 M & W 171, 150 ER 1390.
- 176.
See Tennekoon (1991), pp. 164–165.
- 177.
See Tennekoon (1991), pp. 166–167. The Bill of Exchange Act encapsulates the several laws doctrine in relation to the contractual aspects, Collins (2012), p. 2101; see also Proctor (1997), pp. 452–463. The severability is also acknowledged in the Restatement Second on the Conflict of Laws, American Law Institute (1971), p. 557.
- 178.
This approach would create certainty in financial transactions, Tennekoon (1991), pp. 166–167.
- 179.
See Dalhuisen (2007), pp. 811–816.
- 180.
(Signed 5 July 2006) (2007) 46 ILM 645, with an Introductory Note by Mooney Jr.
- 181.
Uniform Law Annotated, vol 2C, UCC, Revised Art. 8 (1994) (Investment Securities) § 8-110.
- 182.
See Tennekoon (1991), pp. 167–169.
- 183.
See Verhagen (2000), p. 114.
- 184.
See Dalhuisen (2007), p. 812.
- 185.
Macmillian Inc. v. Bishopgate Investment Trust plc (N 3) [1995] 3 All ER 747 (Ch D); see Goode (1996), p. 123.
- 186.
Under the previous practice, it was necessary to appoint a trustee for bonds offered on markets in Anglo-Saxon countries and an agent for the bonds offered on the continental markets, plus a third subject acting as an intermediary between the two, as well as between these and the issuer, Delaume (1967), p. 57. Alternatively, the act establishing the trust was to be drafted consistently with the legal requirements in civil law countries, Weiser (1936), p. 91.
- 187.
- 188.
Aktiebolaget Obligationsinteressenter c. Banque des règlements internationaux, judgment of 26 May 1936 (1937) 32 Rev crit 138. The Tribunal recognised the peculiarity of the relevant situation, arguing that the relationship between the issuer (Germany) and the Bank for International Settlements (trustee) and between the Bank for International Settlements and the bondholders, although incapable of qualifying as agency relationships under the Swiss Code of Obligations, could still be regarded as a contract sui generis, under certain respects analogous to agency, whose content was determined by the loan contract. On these assumptions, the Tribunal held that the Bank for International Settlements acted as a representative of the bondholders in relation to the payment of the interest and the capital. See Delaume (1967), pp. 68–70.
- 189.
Four Seasons Overseases N.V. c. S.A. Fimintrust, judgment of 21 January 1971 (1973) 62 Rev crit 51. Following this decision, Luxembourg enacted a law establishing the institute of the repré-sentance fiduciaire, which aimed at safeguarding its position as European financial centre for bond issues, Horn (1977), p. 768.
- 190.
The Hague Convention on the Law Applicable to Trusts and on their Recognition (concluded 1 July 1985) (1984) 23 ILM 1389; the explanatory report to the Convention is reproduced in (1986) 25 ILM 593. On the Hague Convention, see, generally, Gaillard and Trautman (1986), Hayton (1987), and Harris (2002).
- 191.
Art 13 poses a limit to the obligation to recognise as it stipulates that a contracting State is not bound to recognise a trust when its significant elements, other than the applicable law, the place of administration, and the habitual residence of the trustee, are more closely related to States that do not provide for trusts. Further, Art 21 asserts that contracting States are allowed to make reservations so as to confine the rules on recognition to trusts whose validity is governed by the law of a contracting State.
- 192.
The list of Art 7 is to be intended to be non-exhaustive, Fawcett and Carruthers (2008), p. 1317.
- 193.
- 194.
Art 8 gives a non-exclusive list of these aspects, inter alia: appointment, resignation and removal of trustee, capacity to perform the functions of a trustee and their devolution; reciprocal rights and duties of trustees; the right of the trustees to delegate their duties and powers; and the relationship between the trustee and the beneficiaries, including the personal liability of the former towards the latter.
- 195.
See Hayton (1987), pp. 277–278.
- 196.
Art 16 mirrors closely Art 7 of the Rome Convention, and, for the same reasons as under Art 7(1) of the Rome Convention, Great Britain made a reservation with reference to the second paragraph of Art 16 of the Hague Convention, Hayton (1987), p. 279.
- 197.
Public policy provisions are not necessarily confined to those of the forum, Hayton (2003), p. 1051.
- 198.
This exclusion does not apply to the fiscal agency agreement, which, having a contractual nature, falls within the purview of Rome I Regulation.
- 199.
The Convention has been implemented in England by the Recognition of Trusts Act of 1987, in Halsbury’s Statutes of England and Wales, vol 50 (4th edn, LexisNexis 2011 Reissue) 274.
- 200.
Cf. www.hcch.net.
- 201.
See Scoles et al. (2004), pp. 1146–1148.
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Megliani, M. (2015). Bonded Debt. In: Sovereign Debt. Springer, Cham. https://doi.org/10.1007/978-3-319-08464-0_7
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