37 th Bond Attorneys Workshop October 24-26, 2012 Sheraton Chicago Hotel & Towers It s a Contact Sport: Default Administration Concerns That Bond Attorneys Need to Anticipate 1
Panelists Bryant D. Barber Lewis and Roca LLP, Phoenix, Arizona Angela W. Adolph Kean Miller LLP, Baton Rouge, Louisiana Patrick J. McLaughlin Dorsey & Whitney, LLP, Minneapolis, Minnesota David J. Fernandez Carter Ledyard & Milburn LLP, New York, New York 2
Panel Agenda Points of Emphasis Default Administration 101 Trustee as Default Administrator Document Hot Buttons and Drafting Suggestions Best Practices: Defensive Lawyering 3
Points of Emphasis (Take Aways) 1. Each material provision of an indenture must be viewed from the post-default perspective of bondholders trying to maximize their net recovery. 2. Bond attorneys can reduce their exposure (claims and reputational damage) by making certain that bondholders (or the Trustee acting on their behalf) have a clear legal and factual basis to enforce the underlying documents. 3. Bond documents must be fundamentally solid commercial loan documents insofar as both of these document types must anticipate claims and defenses under applicable law (e.g., claims based on state contract or commercial law and federal and state securities laws). 4
Points of Emphasis (Take Aways) 4. The draftsperson has to think through the mechanical steps and the timing of any instruction to the Trustee that pertains to each material servicing function (e.g., investing trust funds, collecting revenues, monitoring the obligor, responding to incipient defaults, and enforcing remedies). Incomplete or ambiguous instructions may provide a basis for complex and protracted litigation. 5. The parties to an indenture and the related financing documents are constantly engaged in managing and reallocating risk and expense. Careful drafting that anticipates pragmatic solutions is essential to minimizing bad behavior. 5
Default Administration 101 1. Guiding Principles A. Process is Paramount B. Timely and Reasonably Detailed Communication is Essential C. The Privileges and Immunities Conferred on the Trustee in the Trust Indenture are Not Self Executing D. Strategically Managing the Record will Provide the Trustee Advantages over the Course of the Case E. Good Case Management Demands Strong Budget Management 6
Default Administration 101 2. Assessment of Rights and Remedies of the Trustee and the Bondholders Upon Event of Default A. Duties and Obligations of the Trustee B. Access to Trust Funds and Future Revenues to Pay Costs and Expenses C. Rights of the Trustee to Indemnification and Exoneration D. Rights of the Bondholders to Direct Proceedings E. Rights of Third Parties other than Bondholders to Participate in or Control the Direction of Proceedings 7
3. Default Administration Infrastructure Default Administration 101 A. Reservation of Rights and Notices of Claims B. Tolling Agreements C. Forbearance Agreements D. Common Interest Agreements E. Bondholder Direction and Indemnity Agreements F. Bondholder Communications 8
4. Assessment of Surrounding Facts Default Administration 101 A. Default Recognition: Understanding the Existence, Cause and Extent of Defaults B. Determine the Nature and Magnitude of Pending or Contingent Claims Against the Borrower and the Project C. Survey Assets and Available Cashflows D. Determine the Status of Performance Under Contract Rights which Benefit Either the Borrower or the Project 9
Default Administration 101 5. Assessment of Terms and Conditions in Documents A. Outline of Flow of Funds B. Review Scope of Covenants and Reporting Requirements C. Survey of Documents Purporting to Grant or Perfect Liens and Security Interests D. Conditions to Noticing and Acting Upon Events of Default E. Identify Intercreditor Concerns F. Tax Compliance 10
Default Administration 101 6. Conduct Substantive Analysis of Workout Potential A. Determine Need for Expedited Injunctive Relief B. Statutes of Limitations, Statutes of Repose and Time Bars to Enforcement C. Claims against Guarantors and Sureties D. Determine the Ramifications of a Voluntary or Involuntary Filing Under the Bankruptcy Code During the Course of the Workout E. Survey Management Control Devices Available During the Workout F. Obtain Estimates of Workout Costs and Benefit G. Assess Risk of Lender Liability H. Tax Compliance 11
7. Formulation of a Workout Plan 8. Implementation of the Workout Plan 9. Conclusion of Workout Arrangements A. Settlement Agreements Default Administration 101 B. Trust Instructions and Bankruptcy Orders C. Document Closings 12
Trustee as Default Administrator 1. Pre-Default Duties A. Contractual in Nature B. Express Duties (no implied duties) C. Nondiscretionary D. Scope of Administrative Functions depends, in part, on specific terms of Financing Documents 13
2. Post-Event of Default Duties Trustee as Default Administrator A. Heightened Standard of Care: Prudent Person / Prudent Corporate Trustee B. Fiduciary in Nature C. Trustee Charged with Exercising Rights and Powers vested by Indenture (or bond resolution) D. Limitations on Discretion (Non-impairment clauses or other restrictions) 14
Trustee as Default Administrator 3. Role of Trustee in a Defaulted Transaction A. Traditional: acceleration, collection actions, foreclosure and liquidation of collateral B. Possible Alternative Undertakings: depends on circumstances and terms of the applicable documents forbearance agreements, restructurings outside of bankruptcy (work-outs), injunctive relief, receivership, or bankruptcy C. Right to Direct Proceedings Control Issues: Bondholders vs. Credit Enhancer; Majority Bondholder Directions Authority to Settle Claims Protecting Minority Bondholders D. Access to Trust Funds and Future Revenues to Pay Costs and Expenses E. Rights of the Trustee to Indemnification and Exoneration 15
Document Hot Buttons and Drafting Suggestions 1. Responsibility for granting and perfecting liens, pledges and security interest Example: The Trustee shall take such action as may be necessary to maintain the perfection of the security interest granted hereunder or The Trustee shall prepare and file UCC continuation statements, and shall take such other actions, as may be necessary to maintain the perfection and priority of the security interests granted hereunder. 2. Define material and adverse effect on Bondholders Example: Terms allowing withdrawal upon requisition approved by the Trustee or in form and content acceptable to the Trustee or upon such requisition and supporting materials as the Trustee may require or calling for surveys, title reports, etc. to be acceptable to the Trustee or as it may require. Example: Terms stating or implying review or approval by the Trustee, or calling for the same to be in form and content acceptable to the Trustee; or failing to state affirmatively that the Trustee is not under a responsibility to review or examine the content. 16
Document Hot Buttons and Drafting Suggestions 3. Improving access to information pre and post default 4. Express authority to use moneys in Trust Accounts to enforce remedies and protect right of Trustee and Bondholders 5. Enhanced terms concerning covenant (non-payment) breaches and retention of consultants Have specific language in the remedies sections permitting and directing the Trustee to be able to take necessary action to retain and utilize outside help 6. Enhanced definition of defaults/events of defaults Specificity is key Have set limits for cure and action as well as limits/directions for notices and parties to be involved 17
Document Hot Buttons and Drafting Suggestions 7. Alternative terms concerning removal, replacement of Trustee language Have specific language in the remedies sections permitting and directing the Trustee to be able to take necessary action to retain and utilize outside help 8. Enhanced language to address rating downgrades of Investment Providers, Insurers or Credit Enhancers Be aware of rating downgrade sections and how their provisions affect the outstanding issue 18
Document Hot Buttons and Drafting Suggestions 9. Any deviation from the commonly accepted pre-default (strictly contractual) and post-default ( prudent person ) trustee standard of care Example: The Trustee shall take whatever action is necessary to protect the interests of Noteholders. Instead, should be: Except upon the occurrence and during continuance of an Event of Default the Trustee shall have only such duties as are expressly set forth herein Upon the occurrence and during continuance of an Event of Default, the Trustee exercise such of the rights and powers vested in it by the indenture, using the same degree of care and skill in their exercise, as a prudent person would under the circumstance in the conduct of his or her own affairs. 19
Document Hot Buttons and Drafting Suggestions 10. Lack of appropriate indemnification, expense recovery or charging lien Example: Indenture trustee should be provided complete indemnification from any expense, loss and liability (including attorneys fees and expenses) incurred in the acceptance or performance of its duties or administration of the trusts which it has been charged to administer (often qualified to exclude losses caused by its own [gross] negligence or willful misconduct); and recovery of amounts owing to the Trustee should be included as a secured obligation in all granting language. The Trustee should also be granted a charging lien ahead of bond holders. 20
Document Hot Buttons and Drafting Suggestions 11. Lack or absence of standard trustee protections Example: Should be an express recitation of the standard, commonly accepted indenture trustee immunities and protections, such as: ability of the Trustee to rely on documents it receives in good faith without investigation; ability to receive and rely on advice of counsel; not liable for errors of judgment unless negligent in ascertaining facts; not obliged to take action unless indemnified to its satisfaction against expense and liability; etc. 12. Terms improperly imposing any responsibility for tax-exempt qualification on the Trustee, expressly or impliedly Example: Notwithstanding any term herein to the contrary, the Trustee will not take any action that would cause interest on the bonds to fail to be exempt from federal taxation. Or similar terms, in different contexts. 21
Best Practices: Defensive Lawyering 1. Transaction Counsel Must Anticipate Defaults 2. Investors Expect A (Relatively) Clear Path to Sources of Payment and Security 3. Strength of the Credit: No Defense For Poor Drafting 4. Document Provisions Pertaining to the Administration of Remedies are Ripe with Exposure A. Deploy Best Practices from Commercial Loan Documentation B. Make Sure Remedies Provisions Are Fully Integrated as between Financing Documents and Security Documents 22
Best Practices: Defensive Lawyering 5. Financial Distress is Often A Pre-Cursor for Litigation or Bankruptcy A. Understand and Protect Attorney-Client Privilege B. Pay Close Attention to Time Bars to Bringing Claims C. Consult with or insert Litigation or Bankruptcy Counsel Early and Often 6. Lack of Clarity in Financing Documents is Fuel for Protracted Litigation A. Litigation is a Complex Process of Risk Re-Allocation B. Litigation is best viewed as an Expensive and Protracted Negotiation C. Litigators and Bankruptcy Attorneys are not bound by Traditional Interpretations or Plain English 23