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Predicting Bondholder Activism

By J. Andrew Rahl, Jr.
February 26, 2007

Concerted action by public bondholders can be counted upon to attract attention in both the financial markets and the financial press. A current topical example is the wave of public debt refinancings, consent solicitations and conversion price resets that has ensued from enforcement of bondholder remedies for financial reporting covenant defaults (e.g., Peter Lattman and Karen Richardson, Hedge Funds Playing Hardball with Firms Filing Late Financials. The Wall Street Journal, Aug. 29, 2006, at A1). As the title of that article suggests, the image of bondholder activism in many quarters is one of rapacious bondholders aggressively pursuing a ruthless quest for returns. The reality is far more complex, but the outcome of particular cases may be surprisingly predictable for the astute analyst.

Bondholders unquestionably have become progressively more active and assertive over the course of the last three business cycles. That said, the course of many bondholder induced refinancings and restructurings it is possible to predict with some success in light of the considerations discussed in this article. These include: the current highly liquid market environment, the investment strategies of the particular holders of a given bond or note issue, the amount of it which is outstanding, and the dynamics of the bondholder committee process.

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