A New Look at an Old Standard: The Power of Minority Bondholders Under the Trust Indenture Act

Could an obscure statutory provision dating back to the New Deal give a distressed company’s minority bondholders the power to hold up a restructuring agreed upon by all of the other bondholders?  The answer appears to be “yes.”  Two recent cases interpreting the Trust Indenture Act of 1939 (Act) have broadly read a provision of the Act to bar any non-consensual change to the existing bond indenture that would affect any bondholder’s ultimate payment rights in the context of an out-of-court restructuring.  This is regardless of any agreements reached by the majority of bondholders and regardless of the depth of sound business judgment underlying a company’s proposed restructuring plan.  By boosting minority bondholders’ leverage in restructurings, these recent cases interpreting the Act could have far-reaching implications.  Hedge funds and other investors looking to invest in distressed debt would be wise to analyze these decisions closely.  In a guest article, Marc D. Powers, Mark A. Kornfeld, Ferve E. Ozturk and M. Elizabeth Howe provide such an analysis, and discuss the implications of the decisions for hedge funds that invest in distressed debt.  Powers is the national leader of the Hedge Fund Industry and Securities Litigation practices at BakerHostetler; Kornfeld is a BakerHostetler partner; Ozturk and Howe are associates at the firm.

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