How Debtholder Consent Can Make or Break Your Financing Resolution

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Know the Requirements Upfront

As a debt issuer, when you’re considering making material changes to the terms of an existing trust indenture or governing agreement, ensuring you’ve planned for sufficient time to obtain debtholder consent (through a consent solicitation or a debtholder meeting) is one of the most important things to consider. Having a plan in place from the start can help you avoid missteps or unnecessary delays in reaching your objectives.

I’ve overseen many consent solicitations and debtholder meetings over the years, most recently in virtual format for some companies in industries negatively impacted by the pandemic. While the reasons for these solicitations can vary (adding additional reporting requirements for issuers experiencing financial difficulties, addressing rent abatement or deferral, or defaulted transactions) here’s what you need to know about obtaining debtholder consent.

Follow the right steps in the right order

A common mistake issuers make is to reach out to debtholders for consent, prior to alerting their trustee. After the issuer has received the required number of consents, the result is presented to the trustee as a fait accompli – however, this approach introduces the danger of the consents being invalid or creating duplicate work for all involved. For example, in a consent solicitation, the consent forms may be invalid if they are executed by the wrong parties. In the case of a debtholder meeting, there is also a specific voting mechanism that must be followed. The trustee will assist in ensuring that the requisite documentation is validly executed.

So, it’s important for issuers to inform their trustees at the beginning. Computershare’s corporate trust team provides guidance to clients on the consent solicitation and debtholder meeting process to avoid such mistakes. We help our clients follow the right steps, in the right order, to achieve the right outcome.

How a security is held determines how materials can be disseminated to owners

For instance, before an issuer can obtain debtholder consent, it’s necessary to know how the debt security is held. The Canadian Depository for Securities Limited (“CDS”) is the national securities depository, clearing and settlement hub, and provides these services to financial intermediaries in Canada's equity, fixed income and money markets.

When the debt security is registered in the name of many individual debtholders or is registered in the name of CDS & Co. (the nominee name for CDS), with multiple underlying CDS participants involved, it is considered “widely held”. In this instance, the issuer and trustee work together to ensure that enough time is built into the process to provide the meeting or consent materials to all underlying beneficial holders, of which there can be hundreds. A third party is employed to search for and mail information to beneficial holders, so it’s important to factor in that this may lengthen the amount of time needed.

For CDS issues, in order to determine if the debt security is widely held, we start off by helping issuers obtain a CDS participants’ list. When the consent forms are disseminated to CDS and underlying beneficial holders, the consents will have to be executed by the underlying CDS participants in order to be valid. This is done in accordance with the CDS Omnibus Proxy.

There may be instances where the debt is considered “closely held” either by: i) a few CDS participants (the beneficial holders being large institutional investors such as life insurance companies and pension funds), or ii) by a few registered debtholders. In those circumstances the consent process may be quicker because mailing materials to holders and obtaining responses typically require less time.

Ways to obtain debtholder consent

Any specific requirements for obtaining debtholder consent are usually outlined in the existing trust indenture or governing agreement, another item your trustee can help you determine. Whether the debt is widely or closely held can also play a part in how to best conduct the consent process.

If the debt is widely held, a debtholder meeting (in person or virtual during the pandemic) may be more practical. The dissemination of documents through a third party and the electronic voting process built into a debtholder meeting optimize the process. A meeting may be the more practical route, depending on the threshold required in the trust indenture to obtain the appropriate resolution.

If the debt is closely held and if the issuer is confident that the higher resolution threshold will be met, a consent solicitation by an instrument in writing may be more practical. The consent documents can be disseminated by the trustee to the holders quickly and the issuer can communicate with holders easily.

Whether the debt is widely or closely held, it is always important to remember that the issuer should involve the trustee in the debtholder consent process from the outset.

Types of debtholder meetings

Before the pandemic, debtholder meetings were held in person using standardized meeting procedures and documents. If the debt issue was held by CDS, it was rare to see beneficial debtholders attend meetings in person, but it was still an option. Traditionally, most (if not all) debtholders submitted their votes electronically and the results were transmitted to the trustee and tabulation agent in the days leading up to the meeting.

However, since the pandemic, additional options for holding meetings virtually or setting up conference calls where holders can dial-in and listen to the proceedings have become available. Virtual annual shareholder meetings led the way in 2020. Depending on the circumstances and on the advice of counsel, some debtholder meetings have now started to follow this example. Trust indentures and governing documents are now specifically incorporating language that allows for virtual meetings. Having successfully managed over 2,000 virtual annual shareholder meetings globally in 2020, Computershare is well positioned to assist issuers with any virtual or hybrid meeting needs, providing easy, convenient meeting access for holders.

Be prepared

Understanding the debtholder meeting and consent solicitation process before you need it can help you plan in advance and save you time and money, ultimately resulting in a successful resolution. Click here to download the Computershare Guide to Debtholder Consent.

Thanks for reading. Stay tuned for my next blog where I’ll lay out a typical meeting timeline to help you navigate the ins and outs of debtholder consent with ease.

In the meantime, for more information about how Computershare can help, reach out to me directly at Yana.Nedyalkova@Computershare.com or to your local Computershare contact.

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