Holdout problem

In finance, a holdout problem occurs when a bond issuer is in default or nears default, and launches an exchange offer in an attempt to restructure debt held by existing bond holders. Such exchange offers typically require the consent of holders of some minimum portion of the total outstanding debt, often in excess of 90%, because, unless the terms of the bond provide otherwise, non-consenting bondholders will retain their legal right to demand repayment of their bonds at par (the full face amount). Bondholders who withhold their consent and retain their right to seek the full repayment of original bonds, may disrupt the restructuring process, creating a situation known as the holdout problem.

The "holdouts" gamble that the restructuring will take place despite the lack of their consent, potentially leading to full repayment of their bonds, while other bondholders receive reduced payments according to the terms of the restructuring. If the restructuring does not take place, they gain nothing.

The claims of the holdouts may be insignificant enough, and bothersome enough, that the issuer may satisfy them in whole simply not to be bothered.

Where bondholders are widely dispersed, as is often the case, it can be difficult to contact many holders. Further, many holders of small amounts of bonds have little incentive to invest the time and energy in evaluating the terms of the exchange offer. These factors represent substantial difficulties in obtaining the minimum consent levels.

Recent examples

Successful litigations were undertaken by some holdout problems in Peru (1996) and Argentina (2001). In a well-known holdout case involving the sovereign bonds of Peru, the New-York-based vulture fund Elliot Associates L.P. obtained injunctions in Canada, Belgium, Luxembourg, Holland, Germany and the UK to prevent the Peruvian government from repaying other creditors until the hedge fund had received payment in full.

The possibility that holdout creditors can attach future payments on restructured debt and receive better treatment than cooperating creditors distorts incentives and can derail efforts for a cooperative restructuring.^{[citation needed]} It is likely to be of particular importance in cases in which the creditors are being asked to accept substantial debt and debt service reduction. However, it is unclear given the special circumstances of the Elliot case whether it will be broadly applicable to holdouts in other restructurings.

External links

• The problem of sovereign debt restructuring (PDF) by Kentaro Tamura
• Proposals for a sovereign debt restructuring mechanism (SDRM) International Monetary Fund