Cash America and the structure of bondholder remedies

Abstract

... Teachers of contract law and business associations often bewail the failure of parties in longer-term relationships to anticipate and contract for the terms under which they exit the relationship. After all, things do often go wrong. But it is uncomfortable to discuss, at the outset of a hopeful relationship, how things might go wrong. Corporate bonds are an exception to the foregoing narrative. Careful contracting for exit remedies in this context is the norm rather than the exception. On the creditor side, the relevant provisions typically lay out a set of early warning triggers such as the debtor defaulting on certain other debt obligations (cross default clauses) or incurring debt above a certain threshold. If these events occur, creditors have the option to declare an ‘Event of Default’ and ask to be repaid immediately (ie accelerate the maturity of the principal). On the debtor side, the typical exit clause is the optional redemption provision, which specifies at what price the debtor is permitted to call the bonds prior to their stated maturity if it wishes for whatever reason to prepay its obligations early—perhaps because it wants to refinance the debt or because it had previously agreed to onerous covenants that it is now finding difficult to comply with. In effect, we have options on either side; one on the creditor side and one on the debtor side for either one to be able to exit the relationship under certain conditions.