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Council of Foreign Bondholders | |
Formation | 1868 |
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Founder | Private holders of debt securities issued by foreign governments |
Founded at | London |
Dissolved | 1988 |
Legal status | Association |
Purpose | Help investors deal with the government defaults |
Location | |
Region served | Worldwide |
Official language | English |
Affiliations | Board of Trade and the Bank of England |
The Corporation of Foreign Bondholders (also known as the Council of Foreign Bondholders) was a British association established in London in 1868 by private holders of debt securities issued by foreign governments, states and municipalities.
In an era before extensive financial regulation and of wide sovereign immunity, it provided a forum for British creditors to co-ordinate their actions during the financial boom from the 1860s to the 1950s. It created an important mechanism through which investors could formulate proposals to deal with the government defaults, particularly in the Great Depression following the 1929 Wall Street crash, including several early debt restructurings. It would operate until 1988 when it was wound up.
The CFB was a not-for-profit organisation established in 1868. Its formation was triggered by a series of sovereign debt defaults in the mid-19th century. It was incorporated in 1873, under a licence from the Board of Trade, governed by a committee of representatives from brokerages and banks.
In early years, bondholders criticised the settlements that it reached with defaulting bond issuers. Decisions to accept a proposal were voted on at public meetings of members, but it was suspected that banks that underwrote the debt were influencing the decisions.
Corporation of Foreign Bondholders Act 1898 | |
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Act of Parliament | |
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Long title | An Act to reconstitute the Corporation of Foreign Bondholders. |
Citation | 61 & 62 Vict. c. cxlix |
Dates | |
Royal assent | 25 July 1898 |
Text of statute as originally enacted |
To address these concerns, the CFB was reconstituted in 1899 under a private Act of Parliament, the Corporation of Foreign Bondholders Act 1898 (61 & 62 Vict. c. cxlix), which gave it the statutory duty to "watch over and protect the rights and interests of holders of public securities wherever issued but especially of foreign and colonial securities" (Article 4(a) of the Act). A new Council was created with 21 members: 6 nominated by the British Bankers Association, 6 by the London Chamber of Commerce, and 9 co-opted by the Council. Its officers were paid relatively small annual stipends, funded by its members.
To assist members to co-ordinate their actions, the CFB collected and disseminated information about the jurisdictions in which its members invested, including confidential information delivered by its agents in some countries. Ots Annual Reports summarised the debt history of relevant countries, accompanied by economic data and political information. It also provided a reading room and library and ran lectures. Most services were free to members, funded by the interest on an initial subscription fund, and, later by including its costs in any settlements made with defaulters.
Ad hoc committees were formed on request to deal with specific situations if a country was in difficulties. Representatives of the CFB would deal directly with a defaulting country on behalf of its members, giving it considerable influence. To ensure consensus decisions, one principle followed was equal treatment of all classes of bondholder.
The CFB worked with other British associations of investors, including the League Loans Committee, the Chinese Bondholders Committee, and the Committee of British Long-Term and Medium Term Creditors of Germany. In several cases, its actions were co-ordinated with bondholders outside the UK.
The CFB maintained good relations with bondholders in other countries, including the bourses in Rotterdam and Amsterdam; Brussels and Antwerp; Frankfurt, Berlin, and Hamburg; Paris; and (to a lesser extent) New York. The CFB also maintained good relations with the British government, particularly HM Treasury and the Foreign Office, but the government was generally reluctant to exert diplomatic influence on behalf of private investors.
The CFB's main mechanism to bring defaulting countries to the table was to make it difficult for defaulters to make further borrowings. The CFB exerted social pressure to discourage lending to countries in default until the default was resolved. The London Stock Exchange would refuse to list new securities issued by defaulters, and in extreme cases, it could delist existing securities.
A few times, when British diplomatic interests aligned with those of investors, gunboat diplomacy was used: Britain occupied the defaulting Egypt in 1882, and Britain, Germany, and Italy blockaded the defaulting Venezuela in 1902. The differences in practices between investors in the UK and the US often led to conflicting desires, and the Monroe Doctrine often allowed countries in Central and South American to default with impunity until Theodore Roosevelt announced in 1905 that Latin American countries could no longer use the US as a shield to avoid their debt obligations. More formal dispute resolution (mediation, arbitration, or litigation) were largely unsuccessful.
The CFB became less active after the Second World War, and it became closely aligned with the Bank of England. It was formally wound up in 1988. Its archives are held by the Guildhall Library in London.
Related to the CFB is the United States Foreign Bondholders Protective Council (FBPC). In 1933, at the request of the Department of State, President Franklin D. Roosevelt, by Executive Order, created the Foreign Bondholders Protective Council to assist US citizens and creditors in collecting on defaulted foreign government bonds. Prior to formation of the private, non-profit FBPC, no permanent organization existed to negotiate settlements with defaulting debtors. The Council was particularly active before the Second World War and again in the 1970s and 1980s.
As recently as 2002, both the Department of State and the Securities and Exchange Commission recommended creditors who hold more than 18,000 Chinese government bonds issued between 1913 and 1942 to seek the FBPC's assistance in negotiating fair settlements.
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any form of financial instrument, even though the underlying legal and regulatory regime may not have such a broad definition. In some jurisdictions the term specifically excludes financial instruments other than equities and fixed income instruments. In some jurisdictions it includes some instruments that are close to equities and fixed income, e.g., equity warrants.
In finance, a bond is a type of security under which the issuer (debtor) owes the holder (creditor) a debt, and is obliged – depending on the terms – to provide cash flow to the creditor. The timing and the amount of cash flow provided varies, depending on the economic value that is emphasized upon, thus giving rise to different types of bonds. The interest is usually payable at fixed intervals: semiannual, annual, and less often at other periods. Thus, a bond is a form of loan or IOU. Bonds provide the borrower with external funds to finance long-term investments or, in the case of government bonds, to finance current expenditure.
A government bond or sovereign bond is a form of bond issued by a government to support public spending. It generally includes a commitment to pay periodic interest, called coupon payments, and to repay the face value on the maturity date.
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. 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.
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Distressed securities are securities over companies or government entities that are experiencing financial or operational distress, default, or are under bankruptcy. As far as debt securities, this is called distressed debt. Purchasing or holding such distressed-debt creates significant risk due to the possibility that bankruptcy may render such securities worthless.
A vulture fund is a hedge fund, private-equity fund or distressed debt fund, that invests in debt considered to be very weak or in default, known as distressed securities. Investors in the fund profit by buying debt at a discounted price on a secondary market and then using numerous methods to subsequently sell the debt for a larger amount than the purchasing price. Debtors include companies, countries, and individuals.
The Argentine debt restructuring is a process of debt restructuring by Argentina that began on January 14, 2005, and allowed it to resume payment on 76% of the US$82 billion in sovereign bonds that defaulted in 2001 at the depth of the worst economic crisis in the nation's history. A second debt restructuring in 2010 brought the percentage of bonds under some form of repayment to 93%, though ongoing disputes with holdouts remained. Bondholders who participated in the restructuring settled for repayments of around 30% of face value and deferred payment terms, and began to be paid punctually; the value of their nearly worthless bonds also began to rise. The remaining 7% of bondholders were later repaid 25% less than they were demanding, after centre-right and US-aligned leader Mauricio Macri came to power in 2015.
A sovereign default is the failure or refusal of the government of a sovereign state to pay back its debt in full when due. Cessation of due payments may either be accompanied by that government's formal declaration that it will not pay its debts (repudiation), or it may be unannounced. A credit rating agency will take into account in its gradings capital, interest, extraneous and procedural defaults, and failures to abide by the terms of bonds or other debt instruments.
Debt crisis is a situation in which a government loses the ability of paying back its governmental debt. When the expenditures of a government are more than its tax revenues for a prolonged period, the government may enter into a debt crisis. Various forms of governments finance their expenditures primarily by raising money through taxation. When tax revenues are insufficient, the government can make up the difference by issuing debt.
In the context of sovereign debt crisis, private sector involvement (PSI) refers, broadly speaking, to the forced contribution of private sector creditors to a financial crisis resolution process, and, specifically, to the private sector incurring outright reductions ("haircuts") on the value of its debt holdings.
The proposed long-term solutions for the Eurozone crisis address ways to deal with the European debt crisis that took place in the European Union from 2009 till the late 2010s, including risks to Eurozone country governments and the Euro.
Foreign Bondholders Protective Council was an American government sponsored organization to assist US citizens and creditors in collecting on defaulted foreign government bonds. It operated from 1933 into the early 2000s. It was structured as a private, non-profit organisation and negotiated on behalf of creditors with foreign governments with support of the United States Department of State.
Jubilee USA Network is a nonprofit financial reform organization based in Washington, D.C. Jubilee USA's work began in conjunction with the global Jubilee 2000 movement, founded in the late 1990s to advocate for debt relief for developing countries. It is "an alliance of more than 75 U.S. organizations, 650 faith communities and 50 Jubilee global partners."
Republic of Argentina v. NML Capital, Ltd., 573 U.S. 134 (2014), is a U.S. Supreme Court opinion regarding foreign sovereign immunity. After defaulting on its debt and losing a federal collection action, Argentina claimed that its foreign assets were immune from discovery. The Court found that no such immunity existed.
AJ Mediratta is an American investor who has worked in financial markets, particularly in fixed income emerging markets and in sovereign debt restructurings. He is a president at Greylock Capital Management, LLC, an alternative asset investment adviser. Mediratta is active in Greylock Capital's investment activity and debt restructuring efforts globally.
Greylock Capital Management, LLC is a U.S. Securities and Exchange Commission registered alternative investment adviser that invests globally in high yield, undervalued, and distressed assets worldwide, particularly in emerging and frontier markets. The firm was founded in 2004 by Hans Humes from a portfolio of emerging market assets managed by Humes while at Van Eck Global. AJ Mediratta joined the firm in 2008 from Bear Stearns and serves as its president.
Russia defaulted on part of its foreign currency denominated debt on 27 June 2022, because of funds being stuck in Euroclear. This was its first such default since 1918, back when it had issued ruble-denominated bonds). Before that, on 2 June, Russia defaulted on the 30-day interest, incorrectly not counting interest for the grace period, but a failure to pay $1.9 million was not sufficient to trigger a cross-default across other instruments, because the minimum threshold is an amount of at least $75 million, according to documents for other Russian eurobonds. The default occurred due to technicalities as the payment in dollars was impossible due to the sanctions by US and EU authorities, but did not mark an actual lack of capability to pay its debts.