Issuer Fails to Make Bond Payments – What Are the Next Steps?

By Anna Mišņeva, Sworn Attorney, Ellex Kļaviņš
Nasdaq First North Certified Advisor

New barriers to trade, disruptions to international commerce, financial market tensions and geopolitical uncertainty continue to put pressure on companies. Baltics experienced wake of high-profile bond defaults recently. The high-profile PlusPlus case involving €70 million in secured bonds in Estonia has drawn significant public attention. More recently, Nasdaq Baltic delisted the bonds of Lithuanian UAB “Integre Trans” following the initiation of bankruptcy proceedings. From time to time, we see issuers placed under surveillance or their public trading on stock exchanges suspended.

While no recent defaults have occurred in Latvia involving publicly traded bonds, it is crucial to raise investor awareness about available remedies when an issuer refuses to honour its bond payment obligations.

Limited Legal Framework

Latvia currently lacks specific legislation governing investor rights or enforcement procedures in bond defaults. Therefore, bondholder protection is entirely contractual — based on the provisions included in bond documentation such as the terms and conditions, prospectus, and the related security agreements.

Typically, bond documentation will define what constitutes an event of default — for example, failure to make payment within 20 business days. Upon the occurrence of a default, bondholders are entitled to exercise legal remedies, such as issuing default notice to the issuer, enforcing security, or initiating insolvency proceedings.

Below is an outline of the key steps in this process and practical issues that may arise.

Step 1: Formal Default Notice

The default process is generally initiated by a group of investors issuing a formal notice of default on behalf of the bondholders. Bond documentation typically sets thresholds for representation — e.g., holders of 10%, a majority of 50% plus one vote, or other criteria.

Such a decision may be taken at a bondholders’ meeting (convened by the issuer or in another manner defined in the terms). Proactive investor participation is crucial at this stage. However, in practice, it can be challenging as bondholders often do not know or communicate with each other prior to default.

Latvia does not have a trustee concept in bond transactions. Nonetheless, investors are free to appoint a representative to act on their behalf to initiate and coordinate the process.

Once default is declared, bondholders must determine:

• how decisions will be made,
• who will communicate with the issuer,
• who will lead enforcement actions, and
• how associated costs will be covered.

These details are often missing in the bond documents.

Step 2: Restructuring Discussions

Parties frequently attempt to restructure the debt. This may include changes in payment terms, reduction of the principal amount, or exchange offers involving new securities.

As this process is not regulated by law, restructuring outcomes depend on mutual agreement. It is critical to reach consensus among all bondholders, as dissenting investors may delay proceedings through legal actions.

Step 3: Enforcement of Collateral

If no restructuring is agreed, investors typically proceed to enforce the collateral. Collateral may include real estate, assets, shares in related companies, or guarantees — all outlined in bond documentation.

Collateral is registered in the name of a security agent, not the bondholders, to ensure practical enforceability. The agent holds and enforces the collateral on behalf of bondholders.

The agent enforces security upon bondholder instruction and distributes proceeds in line with the bond documents. Individual bondholders do not have the right to enforce security independently.

The agent’s mandate is defined in the bond terms and the security agent agreement, typically attached to the bond documentation. However, the agent may decline to act if, for example:

• advance payment for its services has not been made, or
• enforcement is not reasonably feasible.

Step 4: Litigation Against the Issuer

If the bonds are unsecured and no restructuring agreement is reached, bondholders may initiate legal action to recover amounts due. This can be done collectively or individually.

Latvia has little judicial precedent in such cases, litigation can be lengthy, costly, and unpredictable.

Step 5: Insolvency Proceedings

Insolvency proceedings may be initiated by any creditor (including a bondholder or a group of bondholders), in cases defined by law.

While insolvency is strictly regulated, bond terms will only apply insofar as they are not inconsistent with the Insolvency Law. Creditors must file claims to participate in the process.

If the bonds are secured, theoretically the security agent should participate in the process as a secured creditor. However, the agent’s role and powers in insolvency remain unclear and would need to be tested in practice.

The issuer’s assets will be liquidated, and creditors’ claims satisfied in the statutory order:

• First, costs of insolvency proceedings and certain priority claims (e.g., employees, tax authorities),
• Then, bondholder claims to the extent of principal amounts.

If proceeds are insufficient, claims are satisfied proportionally. Assets serving as collateral are sold separately, and proceeds are distributed among secured creditors.

Common Risk Factors That Can Complicate Recovery:

Before investing, it is critical to review bond documentation and identify potential risks, such as:

• No decision-making mechanism for bondholders is set in the bond documentation,
• No regular reporting obligation by the issuer (especially in private placements),
• Collateral located in foreign jurisdictions requiring cross-border enforcement,
• Foreign issuer, foreign law and courts applicable — increasing costs and unpredictability,
• Vague or ambiguous issuer obligations and representations,
• Security agent roles defined too broadly or superficially,
• No limits on additional debt issuance or creating new security over existing assets,
• No change-of-control restrictions.

Conclusion

The recovery process following a bond default is complex and full of practical and legal challenges. Investors must remain informed and proactive.

Thorough review of bond documentation — especially risk disclosures — is essential before investing, to avoid entering into problematic or high-risk debt instruments.

The ability to assess risks in advance is the best protection against uncertain recovery outcomes.