Iberdrola’s 6,500-Basis-Point Bond Typo Carries Legal Risks


Iberdrola SA’s 6,500-basis-point typo on a bond document has put the Spanish utility into a legal gray area.

The company made the error on a term sheet filed for regulatory purposes, listing the spread over Euribor as 65% instead of 65 basis points. Even though a correction was issued last month, it could still be a costly mistake, according to Jake Hardy, a partner at Reynolds Porter Chamberlain LLP with more than 20 years of experience in financial litigation.

He believes bondholders have a shot at extracting compensation from the company by bringing a complaint, and is asking any disgruntled investors to lawyer up. So far, no action has been taken.

“It certainly could be in the interests of Iberdrola and its advisers, if the group of investors shows commitment, to buy them off, to close down the litigation risk,” said Hardy in an interview. “The amounts are so high that even smaller chances of success at trial would still imply significant settlement value.”

The deal “was executed correctly,” Iberdrola said in a statement to Bloomberg News. The company followed the process to notify bondholders and the exchange when the error was identified, the company said, adding that “no enquiries have been received from investors.”

The right bond spread was used in other communications with investors, and the bond’s price has been little changed since the correction. According to the debt prospectus, the interest rate is final and binding “in the absence of manifest error.”

For Hardy, Iberdrola has various options to deal with the mistake. It could ask the court to declare the correct figure or pursue a court order for rectification, a legal process to correct mistakes in written contracts. Another option is to get all parties to agree to a change with a so-called consent solicitation, a process where the borrower asks bondholders to agree to changes in the contract, usually for a fee.

That’s the route that Tuula Vierimaa, a fund manager at OP Fund Management which holds some of the debt, thinks Iberdrola should take.

“This error in the documentation is, of course, a pity,” she said. A consent solicitation is “a typical way to correct changes or errors” in this type of case, she added.

This issue highlights the complexities of the legal structure underpinning the global debt market. While mistakes are rare, they can cause embarrassment and legal headaches for borrowers.

Last year, Citigroup Inc. filed an amendment notice to correct the maturity date of a $1 billion subordinated bond on a term sheet filed with the Luxembourg Stock Exchange. Movie theater operator Cineworld earlier this year gave in to a dispute in a loan that set the minimum Libor rate at 1%, even though the intention was to set the level at zero.

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