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Decades, it seems, can pass between readings of the standard boilerplate inserted into every debt agreement. After all, this language has been honed by the finest transactional lawyers in the world; once they’re perfect, why change them, or even look at them when copying and pasting from the last one to the next one? It’s perfect, airtight, until it is not, because, as it turns out, some hedge fund managers are cleverer than decades’ worth of diligent contract attorneys, and some clients are far, far stupider than those same attorneys could have possibly imagined.

Now, thanks to the creative eye of Paul Singer, (almost) all sovereign debt deals include some pretty stringent collective action clauses, even without the assistance of the New York State Legislature. And, thanks to the incomprehensible idiocy of one of the world’s biggest and allegedly most sophisticated banks, the boilerplate has been amended once more to make it literally idiot-proof.

Wall Street banks including Citi are protecting themselves from similar situations by inserting legally binding clauses in the form of accidental payment covenants in debt documents, which allow banks to demand the repayment of any money sent to lenders by mistake…. The covenant typically gives banks the discretion to judge whether a payment was mistakenly made and to demand its repayment as well as any interest from the date that the funds were received….

The accidental payment protection has so far been spotted only in US documents, according to Steven Hunter, chief executive of 9fin, who said it may be because of a quirk of New York’s law which allowed Revlon’s hedge fund investors to keep the accidental transfer…. “This is probably going to become pretty standard . . . There’s no harm in putting it in,” he said.

It also can’t hurt to not do business with the hedge funds that necessitated the change in the first place.

The bank is choosing to not invite these money managers, who hung on to over $500 million, to its new-issue debt deals, the people said, asking not to be identified discussing a private matter. Firms targeted include Brigade Capital Management, HPS Investment Partners and Symphony Asset Management, the people said.

These firms and others tangled in a lawsuit with Citigroup can still participate if an issuer specifically requests for them to be able to join their offering, one of the people added…. At least two firms that received the errant payments opted to return it last year after the bank threatened to retaliate, according to people familiar with the matter.

Banks adopt new debt terms to avoid repeat of Citi’s $900m payment mishap [FT]
Citi Blocks Firms With Errant Revlon Payout From Debt Deals [Bloomberg]



Hedge Funds Have Fun At Citi’s Expense, Possibly Their Own (Legally-Speaking)

In fairness to them, the whole paying-Revlon’s-debt-early thing is incredibly funny.


Hedge Fund Very Eager To Do Business With Very Incompetent Bank

We suppose it’s the really the least they could do.


Citi May Lose Half-Billion On Revlon Snafu A Second Time

While some doubt Revlon will screw over its erstwhile ally, the company hasn’t hesitated to do it before.


Maybe Serving As Payment Agent For Sovereign Debt Is Another Business Citi Should Get Out Of

At least when it comes to rogue states and uniquely recalcitrant debtors.