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The author is grateful to Steven Dunaway for helpful comments and suggestions and to Juan José Fernández-Ansola for his valuable input on recent sovereign bond restructurings. The views expressed in the paper and any remaining errors are the author’s.
Junk bonds are high yielding bonds issued by U.S. corporations with non-investment grade ratings. The credit ratings of these companies are roughly comparable to those of many developing countries.
In practice, the seniority of claims is not always strictly enforced in legal proceedings. Weiss (1989) find that in 29 of 37 firms studied priority of claims was not fully respected.
The ability to attach assets abroad may be rather limited depending on the law and custom regarding sovereign immunity existing in various jurisdictions and whether the sovereign borrower has waived its immunity.
In the case of sovereign debt, seniority may be effectively established by collateral arrangements—especially the earmarking of certain types of foreign exchange receipts. Such actions, however, may create difficulties with official creditors.
Financial contributions from third parties, however, may introduce moral hazard problems by altering the expected recovery of the outstanding debt but also by enhancing the perception of implicit payment guarantees.
Not all commercial claims have been resolved through out-of-court agreements. For example, Plenum Financial and Investments LTD and Camdex International pursued their claims against Zambia through the British courts after a restructuring agreement was reached with other creditors and in 1995, they won judgements against the country and some assets were attached. In these cases, however, Zambia had waived its sovereign immunity.
Under the Trust Indenture Act of 1939, a firm can change the core terms of a bond (principal amount, interest rate and maturity) only if every bondholder agrees.
Eurobonds generally are covered by the laws of the United Kingdom or the United States.