See Involving the Private Sector in Forestalling and Resolving Financial Crises: Collective Action Provisions in International Sovereign Bonds, SM/99/207 (8/11/99).
Based on preliminary survey of outstanding international sovereign bonds issued by emerging markets as of December 31, 2001 with a total value of approximately US$354 billion: (a) $ 209.2 billion are governed by New York law (59.07%); (b) $85.18 billion are governed by English law (24.05%); (c) $35.86 billion are governed by German law (10.13%) and (d) $20.7 billion are governed by Japanese law (5.85%>).
As will be discussed, one important exception is sovereign bonds that are governed by German law, which normally do not contain modification provisions.
In the case of bonds governed by Japanese law, although the issuer has the right to call a meeting, any modification proposal must be approved by the "commissioned company for bondholders" before it can be placed on agenda. The commissioned company for bondholders can approve a modification proposal only if it determines that such a proposal would be in the best interest of all bondholders.
Clearing and settlement services are provided by institutions such as The Depositary Trust Company in the United States and, in the case of Eurobonds, Euroclear and Clearstream Banking.
This is achieved by excluding these bonds from the definition of the term "outstanding."
This principle also permits international sovereign bonds governed by English law to exclude majority restructuring provisions. Indeed, many Brady bonds governed by English law do not contain them.
Electricity Generating Authority of Thailand, U.S.$300,000,000, 7 Percent. Guaranteed Bonds Due 2008 issued in 1998.
These Rules were initially contained in the Standard Contracts Act of December 9, 1976; they are now contained in Sections 305 through 310 of the Civil Code.
Rule 144A provides a "safe harbor" from the registration requirements of the U.S. Securities Act of 1933 and is often used for the secondary sales of unregistered securities to "Qualified Institutional Buyers".
Under the proposal, the key terms include not only payment terms but also nonpayment terms such as pari passu and negative pledge covenants, choice of law, waiver of immunities and consent to jurisdiction. Subjecting these nonpayment terms to the 95 percent voting threshold would eliminate the possibility of using exit consents to modify non-payment terms (through a lower majority), a technique that was successfully relied upon by Ecuador in its recent debt restructuring.
The proposal also expands the scope of the bonds that are excluded for voting purposes to include those held by any entity "under the jurisdiction of, formally affiliated with, or under the control of the issuer or its central bank. Some investors have recognized that such a broad exclusion may is not necessary given the 95 percent voting threshold. Moreover, the EMCA model clauses would eliminate the lower quorum requirement for any adjourned meetings that are normally found in existing sovereign bonds and explicitly requires a quorum of 75 percent in outstanding principal for all bondholders' meetings.
Events of default typically include not only the failure to pay principal or interest when due, but also a number of other events, including a default under other indebtedness ("cross-default").
A small portion of Eurobonds governed by New York law are issued under trust indentures which share some of the features of the English-style trust deeds.
Sovereign bonds governed by German law do not use trustees. Samurai sovereign bonds provide for the "commissioned companies for bondholders" to represent bondholders.
Trust deeds are marginally more expensive than fiscal agency agreements since the services of the trustee and the documentation are more costly.
This rule applies to bonds issued under German law.
In the case of Samurai bonds, acceleration requires a request by bondholders holding more than 50 percent of the value of the bond issue.
Sovereign bonds governed by German law and Japanese law do not contain such a provision.
See Lee C. Buchheit, "How Ecuador Escaped the Brady Bond Trap ", International Financial Review, December 2000 at 17.
Special de-acceleration provisions contained in existing international sovereign bonds governed by New York law and English law generally do not contain a special quorum requirement.
Different from a trust deed, a U.S. trust indenture gives each bondholder the right to bring an individual enforcement action against the issuer to recover any principal or interest payments that are not paid to him when due. Only the right of individual bondholders to initiate litigation with respect to the accelerated amounts is delegated to the trustee.
However, only the trust structure could effectively enable a qualified majority of bondholders to limit the ability of individual bondholders to pursue litigation after a default has occurred but before an acceleration is effected.
These proposals include those that have been recently made by Mr. John Taylor, Under Secretary of the U.S. Treasury.
See Lee Buchheit, "The Collective Representation Clause" International Financial Review, September 1998.
"Sovereign Debt Restructuring: A U.S. Perspective" remarks by John B. Taylor, Under Secretary of Treasury for International Affairs at the conference "Sovereign Debt Workouts: Hopes and Hazards?", Institute for International Economics, Washington, D.C. April 2, 2002.
On the inclusion of such clauses in international sovereign bonds governed by German or Japanese law, see Section I.
The Islamic Republic of Pakistan, U.S.$150,000,000 Floating Rate Notes due 2000 governed by English law. 30 Republic of Croatia, U.S.$300,000,000 7 percent. Notes due 2002 governed by English law.
The Republic of Argentina, US$4,500,000,000 Euro Medium-Term Note Programme governed by English law.
Republic of Ecuador, US$1,655,395,000 Collateralized Par Bonds due 2025 governed by New York law.