A. General Approach

6. The general thrust of the G-10 Working Group Report with respect to the design of CACs is consistent with the approach endorsed by the Fund’s Executive Board in June 2002. Specifically, the G-10 Working Group Report recognized that the terms of many international sovereign bonds that have been successfully placed in the market already contain provisions that can help facilitate an orderly process. For this reason, it recommended the incorporation of these provisions (with appropriate modifications where necessary) into bonds issued in jurisdictions where such provisions are not market norms, including bonds governed by New York law.

7. Before discussing the G-10 Working Group’s specific recommendations, some general observations can be made with respect to their conclusions.

• First, to provide meaningful guidance on the design of the clauses, the G-10 Working Group Report made recommendations as to what range of voting thresholds would be desirable, drawing on the thresholds that had already been accepted in the market.

• Second, the Working Group did not propose standardization of terms across jurisdictions. For example, it noted that the majority restructuring provisions recommended for bonds governed by New York law would probably need to contain specific voting calculation methods so as to accommodate the concerns of U.S. institutional investors. However, it did not go as far as to propose that existing majority restructuring provisions would need to be modified in bonds issued in those jurisdictions that can accommodate different voting calculation procedures. It also recognized that, given the constraints of certain legal systems, certain provisions could only be used if a number of modifications were made.

• Third, while most of the provisions recommended already exist in some international sovereign bonds, a few of the recommended features are novel. Of particular importance is the inclusion of an engagement provision, which would be designed to empower a bondholder representative to engage, on behalf of all bondholders, in restructuring negotiations with the debtor and other creditors without delay.

B. Specific Recommendations

8. Majority Restructuring Provisions — In their discussion of the design of CACs in June 2002, Directors recognized that one of the most useful collective action clauses was the provision which enables a qualified majority of bondholders to bind all bondholders within the same issue to the financial terms of a restructuring, both before and after a default (“majority restructuring provisions”). Although majority restructuring provisions are generally found in bonds governed by the laws of England or Japan, they are not included in bonds governed by the laws of New York or Germany. Although Directors did not endorse a specific voting threshold, they noted that the 95 percent voting threshold proposed by one industry association would defeat the purpose of these clauses.

9. Consistent with the approach adopted by the Board, the G-10 Working Group took the view that these provisions were an essential feature of collective action clauses.⁶

In terms of their design, while the G-10 Working Group Report endorsed the 75 percent voting threshold that generally follows the terms of existing bonds governed by English law, it recognized that there may be some resistance to including these provisions in bonds governed by New York law unless the means by which the voting thresholds are calculated were modified.

10. Specifically, for bonds governed by English law, the vote is typically calculated on the basis of the claims of bondholders present at a duly convened meeting. A duly convened meeting typically requires a quorum of bondholders representing 75 percent of the outstanding principal amount. If the quorum requirement is not met, a reconvened meeting allows for a lower quorum, typically 25 percent.⁷ As noted in the G-10 Working Group Report , the advantage of this approach is that it avoids a situation where a restructuring agreement is frustrated solely because a critical mass of bondholders fails to cast a vote, which can be particularly problematic in circumstances where the bonds are held in the retail sector.

11. However, based on its outreach efforts, the G-10 Working Group concluded that such a calculation method could be resisted by u.s. institutional investors who mainly purchase bonds governed by New York law.⁸ The concerns expressed by these investors were that the quorum approach created a risk that a minority of bondholders could conclude a restructuring in the event that a small percentage attended the meeting. To address this concern, the G-10 Working Group proposed that it would be acceptable for the voting threshold to be based on either the quorum requirement discussed above or on the basis of the outstanding principal amount. However, in circumstances where the outstanding principal approach is used, it stressed that going above a 75 percent threshold “could jeopardize the ability to achieve workouts and increase the risk that an organized minority, such as a vulture fund, could hold up a process that a reasonable majority supported.” Moreover, it noted that achieving the necessary support through a higher threshold could be more difficult where the issuance is largely held by retail investors. Finally, the G-10 Working Group Report emphasized that it was not proposing that the quorum approach be abandoned in jurisdictions where it has been accepted.⁹

12. Majority Enforcement Provisions - Many international sovereign bonds governed by both New York and English law contain provisions that prevent a minority of creditors from pursuing disruptive legal action after a default and prior to the reaching of a restructuring agreement (“majority enforcement provisions”). In its June 2002 discussion, the Board endorsed the use of these provisions where: (i) an affirmative vote of a minimum percentage of bondholders is required to accelerate their claims following a default and (ii) a simple or qualified majority of bondholders can reverse an acceleration that has already occurred. The staff had also recommended the incorporation of provisions found in trust deeds governed by English law where, in addition, the right to initiate legal proceedings on behalf of bondholders is conferred upon the trustee, who is only required to act if requested to do so by the requisite percentage of bondholders. Moreover, the terms of the trust deed ensure that the proceeds of any litigation are distributed ratably by the trustee among all bondholders. Although some Directors observed that such trust deeds could serve as a useful model for future issues, others expressed concern that the increased cost of using trust deeds may outweigh the benefits.

13. The G-10 Working Group Report also recommended the inclusion of majority enforcement provisions and identified voting thresholds that are consistent with prevailing market practice. Specifically, it recommended: (i) a vote by 25 percent of the outstanding principal amount to accelerate a bond following a default and (ii) a vote by more than 50 percent or, at a maximum, 66% percent, to reverse an acceleration. The G-10 Working Group Report also recommended the inclusion of provisions found in trust deeds that concentrate the power to initiate litigation within a bondholder representative and ensure the pro rata distribution of proceeds recovered in litigation. However, in recognition that trust deeds may not be compatible with all legal systems, it noted that alternative structures may need to be relied upon by some countries to achieve a similar result.

14. Disenfranchisement Provision - The G-10 Working Group Report recommended that a provision be included that would exclude bonds that are owned or controlled, directly or indirectly, by the issuer and its public sector instrumentalities for quorum and voting purposes. The inclusion of public sector instrumentalities goes beyond disenfranchisement provisions that exist in outstanding bonds in trying to address creditor concerns about manipulation of votes by a sovereign. It was recognized that such a provision may make the introduction of a majority restructuring provision into bonds governed by New York law more acceptable to investors.

15. Engagement Provision - The G-10 Working Group Report recommended the inclusion of provisions that would promote dialogue between the sovereign and the bondholders in two respects. First, it proposed that a bondholder representative be appointed for the life of the bond in order to act as an interlocutor with the sovereign. This role might be performed within a trust structure in some jurisdictions or similar structures in other jurisdictions. Second, the G-10 Working Group Report also considered the need to promote a collaborative sovereign restructuring process by allowing a qualified majority of bondholders of not more than 66% percent of the outstanding principal amount to elect a special bondholder representative to engage, on behalf of all bondholders, in restructuring discussions with the debtor without undue delay.

16. This proposed feature is similar to the representation clause discussed at the Board meeting of June 2002. As recognized by several Directors at that time, the bondholder representation clause could potentially contribute to an orderly and speedy restructuring process by establishing a channel of communication between the debtor and bondholders early in the restructuring process.

17. Transparency Provisions - The G-10 Working Group Report recommended the inclusion of a covenant requiring the provision of financial information by the sovereign. Such a provision does not exist in outstanding international sovereign bonds and was not discussed by the Board in its June 2002 meeting. This new covenant would require the sovereign to provide certain types of key financial information to bondholders over the life of the bond and additional information following an event of default. The G-10 Working Group Report was not specific as to the type of information that was to be provided and recognized that a number of issues would need to be resolved before such clauses are actually included in international sovereign bonds. For example, the G-10 Working Group Report indicated that further consideration would be given as to the type of nonpublic information that could be provided that would not require confidentiality agreements.

18. Consistency with Domestic Laws - The G-10 Working Group Report noted that its recommendations could be incorporated into sovereign bonds governed by English, French and New York law immediately and in bonds governed by Japanese law with some modifications. In the case of Germany, the G-10 Working Group noted that market participants are willing to implement a structure reflecting the above provisions under certain conditions. Some market participants are of the view that legislative clarification would be necessary to support the validity of these clauses. While the German government has confirmed in public the validity of these clauses under German law, it is nevertheless preparing legislation designed to dispel any remaining doubts on this question in order to promote the broader use of CACs.

A. Bonds Governed by New York Law

21. Majority Restructuring Provisions — The majority restructuring provision proposed by the Industry Associations Draft would allow an amendment of payment terms by a vote of 85 percent of the outstanding principal amount, provided that no amendment would become effective over the objection of the holders of more than 10 percent of the outstanding principal amount.¹¹ With respect to bonds governed by New York law, such a threshold would represent an improvement over the unanimity requirement which is current market practice for bonds governed by New York law. However, it would not follow the terms of existing bonds governed by English law in two respects. First, it would establish a considerably higher voting threshold compared to 75 percent under the bonds governed by English law. Second, it would calculate the voting threshold on the basis of the outstanding principal amount rather than on the basis of the claims of bondholders present at a duly convened meeting.

22. The latter deviation from the prevailing English law practice is consistent with the approach recommended by the G-10 Working Group Report. As discussed above, the G-10 Working Group Report took the view that relying on the outstanding principal amount as the basis for calculating the voting threshold may be necessary in order to make a majority restructuring provision acceptable to U.S. investors. However, the first deviation (using a significantly higher threshold than the 75 percent threshold that prevails in bonds governed by English law) is not consistent with the approach taken by the G-10 Working Group. Indeed, and as is discussed above, the G-10 Working Group emphasized that a threshold above 75 percent would be particularly problematic if the vote was calculated on the basis of the outstanding principal amount rather than on the basis of the claims of bondholders present at a duly convened meeting. Such a high voting threshold could continue to make it difficult to coordinate a larger majority of bondholders, particularly in cases in which bonds are largely held by retail investors.

23. The ability of a bondholder holding 10 percent of outstanding principal to block a restructuring supported by bondholders holding 85 percent is likely to give vulture creditors an incentive to acquire such a blocking position. This could be of particular importance in the case of “orphan” bond issues with small outstanding amounts of principal, for which it would be relatively inexpensive for a creditor to acquire a blocking position.

24. Majority Enforcement Provisions -In one respect, the majority enforcement provisions proposed in the Industry Associations Draft would adopt the useful provisions that are often found in international sovereign bonds. Specifically, the Industry Associations Draft proposes that an acceleration of the bonds following a default would require an affirmative vote of bondholders holding 25 percent of outstanding principal. In two other respects, however, the Industry Associations Draft falls short of the majority enforcement provisions that can be found in international sovereign bonds.

25. First, the Industry Associations Draft provides for the reversal of an acceleration by a vote of 75 percent, which is higher than the threshold that is typically found in existing New York law bonds (i.e., more than 50 percent). As discussed above, the G-10 Working Group Report recommended a range from more than 50 percent to a maximum of 66% percent.

26. Second, the Industry Associations Draft does not propose the use of a trust structure for sovereign bonds governed by New York law. As noted above, such a structure can be found in bonds governed by English law and can act as an important deterrent to disruptive litigation after a default but prior to a restructuring agreement. It was for this reason that it was also endorsed by Fund staff and by the G-10 Working Group. As discussed earlier, however, views of Executive Directors were mixed as to whether the costs of such a structure justified their inclusion. The unwillingness of the Industry Associations Draft to include such a provision was due to the concern of certain U.S. trade associations that it “unduly restricts the right of individual bondholder action.” However, according to informal indications from some industry association representatives, as the New York market develops the required expertise to provide the appropriate trustee services, there will likely be more flexibility on this issue going forward.

B. Bonds Governed by English Law

27. Majority Restructuring Provisions - With respect to the essential terms of this provision, the Industry Associations Draft proposes that the majority restructuring provision be the same as the one it proposes for bonds governed by New York law; namely, an amendment of payment terms could be made by a vote of 85 percent of the outstanding principal amount, provided that no amendment would become effective over the objection of the holders of more than 10 percent of the outstanding principal amount. As discussed above, the adoption of such a provision in bonds governed by English law would result in a significant restriction of the clauses that currently exist in such bonds, since it would not only increase the existing voting threshold (typically 75 percent), but would also rely on the outstanding principal rather than the claims of bondholders present at a duly convened meeting as the basis for calculating whether this threshold had been met. The Industry Associations Draft acknowledges that “in compelling circumstances in the context of a predominantly retail distribution, it may be appropriate to reduce the applicable percentage, but not below 75 percent.”¹² However, even in these circumstances, the provision would still give bondholders holding 10 percent of outstanding principal the right to block a restructuring.

28. Majority Enforcement Provisions - With respect to majority enforcement provisions, the Industry Associations Draft proposes 25 percent for acceleration and 75 percent for de-acceleration. With respect to de-acceleration, this would constitute some further restriction from existing English practice, where de-acceleration is typically achieved through the majority restructuring provision, which allows for the 75 percent threshold to be calculated on the basis of the claims of bondholders present at a duly convened meeting (a feature that can be particularly relevant for issues placed in the retail market).

29. In one important respect, however, the Industry Associations Draft maintains existing practice for English law bonds: it recognizes that English law bonds may utilize trust deeds, although it does not necessarily recommend them as being preferable. In

this respect, the Industry Associations Draft deviates from the G-10 Working Group Report, which recommends the use of trust deeds or equivalent structures. The relevant industry associations point out, however, that there have been no issues under English law recently that contain a trustee structure.

C. other provisions

30. Amendment of Nonpayment Terms - The Industry Associations Draft would raise the threshold for the amendment of a number of nonpayment terms as a means of restricting the use of the type of “exit consents” that were successfully relied upon in the restructuring of Ecuador’s debt. In the case of Ecuador, although the bonds in question required unanimity for the amendment of payment terms (as is the case for existing New York bonds), they allowed for the amendment of nonpayment terms by a simple majority. As a means of providing an inducement for bondholders to participate in the bond exchange, the terms of the exchange provided for the amendment of the nonpayment terms of the old bonds in a manner that made these bonds less attractive (e.g., eliminating the requirement to cure a default prior to reversal of acceleration and the elimination of certain financial covenants).

31. The exit consent technique has raised considerable controversy within the creditor community and the Industry Associations Draft would seek to restrict their use in two respects. First, it expands the definition of terms that would require approval by a qualified majority to include, for example, the waiver of certain covenants, including the negative pledge clause and the pari passu provision. Second, it clarifies that amendments that would deprive the creditors of important enforcement rights (e.g. waiver of sovereign immunity and change in governing law) would require unanimous approval.

32. As a general matter, the exit consent technique, when appropriately designed, may play a useful role in facilitating a debt restructuring in circumstances where the bonds do not contain majority restructuring provisions.¹³ However, where a bond already contains a provision that establishes a reasonable threshold for the amendment of payment terms, it is understandable why investors would wish to include provisions that make it more difficult for a debtor to use lower majorities to achieve the same result. Accordingly, the issue raised by the Industry Associations Draft proposal is not whether the restriction it places on the amendment of nonpayment terms is reasonable but, rather, whether the very high threshold needed for the amendment of payment terms is so restrictive that it undermines the effectiveness of these clauses.

33. Disenfranchisement Provision - The Industry Associations Draft proposes to exclude bonds that are owned or controlled, directly or indirectly, by or on behalf of the issuer or any of its agencies or instrumentalities for voting purposes. This disenfranchisement provision is consistent with the approach taken by the G-10 Working Group.

34. Bondholder Committee - It is generally recognized that a representative bondholder committee could play an important role in facilitating early dialogue and coordination between creditors and the sovereign during a crisis so as to address both debtor-creditor and inter-creditor issues. The Industry Associations Draft provides that a bondholder committee may be formed with the consent of bondholders with more than 50 percent of the outstanding principal, but that any appointment to the committee cannot become effective over the objection of bondholders with 25 percent of the outstanding principal.

35. This provision differs from the engagement provision recommended in the G-10 Working Group Report, which proposed that a special bondholder representative be elected for each bond issue to engage in restructuring discussions with the sovereign and other creditors, most probably as part of a single committee for all bond issues. In

contrast, the Industry Associations Draft appears to contemplate the possibility of the formation of a bondholder committee for each outstanding bond issue. Although these committees may eventually consolidate into a single committee during the restructuring process, the potential for a multiplicity of committees may create some inefficiencies. In addition, the Industry Associations Draft requires the sovereign to pay all fees and expenses of the committees and their legal and financial advisors. While the payment of fees by debtors is consistent with standard market practice, its combination with the possibility of a multiplicity of committees could make the costs that must be borne by a debtor excessive.

36. Information Covenants - The Industry Associations Draft also contains, as financial covenants, new transparency requirements for sovereign issuers that are far more detailed than those proposed by the G-10 Working Group. All such information would be published by the relevant industry associations on their websites. Some of the required information includes data that an emerging market country would normally be providing anyway. Most importantly in this regard, the Industry Association Draft would require an issuer to subscribe to the SDDS as long as the bond remains outstanding.¹⁴

37. other specified information, however, would normally not be made available and would raise issues for both the member and the official sector. First, some of information required (e.g., the text of stand-by arrangements) are decisions of the Fund-not documents owned by the member. Moreover, such documents are not published under the Fund’s existing policy. Second, some of the specified information includes confidential agreements between the sovereign and another party and, presumably, consent by the counterparty would be required before the terms of the agreements could be released. For example, the Industry Associations Draft would require the provision of the terms of any agreed minute or bilateral agreement completed under the Paris Club process.

38. In addition to specified information, the Industry Associations Draft would also require the sovereign to provide such other information that can “reasonably” be requested from time to time by bondholders holding 5 percent of outstanding principal.

This provision could require the disclosure of confidential information (unless the sovereign is able to convince a court that such information is not the type that can be “reasonably” requested). Giving 5 percent of bondholders the power to activate this provision is particularly significant given the fact that noncompliance with a financial covenant would typically give rise to an event of default.

39. Finally, the Industry Associations Draft requires quarterly reporting for as long as the bonds are outstanding, of twelve-month projections on government budget and inflation figures. Based on informal consultations with legal experts in this area, this requirement may raise U.S. securities law concerns in cases where, after the issuance of the bonds in question, the issuer plans to conduct a public offering of additional instruments in the United States during the reporting period. In the case of a public offering, the

U.S. Securities Act of 1933, as amended (the “Securities Act”), prohibits any sale of or offer to sell securities in the United States before a registration statement has been filed with the Securities and Exchange Commission (the “SEC”). If an issuer publishes information and statements or initiates publicity relating to the offering during this pre-filing period, it may be held liable under the Securities Act for “conditioning the market” for the offering as part of the selling effort. In the sovereign context, the SEC has not provided specific guidance as to what type of publicity would constitute conditioning the market. Accordingly, legal experts have advised that whether these covenants would, in fact, give rise to problems under the U.S. securities laws would depend on the facts and circumstances of a particular case.

A. Overall Developments in Market Practice

40. Since 1994 there is growing issuance of international sovereign bonds without CACs. ¹⁵ Increasingly bonds are issued under New York law, which do not typically contain CACs, both in terms of number and volume of issues (Table 1 and Figure 1 and 2).¹⁶ Issuances governed by English law, which contain CACs, declined to around 20 percent of the total at end-2002 from a level of 40 percent in 1998. As of February 2003, the outstanding stock of international sovereign bonds issued with CACs amounted to about 33 percent of the total.

Table 1.

Emerging Markets Sovereign Bond Issuance by Jurisdiction ¹

Source: Capital Data.

^1/Number of issuance is in number. Volume of issuance is in billions of U.S. dollars.

^2/English and Japan laws.

^3/German and New York laws. However, the Egyptian issuance of US$1500 million out of New York in June 2001 CACs and thus reclassified.

^4/Data for 2003-Q1 are as of February 20, 2003.

Table 1.

Emerging Markets Sovereign Bond Issuance by Jurisdiction ¹

		2001				2002			2003 4
	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1
With CACs 2
Number of issuance	14	10	2	10	6	5	2	4	6
Volume of issuance	5.6	4.8	1.8	2.2	2.6	1.9	0.9	1.4	4.2
Without CACs 3
Number of issuance	16	17	6	18	17	12	5	10	10
Volume of issuance	6.7	8.5	3.8	6.1	11.6	6.4	3.3	4.4	6.8

Source: Capital Data.

^1/Number of issuance is in number. Volume of issuance is in billions of U.S. dollars.

^2/English and Japan laws.

^3/German and New York laws. However, the Egyptian issuance of US$1500 million out of New York in June 2001 CACs and thus reclassified.

^4/Data for 2003-Q1 are as of February 20, 2003.

View Table

Table 1.

Emerging Markets Sovereign Bond Issuance by Jurisdiction ¹

		2001				2002			2003 4
	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1
With CACs 2
Number of issuance	14	10	2	10	6	5	2	4	6
Volume of issuance	5.6	4.8	1.8	2.2	2.6	1.9	0.9	1.4	4.2
Without CACs 3
Number of issuance	16	17	6	18	17	12	5	10	10
Volume of issuance	6.7	8.5	3.8	6.1	11.6	6.4	3.3	4.4	6.8

Source: Capital Data.

^1/Number of issuance is in number. Volume of issuance is in billions of U.S. dollars.

^2/English and Japan laws.

^3/German and New York laws. However, the Egyptian issuance of US$1500 million out of New York in June 2001 CACs and thus reclassified.

^4/Data for 2003-Q1 are as of February 20, 2003.

View Full Size

Emerging Market Sovereign Bond Issuance by Governing Law ¹

(In percent of total volume)

Citation: Policy Papers 2003, 012; 10.5089/9781498329613.007.A001

Sources: Capital Data Ltd; and IMF staff estimates.¹ The total is the sum of bond issuance governed by New York, English, German, and Japanese laws.

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View Full Size

Emerging Market Sovereign Bond Outstanding by Governing Law

(In percent of total volume)

Citation: Policy Papers 2003, 012; 10.5089/9781498329613.007.A001

¹ The total is the sum of bond issuance governed by New York, English, German, and Japanese laws.

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41. Existing evidence does not suggest that the use of CACs raises borrowing costs.

Most studies have not found evidence that issuers who issue bonds governed by English law systematically pay a premium relative to issuers who issue bonds governed by New York law; and some have found a small discount for the use of English law. One study suggests that with respect to use of English style documentation, higher credit quality issuers paid lower spreads, while lower quality issuers paid a premium.¹⁹

42. There is also no evidence that investors eschew bonds issued with CACs. Rather, the observed pattern of the use of CACs, proxied by the jurisdiction of issuance, is typically determined by a variety of factors, including changes in the issuer and investor base, the desired currency denomination of the issue, and debt management considerations. Changes in the investor base and issuers pool have tended to favor New York as an issuing jurisdiction. On the demand side, institutional investors gained more importance, especially the U.S. institutional and cross-over investors. At the same time, the retail investor base in Europe and Japan has declined. These changes have led to greater focus on the U.S. market and more issuance out of New York. On the supply side, the pool of issuers has changed as well with Latin American issuers becoming more prominent and emerging European issuers declining in importance, most noticeably Russia. Typically, issuers targeting a global investor base increasingly tend to issue out of New York. The decline in new bonds governed by English law is partially explained also by the fact that Russia, which has issued only Eurobonds out of London, has not accessed the market recently, except for an exchange in 2000 (Table 2).

Table 2.

EMSB Outstanding Issuance by Governing Law and Issuer

(Number of bond outstanding)

Source: Capital Data

Table 2.

EMSB Outstanding Issuance by Governing Law and Issuer

(Number of bond outstanding)

	New York	English	German	Japan
Emerging Markets	270	158	72	55
Asia	30	18	1	13
Europe	34	77	27	18
Latin America	169	47	43	15
Middle East/Africa	37	16	1	9

Source: Capital Data

View Table

Table 2.

EMSB Outstanding Issuance by Governing Law and Issuer

(Number of bond outstanding)

	New York	English	German	Japan
Emerging Markets	270	158	72	55
Asia	30	18	1	13
Europe	34	77	27	18
Latin America	169	47	43	15
Middle East/Africa	37	16	1	9

Source: Capital Data

43. The use of governing laws is highly correlated with the currency of a bond issue, with the exception of English law. Bonds issued under New York law are largely denominated in U.S. dollars. The increasing use of New York law reflects a stronger preference for U.S. dollar denominated bonds over other currencies, with the termination of the German mark and the decline of Japanese yen issuance worldwide (Table 3).

Table 3.

EMSB Outstanding Issuance by Governing Law and Currency ^1/

Source: Capital Data; and IMF staff estimates.

^1/Brady bonds are excluded.

Table 3.

EMSB Outstanding Issuance by Governing Law and Currency ^1/

	New York	English	German	Japan	Total
	(In percent)
U.S. dollar	91	34	0	0
Euro	8	54	53	0
Deutsche Mark	0	0	46	0
Japanese yen	0	3	0	100
other	1	8	10
	(In billions of U.S. dollars)
Total	151	72	29	17	270
	(In number of issuance)
Total	270	158	72	55	555

Source: Capital Data; and IMF staff estimates.

^1/Brady bonds are excluded.

View Table

Table 3.

EMSB Outstanding Issuance by Governing Law and Currency ^1/

	New York	English	German	Japan	Total
	(In percent)
U.S. dollar	91	34	0	0
Euro	8	54	53	0
Deutsche Mark	0	0	46	0
Japanese yen	0	3	0	100
other	1	8	10
	(In billions of U.S. dollars)
Total	151	72	29	17	270
	(In number of issuance)
Total	270	158	72	55	555

Source: Capital Data; and IMF staff estimates.

^1/Brady bonds are excluded.

B. Issuing Country Developments

Mature Market Issuers

44. In response to the official community’s call for encouraging greater use of CACs, a number of mature market countries have taken steps to introduce such clauses in their international sovereign bonds. In January 2000, the United Kingdom included a majority amendment clause in its euro-denominated treasury note program, which had no discernible impact on price or liquidity. In April 2000, Canada announced that it would include CACs in its future foreign jurisdiction bond and note issues.

45. In September 2002, EU Finance Ministers stated that EU countries’ sovereign bonds issued under foreign jurisdictions (i.e., bonds governed by a foreign law or subject to the jurisdiction of a foreign court) would henceforth include CACs. Although such bonds are a small part of overall bond issuance by EU countries, there are a number of countries that have issued in foreign jurisdictions in the past few years, such as Austria, Finland, Italy, Portugal, and Spain.²⁰ The intent of this step is to “lead by example”, thereby facilitating the incorporation of such clauses in bonds issued by emerging market countries.

Emerging Market Issuers

46. Egypt, Lebanon, and Qatar - There have also been important developments with respect to emerging market issuers. Although the most publicized case is the recent issuance by Mexico, which is discussed in considerable detail below, three other emerging market countries have also successfully included majority restructuring provisions in bonds governed by New York law. Specifically, Egypt, Lebanon and Qatar issued bonds under New York law, which in the U.S. were offered to institutional investors under Rule 144A of the U.S. Securities Act of 1933. ²¹ Leb anon’s Global Medium Term Note Program launched in June 2000, Qatar’s bonds issued in June 2000, and Egypt’s bonds issued in June 2001, all contain majority restructuring provisions. While, in the case of Lebanon and Qatar, the provisions include a 75 percent voting threshold based on the claims of bondholders present at a duly convened meeting, the Egyptian bond provides for an 85 percent threshold calculated on the basis of the outstanding principal amount. Although the bonds issued by Egypt and Qatar also include a very limited form of majority enforcement provisions, the Lebanese bonds do not contain such provisions.²² None of the bonds were issued under a trust deed.

47. At the time of issuance of these bonds, there was no discussion among market participants concerning their inclusion of majority restructuring provisions. In recent months, however, as the general discussion of CACs made investors aware that the Egyptian bonds included these provisions, there was no indication that the market penalized these

Mexico

48. In March 2003, Mexico issued bonds governed by New York law that included both majority restructuring provisions and majority enforcement provisions. This issuance has garnered considerable attention because there had been extensive discussion of CACs prior to the issuance. More specifically, the issuance follows the completion of both the G-10 Working Group Report and the Industry Associations Draft. Accordingly, there has been considerable interest as to the manner in which the provisions proposed by the G-10 Working Group and the Industry Associations Draft were applied by Mexico. Moreover, a detailed discussion of the CACs took place with investors when the bonds were marketed.

49. A close look at the provisions reveal that they are generally—but not entirely— consistent with the types of clauses recommended by the G-10 Working Group and attempt to achieve a careful balance between the objectives of resolving collective action problems and protecting creditor rights. While these provisions also include some of the features proposed in the Industry Associations Draft, they depart from the Industry Associations Draft in a number of important respects.

50. Majority Restructuring Provisions - The Mexican bonds provide that the payment terms may be amended by 75 percent of the outstanding principal amount.²⁴ The 75 percent threshold is consistent with the prevailing practice for bonds governed by English law. However, the reliance on the outstanding principal amount as the basis for calculating whether the threshold has been met deviates from English practice but, when taken together with the 75 percent voting threshold, follows the recommendations of the G-10 Working Group Report. As noted earlier, reliance on the outstanding principal as a means of bonds for their inclusion of CACs.²³

calculating whether the voting threshold has been met was viewed by the G-10 Working Group as a possible way addressing the specific concerns of U.S. investors. While the Industry Associations Draft also utilizes the outstanding principal approach, its proposed voting threshold is higher than 75 percent.

51. Majority Enforcement Provisions - The applicable voting thresholds for the acceleration and de-acceleration of the bonds are 25 percent and more than 50 percent, respectively. These thresholds are consistent with the prevailing practice for bonds governed by New York law and are consistent with the ranges proposed by the G-10 Working Group. While the acceleration provision is consistent with the Industry Associations Draft, the voting threshold for de-acceleration is lower than that proposed by the Industry Associations Drafts, which is 75 percent.

52. The Mexican bonds were not issued under a trust deed as proposed by the recommendations set forth in the G-10 Working Group Report. However, the authorities have indicated that this is attributable to the fact that the issue was part of Mexico’s ongoing Medium-Term Notes program, under which Mexico regularly issues bonds. Rather than issuing the bonds under a new trust deed, Mexico revised the fiscal agency agreement in the medium-term program to reflect the inclusion of the CACs.

53. Disenfranchisement Provision - The documentation expands the scope of bonds excluded for voting and quorum purposes from bonds owned by Mexico to those owned directly or indirectly by the government or any public sector instrumentality. This expansion, which is consistent with the recommendations of the G-10 Working Group and the Industry Associations Draft, is designed, in large part, to provide investors with a greater assurance that the issuer will not be able to manipulate the voting process through its effective control of certain bondholders.

54. Engagement Provisions - The Mexican bonds did not contain the type of engagement provisions proposed in the G-10 Working Group Report, nor did they provide for the establishment of a bondholders committee, as proposed by the Industry Associations Draft. Mexico has expressed the view that it would be inappropriate to determine ex ante the type of restructuring process that may occur many years in the future, by which time best practices may have evolved.

55. Transparency - As discussed earlier, the G-10 Working Group Report proposed the inclusion of some general transparency covenants, recognizing that the type of information to be provided would need to be resolved. The Industry Associations Draft proposed a very ambitious list of information that would need to be disclosed pursuant to a covenant under the terms of the bond. The terms of the Mexican bonds do not include any covenants that require the provision of such information. Mexico did not believe it was necessary to include such covenants since it believes its continued access to capital markets would be conditioned on transparency. For example, the relevant prospectus provided that Mexico subscribed to the SDDS, one of the requirements under the covenants of the Industry Associations Draft.

56. Mexico’s March issuance with CACs was a success. Based on analysis of the Mexican sovereign yield curve, there is no evidence that the issue price of the US$1 billion placement reflected a yield premium for including CACs (Figure 3).²⁵ A number of private market buyers of the bond also expressed the view at the time of issuance that there had been no premium due to CACs. To date, the bond has traded without a yield premium in the secondary market.

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Mexico Sovereign Yield Curve

Citation: Policy Papers 2003, 012; 10.5089/9781498329613.007.A001

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57. Mexico’s bond placement with CACs is a test of the market’s acceptance of meaningful clauses. Its continued successful performance in the secondary market may determine the extent to which this issuance will be a significant step in eliminating the first mover problem for including majority restructuring provisions in New York law governed bonds. Indications from private market participants are that two conclusions may be drawn from this experience. First, even if Mexico’s move shows that the market will readily accept CACs from investment grade emerging market issuers with an established reputation for sound debt management practices without extracting a yield premium, investors may be more resistant to CACs from other issuers that are below investment grade, and this may lead in some cases to pressures to modify the contractual provisions and/or to accept some premium due to CACs. Second, whether or not successful, this was an educational process for private investors, in particular cross-over investors. As investors that are active with instruments governed by New York law become familiar with CACs, they may gradually become less resistant to such contractual provisions.

58. Reportedly, several other investment grade emerging market issuers are also considering to include CACs in their future government bond contracts, although no formal announcements have been made yet. In addition, Argentina has suggested that it may be considering including CACs in debt instruments to be issued in its forthcoming restructuring, in the terms of reference for the recently appointed external debt restructuring advisors.²⁶