Communiqué of the International Monetary and Financial Committee of the Board of Governors of the International Monetary Fund, Dubai, September 21, 2003 http://www.imf.org/external/np/cm/2003/092103a.htm.
In this paper, the term “collective action clauses” (CACs) is used to refer to clauses that include both majority restructuring and majority enforcement provisions. The term “international sovereign bonds” means a bond that is governed by a foreign law or subject to the jurisdiction of a foreign court.
Developments in the Fund’s lending operations, including exceptional access, are discussed in the Report of the Acting Managing Director to the International Monetary and Financial Committee on the IMF’s Policy Agenda (SM/04/111 Rev. 1, 4/19/04).
This represents about 70 percent of total issues, by count.
There were also two new issues by Mexico, and three new issues by Brazil already included CACs in their issues during the first half of 2003, and a second issue by Turkey.
Only in the case of Colombia were spreads somewhat above the current yield curve. However, market participants reported this was entirely the effect of high volumes of emerging market debt placed earlier in the week, while none of the press reports mentioned that CACs had been included in the bonds.
In the case of the Philippines, the new bonds were issued in exchange for existing series, but investor participation in the exchange was very low. Reportedly, this reflected investors’ uneasiness about extending duration ahead of the presidential elections, while press reports did not mention the inclusion of CACs in the exchanged bonds.
See also Eichengreen and Mody, “Bail-ins and Borrowing Costs,” IMF Staff Papers, Volume 47, and “Would Collective Action Clauses Raise Borrowing Costs: An Update and Additional Results,” Policy Research Working Paper No. 2363, World Bank, May 2000; and Gugiatti and Richards, “Do Collective Action Clauses Influence Bond Yields? New Evidence from Emerging Markets”, International Finance 6: 3 2003; pp. 415-447.
Legislative work aiming at the elimination of perceived legal risk in the usage of CACs under German law is underway. The Ministry of Justice is expected to present a draft act to parliament containing the following three elements: (i) allow in the Civil Code for either statutory CACs with the possibility of a total or partial opt-out or optional CACs, enabling parties to use such clauses, if they so desire (opt-in); (ii) a repeal of the German bond indenture act of 1899; and (iii) a repeal of the applicability of consumer protection laws to bonds with respect to “unfair terms in conditions”.
In particular, Directors considered it reasonable to set the voting threshold at 75 percent of outstanding principal with respect to majority restructuring provisions contained in bonds governed by New York law. Directors generally viewed as reasonable the thresholds for majority enforcement provisions that have already been generally accepted in New York law governed bonds, namely a vote of 25 percent of outstanding principal to accelerate the claims following a default and a vote of more than 50 and up to 66⅔ of outstanding principal to reverse an acceleration of these claims. See The Acting Chair’s Summing Up: Collective Action Clauses-Recent Developments and Issues (BUFF/03/52, 4/10/03).
See Collective Action Clauses-Recent Developments and Issues (SM/03/102, 03/25/03) for a detailed comparison of the design of CACs recommended by the G-10 Working Group and those contained in certain recent New York law bonds.
While the disenfranchisement provisions contained in the Chilean and Polish bonds do not specifically refer to public sector instrumentalities, they use the control concept (i.e., exclusion of bonds controlled directly or indirectly by the issuer).
The Polish bond allows each bondholder to accelerate its claim upon a payment default or declaration of moratorium by the sovereign issuer.
See The Design and Effectiveness of Collective Action Clauses (SM/02/173, 6/7/02) for a detailed discussion of the design of acceleration and de-acceleration provisions.
Under a fiscal agency structure, individual bondholders have the right to initiate legal proceedings against the debtor following a default for the amount that is due and payable and can keep any recoveries from such proceedings. Under a trust structure, however, the right of individual bondholders to initiate litigation is effectively delegated to the trustee, who is required to act only if, among other things, it is requested to do so by bondholders holding a requisite percentage of outstanding principal. The terms of the trust deed will ensure that the proceeds of any litigation are distributed by the trustee on a pro rata basis among all bondholders. See Collective Action Clauses-Recent Developments and Issues (SM/03/125, 03/25/03) for a detailed discussion of the benefits of using a trust structure.
Republic of Hungary Offering Circular dated January 28, 2004 for €1,000,000,000 4.50 percent; Notes due 2014. The U.S. dollar denominated bond issued by the U.K. in June 2003 that is governed by English law also included an engagement provision that is consistent with the G-10 recommendations. That provision allows bondholders with at least 66⅔ percent of outstanding principal to appoint any person or persons as a committee or committees to represent their interests in any discussions with the issuer or any other creditors in connection with any proposed restructuring and to confer upon such committee or committees any powers or discretions which bondholders could themselves exercise by extraordinary resolution.
The Restructuring of Sovereign Debt-Assessing the Benefits, Risks and Feasibility of Aggregating Claims (SM/03/308, 9/4/03).
Ibid. See Box 1 for details on the aggregation feature in Uruguay’s bond issues. In October 2003, Uruguay issued another bond that included aggregation clauses. This issuance was successfully reopened in March 2004.
The previous progress report highlighted several challenges that have emerged in efforts to elaborate a Code. See Progress Report on Crisis Resolution (SM/03/31, 8/26/03).
The IIF’s views are presented in a recent press release IIF Calls for Debtor-Creditor Principles for Emerging Markets’ Crisis Management and Debt Restructuring, available on its website: http://www.iif.com/.
Additional information on the Evian Approach is available on the Paris Club’s website: www.clubdeparis.org/en/index.php.
Recently, staff made a presentation to the Paris Club on the Fund’s framework for assessing debt sustainability. This framework is described in Assessing Sustainability (SM/02/166, 5/28/02), Sustainability Assessments-Review of Application and Methodological Refinements (SM/03/206, 7/1/03), and Debt-Sustainability in Low-Income Countries- Proposal for an Operational Framework and Policy Implications (SM/04/27, 2/3/04).
The Paris Club has provided one rescheduling under the Evian approach. In this case, Kenya received a flow rescheduling under Houston terms, as its external debt was considered to be sustainable.