Communiqué of the International Monetary and Financial Committee of the Board of Governors of the International Monetary Fund, Washington, October 2, 2004.
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” refers to bonds issued or guaranteed by the government or central bank that are governed by a foreign law or subject to the jurisdiction of a foreign court.
The Lebanese bond includes only majority restructuring provisions.
The Israeli bond is fully guaranteed by the United States with respect to principal and interest.
See Progress Report on Crisis Resolution (SM/04/316, 9/08/04).
Review of G-10 Working Group on Contractual Clauses, 9/26/01, www.bis.org/publ/gten08.htm. In particular, Directors expressed the view that it would be 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 considered as reasonable the thresholds for majority enforcement provisions that have already been accepted in New York law bonds, namely a vote of 25 percent of outstanding principal to accelerate the claims following a default and a vote of 50 percent and up to 66? percent of outstanding principal to rescind an acceleration of these claims. See Acting Chair’s Summing Up: Collective Action Clauses – Recent Developments and Issues (BUFF/03/52, 4/10/03).
While the voting threshold in the Lebanese bond is calculated on the basis of the claims of bondholders present at a duly convened meeting that meets the specified quorum requirements, the threshold in the other bond issues is based on the outstanding principal of the bond.
The Lebanese bond allows individual bondholders to accelerate their claims upon default.
While Brazil, El Salvador, Guatemala, Italy, Panama and Turkey adopted a 66 2/3 percent threshold for de-acceleration, the others relied upon a threshold of 50 percent of outstanding principal.
Trust structures are not common in New York law bonds as some investors view them as being excessively intrusive on creditor rights. Under a trust structure, 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. Significantly, the terms of the trust deed will also ensure that the proceeds of any litigation are distributed by the trustee on a pro rata basis among all bondholders. By contrast, 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. While several issuers have included trust structures in New York law bonds, they represent the exception rather than the rule. See Collective Action Clauses -Recent Developments and Issues (SM/03/102, 03/25/03) and The Design and Effectiveness of Collective Action Clauses (SM/02/173, 6/7/02) for a detailed discussion of the differences between a fiscal agency structure and a trust structure.
An engagement clause seeks to provide for the appointment of a bondholder representative for the life of the bond (to act as interlocutor with the sovereign during this time) and for the election of a bondholder representative that could represent bondholders in connection with any restructuring. See Report of G-10 Working Group on Contractual Clauses, 9/26/2002, www.bis.org/publ/gten08.pdf.
Hungary included a similar engagement clause in its English law bonds issued in 2004. See Progress Report on Crisis Resolution (SM/04/108, 3/31/04).
The six trade associations are the Bond Market Association, the Emerging Markets Creditors Association, the Emerging Markets Traders Association, the Institute of International Finance, the International Securities Market Association, and the Securities Industry Association.
The current version of the draft Principles, dated March 11, 2005, can be viewed at http://www.iif.com/data/public/Principles.pdf
The draft Principles-whose origins can be traced to earlier proposals for a Code of Conduct (the "Code") put forward by the Council on Foreign Relations (2000), the Bank of France (Fall 2002), and the IIF (January 2003)-are the result of extensive consultations since early 2003 between several emerging market countries and a number of private sector groups, notably the Institute of International Finance (IIF).
Previous progress reports highlighted challenges that have emerged in efforts to elaborate a Code. See “Progress Report on Crisis Resolution” (SM/03/31, 8/26/03), “Progress Report on Crisis Resolution” (SM/04/108, 3/31/04);” Progress Report on Crisis Resolution” (SM/04/316, 9/8/04).
Communiqué of G-20 Finance Ministers and Central Bank Governors, Berlin, November 20-21, 2004. G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Korea, Mexico, Russia, Saudi-Arabia, South Africa, Turkey, the United Kingdom, the United States, and the European Union, represented by the Council presidency and the President of the European Central Bank. Argentina did not participate in the November 2004 meeting.
See “Investor Relations Programs—Report of the Capital Markets Consultative Group—Working Group on Creditor-Debtor Relations,” (SM/01/174, 6/19/01), “Investor Relations Program—Recent Developments and Issues,” (SM/04/364, 10/27/04).
“The Acting Chair’s Summing Up on Fund Policy on Lending into Arrears to Private Creditors—Further Considerations of the Good Faith Criterion,” (BUFF/02/142, 9/05/02).
The draft Principles also note that in previous restructuring cases, when a creditor committee has been formed, debtors have borne the reasonable costs of a single creditor committee.
In some cases, selective payments could help facilitate a debt restructuring. For example, in cases where a debtor is seeking a restructuring of a number of different bond issues (either as a pre-emptive deal or following default), creditors will be differently situated depending on the original terms of the bonds. In such cases, the use of limited resources to make a cash payment to bring all creditors up to a common starting point may help resolve inter-creditor equity issues and thereby facilitate agreement.
The Principles are not clear on whether this applies to pre-emptive restructurings as well as post-default situations.
The case of Uruguay is an example, where in the context of a pre-emptive restructuring, debt relief was not sought from official bilateral creditors as their share in the country's debt was small.
Communiqué of G-20 Finance Ministers and Central Bank Governors, Berlin, November 20-21, 2004.
Argentina did not participate in the November 2004 G-20 meeting. It circulated a note to G-20 ministers expressing its concerns about elements of the draft Principles. This note is not publicly available. In a recent speech, Secretary Nielsen confirmed that Argentina “objected to subscribing to such a Code of Conduct....” See “Speech by Secretary of Finance Guillermo Nielsen,” Argentina Seminar 2005 -Macroeconomic Focus, Deutsche Bank Latin American Corporates Global Markets Research, March 4, 2005.
Staff conducted a survey of a wide range of market players. The survey was conducted via telephone conferences. Market participants interviewed included fund managers, advisors to fund managers, traders in hedge funds and securities firms, market analysts and analysts from rating agencies. Generally, these participants had not been involved in the drafting of the Principles.
It was noted, however, that enhanced dialogue with the private sector poses the risk that investors use the confidential information for making profits, violating insider-trading rules.
In particular, participants referred to Hungary's recent New York law bonds, which are discussed above.
The total eligible claims amount to US$81.8 billion, of which US$79.7 billion is principal and US$2.1 billion is accrued but unpaid interest through December 31, 2001, the date of default. According to the authorities, including past due interest since December 31, 2001 raises the total defaulted claims to about $103 billion. Bilateral debt to the Paris Club, amounting to an estimated US$2.6 billion, is expected to be restructured following the completion of this debt exchange.
In Japan, the concurrent offer was not launched until a week later because of delays in reaching agreement with banks on the mechanics of the exchange before regulatory approval could be sought. To market the deal to creditors, the authorities embarked on a roadshow, visiting cities in Italy, Japan, Germany, the Netherlands, Switzerland, the United Kingdom, and the United States. They presented the debt offer to invited groups of institutional investors and advisors of retail creditors. In their presentation, the authorities explained the mechanics of the exchange and the risks of not participating, noting in particular the rationale for the offer and the reasons why the debt burden was no longer sustainable.
Each of the options was designed to have broadly similar NPV value. The relative value of the offer benefited from a general decline in emerging market spreads and at the time of the exchange was in line with secondary market prices of defaulted debt-around 32 cents per dollar of principal claims. Including past due interest, this implied an NPV haircut on total claims, on the order of 75 percent using a 10 percent discount rate, the rate most commonly used by market analysts at the time.
The law was passed by Congress on February 9, 2005, and was designed to reduce the incentives for not participating in the exchange offer. As stated in Argentina's amended filing with the U.S. Securities and Exchange Commission, the new law provides that: (i) the executive branch is precluded from making any future offer to exchange any Eligible Securities that are not tendered pursuant to the Offer; (ii) Argentina is precluded from entering into any type of settlement, whether judicial, extra-judicial or private, with respect to Eligible Securities not tendered pursuant to the Offer; (iii) the executive branch is charged with taking all necessary steps to delist from any stock exchange all Eligible Securities that are not tendered pursuant to the Offer, subject to applicable law and the terms of the original issuance; and (iv) “all Eligible Securities pledged or otherwise deposited pursuant to the order of any Argentine tribunal of competent jurisdiction, which have not been tendered pursuant to the Offer and whose depositary... has not affirmatively expressed, prior to the Expiration Date, its decision not to tender such Eligible Securities pursuant to the Offer, shall be replaced by peso-denominated Pars.”
The participation rate was achieved without use of majority restructuring provisions or exit consents. Majority restructuring provisions were only available in a few of the Argentine bond issues governed by Japan or English law. A piecemeal use of majority restructuring provisions or exit consents would have complicated the debt exchange. See footnote 53 for a further explanation of exit consents and their controversial nature.
Several ex parte court orders were issued preventing transactions by Argentina and its exchange agent, Bank of New York, in certain bonds with a face value of US$14 billion that had been tendered by bondholders participating in the debt exchange. Upon a hearing, the court decided to vacate the attachment orders, but upon request of the plaintiffs, agreed to stay the vacation of these orders pending plaintiffs' appeal. The hearing of this appeal is scheduled for the week of April 25, 2005.
Under these provisions, modifications to payment and other key terms may be made to a single series of new securities with the consent of the holders of 75 percent of aggregate principal amount outstanding of that series, and to multiple series of new securities with the consent of the holders of 85 percent of the aggregate principal amount outstanding of all affected series and 66 2/3 percent in aggregate principal amount outstanding of each affected series.
The strategy includes (i) issuance of domestic bonds to clear arrears with local suppliers and to refinance some loans from domestic banks; (ii) continued support from the IDB and World Bank at US$260 million in 2005; and (iii) oil import financing from the government of Venezuela that provides US$200 million in long-term financing for 2005, at concessional rates.
Dominica's public debt at end-2003 amounted to 115 percent of GDP, of which 39 percent was owed to multilateral creditors, the majority of which to the Caribbean Development Bank (CDB). Claims of external commercial and official bilateral creditors, including France and the United Kingdom, accounted for about 23 and 13 percent of total debt, respectively. Domestic debt accounted for 23 percent of Dominica's obligations. Following a 16-month stand-by arrangement, Dominica has had a PRGF arrangement since December 2003.
The authorities are making payments accruing to non-participating creditors on the restructured terms into an escrow account.
At end-2004, Grenada's public and publicly guaranteed debt amounted to US$ 566 million (130 percent of GDP). Claims of external commercial, multilateral, and official bilateral creditors amounted to about US$177 million, US$102 million, and US$51 million, respectively.
Iraq's total external debt as of end-2004 is estimated at some US$120 billion, or around six times estimated GDP for 2004, and is unsustainable. All of this debt is in arrears. This does not include U.N.-mandated Iraqi war reparations related to the Kuwait invasion of 1990 (which are paid annually from 5 percent of Iraq's oil revenues). Outstanding debt to private creditors is tentatively estimated at $10-20 billion as of end-2004, equivalent to 50-100 percent of estimated GDP for 2004.
Serbia-Montenegro has an extended arrangement with the Fund, which is set to expire in May 2005. The fifth review of the program is ongoing.
In addition, a goodwill payment of US$40 million was settled in November 2004.
The Evian Approach is described in Progress Report to the International Monetary and Financial Committee on Crisis Resolution (IMFC/Doc/9/04/7, 4/21/2004). Additional information on the Evian Approach is available on the Paris Club's website: http://www.clubdeparis.org/en/presentation/presentation.php?BATCH=B06WP14.
Over that same period, the official bilateral debt of three HIPC countries (the Republic of Congo, Ethiopia and Madagascar) was reduced and restructured following HIPC procedures.
Creditors may charge moratorium interest on a bilateral basis. However, since no payment is expected in 2005, moratorium interest accrued in 2005 will be capitalized and also rescheduled over 5 years, in line with other deferred payments
Paris Club press release, November 21, 2004. Eighteen Paris Club creditors (Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, the Netherlands, the Republic of Korea, the Russian Federation, Spain, Sweden, Switzerland, the United Kingdom and the United States of America) participated in the restructuring of Iraq s debt.
Iraq’s external public debt was estimated at about US$120 billion as of end-2004, of which about 33 percent was owed to Paris Club creditors, 57 percent to other official bilateral creditors, and 10 percent to private creditors.
Following the Paris Club agreement, the United States went beyond the 80 percent debt reduction under the Paris Club agreement and wrote off 100 percent of its claims on Iraq.
In addition, the authorities have committed not to impose additional restrictions not agreed with the IMF which could prevent prompt repayment by private debtors in Iraq of obligations that are overdue or falling due.
The previous legislation was contained in Article 9 of the law of April 28, 1999, which had been adopted in implementing the European Directive (98/26/EC) on settlement finality in payments and securities settlements systems. The recent amendment extends the scope of Article 9 to provide: “Any cash settlement account maintained with the operator of a system or with a cash settlement agent, as well as any cash transfer, through a Belgian or foreign credit institution, to be credited to such cash settlement account, cannot be attached, put under sequestration or otherwise blocked by any means by a participant (other than the operator or the settlement agent), a counterpart or a third party.” (new text in bold).
See Recent Developments in Sovereign Debt Litigation and Implications for Debt Restructurings and Debt Relief Processes (SM/04/98, 3/24/04). LNC's appeal to the Belgium Supreme Court (Cour de Cassation) is still pending against the Court of Appeal ruling that the pari passu clause could not be invoked against Euroclear, as a third party to the contractual obligations between Nicaragua and LNC. See Progress Report to the International Monetary and Financial Committee on Crisis Resolution, (IMFC/DOC/10/04/6, Rev. 1, 9/30/04).
See discussion in Recent Developments in Sovereign Debt Litigation and Implications for Debt Restructuring and Debt Relief Processes, (SM/04/98, 3/24/04).
Exit consents entail amendments to non-payment terms of New York law governed bonds through the vote of a majority of bondholders (typically 50 percent or 66 ? percent of outstanding principle) as they exit the bonds in an exchange for new bonds. For a discussion of the legal controversy surrounding the use of exit consents, see Seminar on Involving the Private Sector in the Resolution of Financial Crises—The Restructuring of International Sovereign Bonds—Further Considerations, (EBS/02/15, 1/31/02).
The New York court upheld the use of exit consents in the Mendoza exchange aimed at limiting the waiver of sovereign immunity, but at the same time ruled that there was an independent basis to attach commercial property of Mendoza, as an "agent or instrumentality" of a foreign state under the U.S. Foreign Sovereign Immunities Act.
Around 40 law suits are being maintained in New York courts against Argentina and over 100 further actions in Italy and Germany.
To date, nine bondholder class actions have been certified to proceed by the New York court, with certification of eight of these taking place after the offer period for the exchange had closed. The "Lavaggi" class action against Argentina-noted in the September 2004 Progress Report for the US$100 billion punitive damages claim against Argentina-has not progressed beyond the initial filing stage.
Also, the unsuccessful attempt to block the Province of Mendoza debt exchange on the grounds that it entailed an unlawful use of exit consents is noted in paragraph 53 above.
Strict application of such a rule would have subjected the terms of an exchange offer to judicial review. This issue is discussed in Recent Developments in Sovereign Debt Litigation and Implications for Debt Restructuring and Debt Relief Processes, (SM/04/98, 3/24/04).
Specifically, with regard to creditor committees where a formal negotiation framework is warranted, the expectation of the LIA policy is that creditors represented on the committee would adhere to a standstill on litigation.
See GCAB's November 12, 2004 Press Release: GCAB Files Brief in Support of Motion to Prevent Argentina’s Exchange Offer, available on GCAB's website: http://www.gcab.org/images/GCAB_-_Press_Release_-_Support_of_Motion_to_Enjoin_-_Final_Version_-_11-12-042.pdf.
At around the time of GCAB's involvement in the Urban class action as an amicus curiae (friend of the court), it amended its by-laws to remove the condition restricting membership to creditors that were not pursuing litigation against Argentina.
Some of the peculiar policy challenges raised by retail investor law suits against a sovereign issuer are discussed in Recent Developments in Sovereign Debt Litigation and Implications for Debt Restructuring and Debt Relief Processes (SM/04/98, 3/ 24/04).
Although appointed by the issuer, the trustee is an agent of the bondholders and owes fiduciary duties to the bondholders as a class. Paying and transfer agents are agents of the issuer and these roles do not imply any fiduciary duties. For a discussion of the legal elements of trust structures, see The Design and Effectiveness of Collective Action Clauses, (SM/02/173, 6/07/02).
The announcement was reported to be made by representatives of GCAB in its February 2005 “Roadshow Presentation” and was followed by the release of the GCAB-ICSID Position Paper, available on GCAB's website: http://www.gcab.org/images/GCAB_-_ICSID_Position_Paper_2-15-05.pdf
Some bondholders are known to have considered international arbitration in relation to Russia's restructuring of GKO bonds in the late 1990s. Those claims are reported to have been settled.
The features of the law are described in footnote 33, above.
Argentina is already a defendant in over 30 investments arbitrations before ICSID tribunals mainly brought by foreign investors in the utility sector.
In practice, states have complied with ICSID tribunal awards without requiring the claimant to initiate enforcement proceedings. The provisions in the ICSID convention on the enforcement of awards, however, are somewhat qualified. Article 54(3) of the ICSID Convention provides that: “Execution of the award shall be governed by the laws concerning the execution of judgments in force in the State in whose territories such execution is sought.” This implies that where execution of an ICSID award is sought, the same legal defenses that arise with court judgments may be applied. In that same vein, Article 55 expressly states that “[N]othing in Article 54 shall be construed as derogating from the law in force in any Contracting State relating to immunity of that State or any foreign State from execution.”