ANNEX I. Incorporation of Enhanced Sovereign Bond Clauses
(October 1, 2014 – October 30, 2016)1
See http://www.imf.org/external/np/pp/eng/2014/090214.pdf (the “2014 paper”) and http://www.imf.org/external/np/sec/pr/2014/pr14459.htm.
For descriptions of “series by series” and “two-limb” aggregated voting procedures, see paragraphs 24 and 28 of the 2014 paper, respectively. Note that with respect to a “single-limb” aggregated voting procedure, to safeguard the interests of creditors, the enhanced CAC requires all affected bondholders to be offered the same instrument or an identical menu of instruments (the “uniformly applicable” condition, see paragraphs 33-34 of the 2014 paper) and include a voting threshold of 75 percent of the aggregated outstanding principal of all affected bond series. The enhanced CAC also provides the issuer the flexibility to use the single-limb voting procedure to conduct separate votes for different groups of bond issuances (“subaggregation”, see paragraph 37 of the 2014 paper). It also includes a disenfranchisement provision, which, in line with the G-10 approach, excludes for voting purposes all bonds owned or controlled directly or indirectly by the issuer and its public sector instrumentalies (see paragraph 46 of the 2014 paper) and an information covenant consistent with Fund policy (see paragraph 44 of the 2014 paper).
International sovereign bonds are defined as bonds issued or guaranteed by a government or central bank under a law other than the law of the issuer (or where a foreign court has jurisdiction over claims arising under the bond), in freely traded form with fixed maturities, normally in excess of one year. Consistent with the approach taken in past papers, staff has not focused on the incorporation of the enhanced clauses in international sovereign guaranteed bonds.
See http://www.imf.org/external/np/pp/eng/2015/091715.pdf (the “2015 paper”)
The figures presented in this paper are based on information available to staff through the Perfect Information database. The sample includes international sovereign bonds issued between October 1, 2014 and October 31, 2016, except: euro area sovereign issuances (as they are required by law to include euro area-specific CACs), China’s domestic issuances under Hong Kong law, and GDP warrants. There may also be international sovereign bond issuances (e.g., private placements) that have not been captured by the database relied upon by staff.
International sovereign bonds issued by euro area countries during the period October 1, 2014 to October 31, 2016 did not include enhanced CACs (the issuers were: Latvia, Lithuania, Cyprus, Finland, Luxembourg and Spain); as noted above, these issuers are required to include euro area-specific CACs. The euro area-specific CACs provide issuers the option of using either a series-by-series or a two-limb aggregated voting procedure, the latter of which requires that a minimum threshold of support be achieved both in each series and across all series being restructured. They do not include an option for single-limb aggregation.
The issuers in this category that did not include the enhanced CACs are: under English law, Cote d’Ivoire, Hungary, Poland, Macedonia and Kenya; under New York law, Lebanon, Mongolia, Philippines and Sri Lanka; and Poland and Korea under Chinese law.
A notable exception to this general trend is Uruguay’s November 2015 issuance, a takedown from a shelf registration statement filed before October 2014, which did include the enhanced clauses.
As of October 31, 2016, of the total outstanding stock of international sovereign bonds, approximately 45 per cent are governed by English law and approximately 53 percent by New York law (as a share of nominal principal amount).
Formulation of the clauses under English law and New York law governed bonds generally track the language of their respective model clauses published by the International Capital Market Association (ICMA): http://www.icmagroup.org/assets/documents/Resources/ICMA-Standard-CACs-Pari-Passu-and-Creditor-Engagement-Provisions---May-2015.pdf.
During the Executive Board discussion of the 2014 paper, Directors noted that bonds issued by euro area sovereigns are required to include a CAC that allows for either a series-by-series or a two-limb aggregated voting procedure. Taking into account the fact that bond issuances by euro area sovereigns are, in most cases, governed by domestic law, and that this type of CAC has been positively received by market participants over recent years, Directors considered that this approach is appropriate for such bonds.
As to the latter group, Hong Kong, Indonesia, and Turkey issuances included series-by-series CACs, while Malaysia included a two-limb aggregated CAC.
The Financial Markets Law Committee (FMLC), an independent body of legal experts established by the Bank of England to examine issues of legal uncertainty in financial markets, has taken the view that the interpretation of the pari passu clause by the New York courts is unlikely to be followed by the English courts (see paragraph 18 of the 2014 paper).
Lithuania has included modified pari passu provisions in its new international sovereign bond issuances, while Luxembourg has not. Cyprus, Finland, Latvia and Spain did not include them in their issuances that were take-downs from pre-October 2014 note programs. Greece included a modified pari passu provision in its pre-October 2014 issuance.
ICMA published in May 2015 two different versions of the model pari passu clause—one for English law and another for New York law bonds: http://www.icmagroup.org/assets/documents/Resources/ICMA-Standard-CACs-Pari-Passu-and-Creditor-Engagement-Provisions---May-2015.pdf.
Bardozzetti and Dottori, (2013) Collective Action Clauses: How Do They Weigh on Sovereigns?, Banca d’Italia Working Paper Number 897.
This study analyzed primary market data on euro area sovereign bond issuances during 1990-2010, Bradley, Michael and Gulati, G. Mitu, (2013) Collective Action Clauses for the Eurozone: An Empirical Analysis, Review of Finance, 2013, pp. 1-58.
Ratha, Dilip, Supriyo De, and Sergio Kurlat, (2016) Does Governing Law Affect Bond Spreads?, World Bank Policy Research Working Paper, WPS7863.
The figures for the current outstanding stock are based on information obtained through the Perfect Information database.
Approximately 45 percent of international sovereign bond issuances between October 1, 2014 and July 31, 2015 used trust structures, and approximately 83 percent of these were under New York law.
International sovereign bonds are typically issued under either fiscal agency agreements (FAAs) or trust structures. Under an FAA, the fiscal agent serves as an agent of the issuer, and its main responsibility is the making of principal and interest payments to the bondholders. Under trust structures (“trust indenture” under New York law or “trust deed” under English law), a bond trustee acts on behalf of, and has a number of responsibilities to, bondholders as a group.
Debt managers from the following countries attended the workshop: Cote d'Ivoire, Ethiopia, Ghana, India, Malaysia, Mauritius, Mongolia, Mozambique, Namibia, Pakistan, Seychelles, South Africa, Sri Lanka, Uganda, and Zambia.
The dataset is based on information available to staff and includes international sovereign bonds whose issuances were announced between October 1, 2014 and October 31, 2016, except: euro area sovereign issuances (as they are required under law to include euro area-specific CACs); China’s domestic issuances under Hong Kong governing law; and GDP warrants. There may also be international sovereign bond issuances (e.g., private placements) that have not been captured by the database relied upon by staff and thus are not reflected in staff’s findings.
Pre-October 2014 registration statement