Count the Limbs: Designing Robust Aggregation Clauses in Sovereign Bonds

Too Little, Too Late: The Quest to Resolve Sovereign Debt Crises (Initiative for Policy Dialogue at Columbia 2016)

29 Pages Posted: 5 Aug 2016 Last revised: 11 Aug 2016

See all articles by Anna Gelpern

Anna Gelpern

Georgetown University Law Center

Ben Heller

Hutchin Hill Capital

Brad Setser

Roubini Global Economics, LLC; University College London

Date Written: November 24, 2015

Abstract

On August 29, 2014, the International Capital Market Association (ICMA) published new recommended terms for sovereign bond contracts governed by English law. One of the new terms would allow a super majority of creditors to approve a debtor’s restructuring proposal in one vote across multiple bond series. The vote could bind all bond holders, even if a series voted unanimously against restructuring, so long as enough holders in the other series voted for it. An apparently technical change, awkwardly named “single-limb aggregated collective action clauses (CACs)” promised to eliminate free-riders for the first time in the history of sovereign bond restructuring. It could also open up new possibilities for abuse.

The markets might have rebelled. Instead, they yawned … and proceeded to adopt the new terms. We consider why such consequential contract change met with less resistance than its relatively modest predecessors, series-by-series and two-limb aggregated CACs. We focus on contract design, and the process by which it came about. Most of the essay is devoted to analyzing the key features of single-limb aggregated CACs and the considerations that shaped decisions about these features. We conclude with observations on contract reform in sovereign debt restructuring and the challenges ahead.

Keywords: Sovereign debt restructuring, sovereign bankruptcy, sovereign bonds, creditor collective action, CACs, IMF, G20, Argentina, Greece, debt crisis, contract modification, contract design, contract drafting, international financial architecture, financial crisis

JEL Classification: F33, F34, G28, G33, H63, K12, K22

Suggested Citation

Gelpern, Anna and Heller, Ben and Setser, Brad, Count the Limbs: Designing Robust Aggregation Clauses in Sovereign Bonds (November 24, 2015). Too Little, Too Late: The Quest to Resolve Sovereign Debt Crises (Initiative for Policy Dialogue at Columbia 2016). Available at SSRN: https://ssrn.com/abstract=2817666

Anna Gelpern (Contact Author)

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States

Ben Heller

Hutchin Hill Capital ( email )

142 West 57th Street
New York, NY 10019
United States

Brad Setser

Roubini Global Economics, LLC ( email )

131 Varick Street, Suite 1005
New York, NY 10013
United States

University College London ( email )

Gower Street
London
United Kingdom

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