The Use of Collective Action Clauses in New York Law Bonds of Sovereign Borrowers

Abstract

There has recently been renewed focus on the role that collective action clauses (CACs) could play in facilitating the resolution of sovereign debt problems. The most important such clause is the majority restructuring clause, by which a qualified majority of bondholders can vote to alter the payment terms of the bond and make these changes binding even for dissenting bondholders. In this note, we investigate the actual contractual terms of a large sample of bonds issued into the Euromarket by emerging market sovereigns. We identify around $12 billion of issuance over 1997-2002 with New York governing law but which departed from US market convention and included CACs (which are common in bonds with English governing law). In each case the legal adviser was the London office of a US law firm, helping produce this unusual combination of English and American legal practice. It appears that this departure from convention was in some sense inadvertent.

The existence of this group of bonds appears to have escaped the notice of all those - in academia, the official sector and the private sector - in the debate over sovereign debt restructuring and suggests that the use of CACs has been substantially wider than previously thought. Indeed, an examination of bond issuance shows that - even prior to the issuance that has followed Mexico's landmark February 2003 issue - most major issuing countries had already issued bonds that included CACs, suggesting that most bond investors that invest in sovereign debt probably already held bonds with CACs, even if they were unaware of it. Our findings lend further support to the existing evidence that the presence of absence of CACs has not affected bond pricing: if investors have not been aware of which bonds contain CACs, it is difficult to see how CACs could have been priced.

Keywords: collective action clauses, sovereign debt restructuring, emerging markets, governing law

JEL Classification: F34, G15, K12, K33