The model clauses should lead to greater consistency and efficiency in sovereign bond restructurings.
On May 11, the International Capital Market Association (ICMA) published a revised version of its model collective action clauses (CACs) for sovereign bonds governed by English law, together with new model CACs for sovereign bonds governed by New York law. The model provisions also include pari passu and bondholder committee engagement clauses for sovereign bonds. ICMA has recommended the use of these standardised provisions to facilitate orderly and efficient future sovereign debt restructurings.
ICMA published model English law–governed CACs and pari passu and bondholder committee engagement clauses in August 2014 after an extensive consultation process that involved a wide range of issuers, investors, and other market participants. The model CACs were aimed at preventing future disorderly and costly sovereign bond restructurings of the type that had been experienced in the recent sovereign bond restructurings of Argentina and Greece. The most novel feature in the model CACs—which received the endorsement of the International Monetary Fund—was the so-called “single-limb” aggregated voting mechanism. This mechanism enables aggregation of votes across multiple series of bonds when agreeing to changes in bond payment terms, such as maturity extensions or principal reductions, with bondholders in each affected series being bound by the outcome of a single cross-series vote.
Following their publication in August 2014, the ICMA model CACs were included in full in the English law–governed bond offering by Kazakhstan in October 2014. Several other countries, including Vietnam and Mexico, subsequently included ICMA’s model voting provisions in their New York law–governed bonds. However, the New York law–governed bonds contained a modified formulation of the clauses that was designed to conform to market practice for New York law–governed documentation.
The updated model clauses published this month are aimed at achieving consistency between the English law and New York law provisions while at the same time taking into account market differences. One of the key changes in the recently published model clauses is an amendment to the definition of the term “Uniformly Applicable”, which is a key condition to the use of the “single-limb” aggregated voting mechanism. The amendment is intended to make more clear when that voting mechanism can be used.
Should they continue to gain market acceptance, the ICMA model CACs are expected to create greater consistency in the sovereign bond markets and to facilitate smoother and more efficient sovereign bond restructurings. In particular, we believe that the standardization of bondholder committee engagement provisions included in the ICMA model CACs is important. As demonstrated by practical experience over the last several decades, creditor committees are valuable for addressing identified risks and achieving prompt, fair, and sustainable restructuring of sovereign bonds.