## _091715

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### INTRODUCTION
- Board endorsement (October 2014): inclusion of key features of enhanced pari passu provisions and collective action clauses (CACs) in new international sovereign bonds.
  - Endorsed features: (i) a modified pari passu clause that explicitly excludes the obligation to effect ratable payments; (ii) an enhanced CAC with a menu of voting procedures including a “single-limb” voting procedure, a two-limb aggregated voting procedure and a series-by-series voting procedure.
- Three-pronged Fund approach to promote inclusion:
  - (i) collect detailed information on the stock of existing international sovereign bonds (use of CACs and pari passu provisions, residual maturities, authorities’ intentions regarding future issuances), potentially including periodic surveys of public debt managers;
  - (ii) engage with membership and stakeholders via dialogue in various fora (Fund’s Public Debt Management Forum, IMFC, G20);
  - (iii) inform the Board and the public via periodic progress reports on status of inclusion of enhanced contractual provisions.
- Scope: focus on international sovereign bonds (defined as bonds issued or guaranteed by a government or central bank under a law other than the law of the issuer, in freely traded form with fixed maturities, normally in excess of one year).
- External endorsements and calls:
  - IMFC communiqué (October 11, 2014), G20 Leaders’ Communiqué (Brisbane, November 16, 2014), G20 communiqué (Istanbul, February 9-10, 2015), G20 Leaders’ Communiqué (Istanbul, September 5, 2015).
- Staff outreach since October 2014:
  - seminars at World Bank and Fund public debt management events (December 2014, June 2015);
  - meetings in New York, London and Paris with private sector legal advisors for debtors and underwriters;
  - surveys of public debt management offices of selected member countries;
  - database established with contracted provider Perfect Information to track new issuances and clause inclusion details.

### ENHANCED CONTRACTUAL PROVISIONS — A. Collective Action Clauses (CACs): Findings on uptake
- Single-limb aggregated voting procedure description and safeguards:
  - Enables restructuring on the basis of a single vote across all instruments or a subset of instruments to limit holdout creditors.
  - Safeguards: “uniformly applicable” condition and a voting threshold of 75 percent of the aggregated outstanding principal of all affected bond series.
  - CAC menu recommended: single-limb, two-limb aggregated, and series-by-series; accommodate bonds in different currencies and governed by different laws; include a disenfranchisement provision and an information covenant consistent with Fund policy.
  - Note: euro area sovereigns are required to include CACs allowing either series-by-series or two-limb aggregated procedures.
- Empirical uptake (information as of July 31, 2015):
  - Since October 1, 2014 there have been 73 international sovereign bond issuances, by 37 sovereign issuers, for a total nominal principal amount of approximately US$ 86 billion.
  - Of these 73 issuances, 42 issuances, representing about 60 percent of the nominal principal amount of total issuances, have included the enhanced CACs.
  - The 21 issuers that have included the enhanced CACs:
    - Under New York law: Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Indonesia, Jamaica, Mexico, Panama, Turkey, and Vietnam.
    - Under English law: Armenia, Bulgaria, Croatia, Egypt, Ethiopia, Gabon, Kazakhstan, Montenegro, Tunisia, and Zambia.
  - Sample and database notes:
    - Figures based on Perfect Information database for issuances between October 1, 2014 and July 31, 2015, except: euro area sovereign issuances (required by law to include euro area-specific CACs), China’s domestic issuances under Hong Kong law, and GDP warrants.
    - As of July 31, 2015, of total outstanding stock of international sovereign bonds, approximately 50 per cent are governed by New York law and approximately 46 percent by English law (as a share of nominal principal amount).
- Breakdown by issuance type:
  - New issuances (stand-alone or under a new “shelf” registration statement or new medium term note program established on or after October 1, 2014):
    - Account for approximately 70 percent of all issuances (as a share of total nominal principal amount).
    - About 85 percent of these new issuances included the enhanced CACs (as a share of nominal principal amount).
    - New-issuance exceptions that did not include enhanced CACs:
      - Under English law: Cote d’Ivoire, Pakistan and Poland;
      - Under New York law: Mongolia, the Philippines and Sri Lanka.
      - Recently issued sukuk by Malaysia, Hong Kong and Turkey (all under English law) did not include the enhanced CACs (Hong Kong and Turkey issuances included series-by-series CACs; Malaysia included a two-limb aggregated CAC).
  - Re-openings or take-downs under programs established prior to October 1, 2014:
    - Account for remaining 30 percent of all issuances (as a share of nominal principal amount).
    - None of these re-openings/take-downs included the enhanced CACs.
    - Issuers that conducted re-openings or take-downs under existing programs and did not include enhanced CACs:
      - Under New York law: Colombia, Lebanon, Paraguay, Peru, Turkey, Uruguay;
      - Under English law: Poland, Romania, Kenya, Sweden.
      - Namibia’s June 2015 issuance under South African law and Indonesia’s May 2015 sukuk issuance under English law also did not include the enhanced CACs.
  - Market practice explanation: re-openings/take-downs preserve general contractual terms (including CACs) to achieve fungibility and faster execution times and lower issuing costs (in particular, legal costs). Frequent issuers often rely on “shelf” registration statements or medium term note programs.
- Jurisdictional uptake differential:
  - Uptake greater for new issuances under New York law than English law:
    - Of the new issuances, approximately 92 percent of New York law-governed bonds included the enhanced CACs, while approximately 75 percent of English law-governed bonds included the enhanced CACs (as a share of total nominal principal amount).
    - Of the 92 percent New York uptake, approximately 71 percent were issued by Latin American issuers.
  - Possible factors for differential: inertia, lack of awareness, pricing concerns despite no observed pricing impact, infrequent issuers' lower emphasis on aggregated procedures, Mexico’s November 2014 New York-law issuance influence, and regional awareness differences.
- Formulation and market evolution:
  - Market formulations incorporated Board-endorsed features but evolved to reflect market preferences and stylistic differences between New York and English law markets.
  - November 2014: New York law version of ICMA model clauses formulated; some variations (e.g., omission of phrase “on the same terms” in some definitions of “uniformly applicable” beginning with Mexico November 2014 issuance).
  - May 2015: ICMA published two versions of model clauses—one for English law and another for New York law—to accommodate stylistic differences while ensuring substantive alignment.
    - Both versions clarify the “uniformly applicable” condition regarding amount of consideration per amount of principal and interest (accrued and past due).
    - New York law model clauses clarify that two-limb voting procedure use is not limited to situations where the “uniformly applicable” condition cannot be met.

### ENHANCED CONTRACTUAL PROVISIONS — B. Pari Passu; Pari passu clause and recent litigation
- Litigation background:
  - NML v. Argentina (New York courts) found Argentina in breach of the pari passu clause and issued an injunction requiring Argentina to pay holdout creditors on a ratable basis with bondholders holding restructured bonds.
  - New York courts’ decision is final; related litigation continues.
  - English High Court judgment (February 13, 2015) did not address the viability of the U.S. District Court’s construction; prevailing view is English courts would not follow the New York interpretation nor grant similar remedies.
  - Extent to which New York courts’ interpretation will apply to other sovereigns remains unclear.
- Modified pari passu clause: rationale and Board support:
  - Executive Board supported widespread use of modified pari passu provisions to mitigate risk of courts adopting Argentine litigation interpretation.
  - Modified clause explicitly states it does not require the issuer to pay external indebtedness on an equal or ratable basis.
  - Widespread use could help enhance legal certainty and consistency across jurisdictions.
- Adoption patterns and legal packaging:
  - Modified pari passu clause is being incorporated as a package with the enhanced CACs:
    - All post-October 1, 2014 issuances that included enhanced CACs also include modified pari passu clauses.
    - Cote d’Ivoire (English law) and Mongolia (New York law) did not include enhanced CACs but did include modified pari passu clauses.
    - No issuers declined to include modified pari passu clauses but included enhanced CACs.
  - Euro area sovereigns (required under the ESM treaty to include the two-limb euro area CACs) have generally not included modified pari passu clauses.
  - Variations exist in formulation, but all modified clauses specifically disavow an obligation to make ratable payments.
  - Market consultations indicate general favorable view of modified pari passu clauses; some creditor concerns about de facto subordination to legacy debt have not manifested in inhibiting incorporation.

### MARKET IMPACT, OUTSTANDING STOCK, AND LIABILITY MANAGEMENT
- Market impact and pricing:
  - Market acceptance of enhanced contractual provisions has been strong with no observable impact on pricing.
  - No published study on market impact of enhanced clauses; public debt managers and market participants indicate no material impact on pricing at the time of issuance.
  - Existing empirical analyses of traditional, series-by-series CACs:
    - Bardozzetti and Dottori (2013) find CACs have little impact for high- and low-rated issuers, but generally reduce cost for mid-rated issuers.
    - Bradley and Gulati (2013) found inclusion of CACs is associated with a lower cost of capital, especially for financially-weak issuers.
- Outstanding stock of bonds (magnitude and composition) as of July 31, 2015:
  - Outstanding stock estimated at approximately US$ 915 billion, compared to approximately US$ 900 billion as of September 2014.
    - Difference reflects factors including that new bond issuances since September 2014 exceeded bonds maturing in the same period.
  - Governing-law composition:
    - Approximately 46 per cent of the outstanding stock are governed by English law.
    - Approximately 50 percent are governed by New York law.
  - Enhanced CACs coverage:
    - Approximately 6 percent of the outstanding stock includes enhanced CACs.
    - Of that, New York law governed bonds account for approximately 4 percent.
  - Maturity profile:
    - Approximately 71 percent of the total stock will mature within the next ten years.
    - The remaining 29 percent will take 10 years or more to mature.
    - For New York law governed bonds, approximately 39 percent will take ten years or more to mature.
- Liability management and outstanding stock remediation:
  - No sovereign issuer is known to have engaged in liability management operations solely to accelerate incorporation of enhanced contractual provisions.
  - Issuers and investors expressed little appetite historically for liability management operations (bond buybacks, bond swaps) to accelerate turnover.
  - With the “first mover” problem diminished and no observed pricing impact at issuance, issuers remain reluctant to conduct liability management solely to adopt enhanced clauses unless it aligns with their financial interests (cost of funding).
  - Mexico stated in the Fund’s Debt Managers Forum it would be evaluating a liability management exercise in the future.
  - Consideration could be given to legislative solutions if courts interpret New York court decisions broadly in ways that seriously undermine restructuring.

### BOND GOVERNANCE STRUCTURES: FAAs versus TRUST STRUCTURES
- Common issuance structures:
  - International sovereign bonds are typically issued under either fiscal agency agreements (FAAs) or trust structures (trust indenture under New York law; trust deed under English law).
- FAAs:
  - Fiscal agent acts as an agent of the issuer; main responsibility is making principal and interest payments.
  - FAAs are marginally cheaper and easier to implement than trust structures; often used for New York- and English-law governed bonds.
  - Some FAAs allow each individual bondholder to accelerate its own bond without limitation; under some FAAs, acceleration is automatic upon receipt of notice.
  - Under FAAs permitting individual litigation, proceeds from litigation remain with the individual bondholder.
- Trust structures:
  - A bond trustee acts on behalf of, and has responsibilities to, bondholders as a group.
  - Trustees typically require bondholders holding a minimum principal amount (normally 25 percent) to request acceleration; the trustee usually has discretion to accelerate on behalf of all bondholders.
  - Trustees commence litigation on behalf of bondholders only if: (i) requested by bondholders holding a requisite percentage (typically 25 percent) and (ii) adequate indemnification has been provided.
  - Trustees ensure pro rata distribution of any amounts recovered through litigation to all bondholders.
  - Trust structures effectively restrict individual bondholders from initiating litigation while restructuring negotiations are ongoing, reducing disruption risk and protecting sovereign assets during negotiation.
- Acceleration, initiation of litigation, and sharing of proceeds:
  - Acceleration:
    - Trust structures typically require collective request (normally 25 percent) for trustee to accelerate; trustee has discretion.
    - FAAs can permit individual bondholders to accelerate their own bonds; some FAAs have automatic acceleration upon notice.
    - Acceleration may typically be reversed by bondholders holding a requisite percentage of outstanding principal (typically 50 percent) if defaults have been cured or waived.
  - Initiation of litigation:
    - Under trust structures, the trustee normally initiates litigation on behalf of bondholders subject to the conditions above; individual bondholders can only initiate if trustee fails to act after conditions are met.
    - Under FAAs, individual bondholders can initiate legal proceedings for amounts due and payable.
    - Centralizing litigation rights in a trustee can deter minority creditors from disrupting restructurings.
  - Sharing of proceeds:
    - Trust structures require pro rata distribution of litigation recoveries among bondholders, reducing incentives for minority holders to litigate.
    - Under FAAs that permit individual litigation, litigation proceeds remain with the litigating bondholder.
- Recent experience and policy views:
  - Executive Board discussion in the early 2000s produced mixed views on whether costs justify inclusion of trust structures; many Directors noted potential benefits may justify limited cost while others left decision to issuers and investors.
  - Trust structures more common in common law jurisdictions; civil law jurisdictions may use alternative devices to represent bondholders as a group (e.g., commissioned company for bondholders under the Japanese Commercial Code).

### USE OF TRUST STRUCTURES AND UPTAKE STATISTICS
- Uptake statistics (October 1, 2014 – July 31, 2015):
  - Approximately 45 percent of international sovereign bond issuances used trust structures.
  - Approximately 83 percent of trust-structured issuances were under New York law.
  - Large emerging market issuers (e.g., Mexico and Chile) have recently switched to using trust indentures in their New York law governed bonds.
  - Issuers under English law appear to prefer FAAs; market participants indicate this may reflect lack of awareness and sensitivity to higher costs associated with trust structures among many lower income countries.
- Limitations and role in restructurings:
  - Trust structures can help alleviate collective action problems by limiting individual enforcement action after default and prior to restructuring, supporting orderly restructuring even when enhanced CACs are present.
  - If holdouts control the full amount of unresstructured bonds after a restructuring agreement, benefits of trust structures are limited because holdouts can instruct the trustee to accelerate or commence litigation; proceeds sharing would no longer deter holdouts.
  - Inclusion of enhanced CACs is particularly important because it reduces the likelihood of holdouts remaining after the qualified majority of bondholders have agreed to restructure.
  - Empirical research does not reveal any meaningful impact on sovereign bond default risk from using trust structures (Häseler, Sönke, 2010).

### STAFF ACTIONS, POLICY RECOMMENDATIONS, AND NEXT STEPS
- Staff will continue to promote inclusion of modified pari passu clauses and enhanced CACs using the Board-endorsed three-pronged approach:
  - (i) collect information on the stock of existing international sovereign bonds, including use of CACs and pari passu provisions, residual maturities, and authorities’ intentions regarding future issuances;
  - (ii) engage on related issues with the membership through various fora, including the Fund’s Public Debt Management Forum and meetings of the IMFC and the G20;
  - (iii) inform the Board and the public periodically on the status of sovereign issuers’ inclusion of the enhanced contractual provisions in international sovereign bonds.
- Targeted engagement:
  - In light of lower uptake rates in certain jurisdictions and regions, staff will conduct more targeted engagement with debt management offices, underwriters, and legal advisors in:
    - Africa,
    - Asia,
    - non-euro area Europe.
- Considerations on amendments and liability management:
  - Consideration could be given to amending existing bond documentation for re-openings or take-downs to include enhanced contractual provisions; however:
    - Incorporating enhanced clauses in re-openings/take-downs may undermine fungibility with existing bond series and harm liquidity and trading.
    - Amending terms may not be practical for re-openings, which are often conducted within a short time frame.
    - Consultations indicate issuers may be more willing to incorporate clauses if amending existing programs for other debt management reasons.
  - Staff will closely monitor and assess whether liability management represents a viable solution for accelerating turnover of the outstanding stock of bonds; Mexico’s anticipated evaluation of liability management operations will act as an important indicator of viability.
- Building on trust structure uptake:
  - Staff will engage with membership to increase understanding of benefits of trust structures given increasing market acceptance in the New York market.

### ANNEX: TIMELINE HIGHLIGHTS AND DATASET FINDINGS (October 1, 2014 – July 31, 2015)
- Key timeline entries:
  - October 11, 2014: IMFC communiqué calling on IMF, members, and private sector to promote use of enhanced contractual clauses.
  - November 16, 2014: G20 welcomes international work on strengthened collective action and pari passu clauses.
  - March and June 2015: IMF staff survey received responses from 32 members; all were aware of enhanced contractual clauses and acknowledged benefits of including them.
  - September 4-5, 2015: G20 welcomed increased adoption and stressed importance of accelerating implementation.
- Dataset scope and caveats:
  - Dataset based on staff information for issuances announced between October 1, 2014 and July 31, 2015, except: euro area sovereign issuances; China’s domestic issuances under Hong Kong governing law; and GDP warrants.
  - There may be issuances (e.g., private placements) not captured by the database.
- Representative dataset observations:
  - Annex II (A) lists multiple issuances that included the enhanced clauses with examples spanning countries, sizes, tenors, governing laws, and structures (e.g., Kazakhstan Oct 2014 US$ 1.5 bn 10Y English FAA; Mexico Nov 2014 US$ 2 bn 10Y New York Trust Indenture; Chile Dec 2014 US$ 1.06 bn 11Y New York Trust Indenture; Indonesia Jan 2015 US$ 2bn 10Y New York Trust Indenture; Mexico Apr 2015 EUR 1.5bn 100Y (US$ 1.6bn) New York Trust Indenture).
  - Annex II (B) documents issuances without the new clauses, distinguishing new standalone issuances and take-downs under new note programs (B1) and re-openings/take-downs under pre-October 1 2014 note programs (B2) with examples (e.g., Turkey (Sukuk) Nov 2014 US$ 1bn 10Y English Trust deed – No – Series by series – No; Philippines Jan 2015 US$ 2 bn 25Y New York FAA – No – Series by series – No; Colombia Oct 2014 US$ 0.50 bn 10Y New York FAA – No – Series by series – No; Sweden Nov 2014 US$ 3bn 3Y English FAA – No – Series by series – No).

*Source: PROGRESS REPORT, September 17, 2015 — INTERNATIONAL MONETARY FUND*

### INTRODUCTION ___________________________________________________________________________ 2

### _091715 - INTRODUCTION ___________________________________________________________________________ 2

### INTRODUCTION
- Board endorsement (October 2014): inclusion of key features of enhanced pari passu provisions and collective action clauses (CACs) in new international sovereign bonds.
  - Endorsed features: (i) a modified pari passu clause that explicitly excludes the obligation to effect ratable payments; (ii) an enhanced CAC with a menu of voting procedures including a “single-limb” voting procedure, a two-limb aggregated voting procedure and a series-by-series voting procedure.
- Three-pronged Fund approach to promote inclusion:
  - (i) collect detailed information on the stock of existing international sovereign bonds (use of CACs and pari passu provisions, residual maturities, authorities’ intentions regarding future issuances), potentially including periodic surveys of public debt managers;
  - (ii) engage with membership and stakeholders via dialogue in various fora (Fund’s Public Debt Management Forum, IMFC, G20);
  - (iii) inform the Board and the public via periodic progress reports on status of inclusion of enhanced contractual provisions.
- Scope: focus on international sovereign bonds (defined as bonds issued or guaranteed by a government or central bank under a law other than the law of the issuer, in freely traded form with fixed maturities, normally in excess of one year). Staff has not focused on international sovereign guaranteed bonds.
- External endorsements and calls:
  - IMFC communiqué (October 11, 2014) called on Fund, members and private sector to promote enhanced clauses.
  - G20 Leaders’ Communiqué (Brisbane, November 16, 2014) called for inclusion and promotion of enhanced clauses.
  - G20 communiqué (Istanbul, February 9-10, 2015) called on the Fund to report on progress; G20 Leaders’ Communiqué (Istanbul, September 5, 2015) welcomed progress and stressed importance of accelerating implementation.
- Staff outreach since October 2014:
  - seminars at World Bank and Fund public debt management events (December 2014, June 2015);
  - meetings in New York, London and Paris with private sector legal advisors for debtors and underwriters;
  - surveys of public debt management offices of selected member countries (Annex 1);
  - database established with contracted provider Perfect Information to track new issuances and clause inclusion details.

### ENHANCED CONTRACTUAL PROVISIONS — A. Collective Action Clauses (CACs)
Findings on uptake
- Description of enhanced CAC single-limb procedure:
  - Single-limb aggregated voting procedure enables restructuring on the basis of a single vote across all instruments or a subset of instruments to limit holdout creditors.
  - Safeguards for creditors: “uniformly applicable” condition (all affected bondholders offered the same instrument or identical menu of instruments) and a voting threshold of 75 percent of the aggregated outstanding principal of all affected bond series.
  - CAC should include menu of voting procedures: single-limb, two-limb aggregated, and series-by-series; accommodate bonds in different currencies and governed by different laws; include a disenfranchisement provision and an information covenant consistent with Fund policy.
  - Note: euro area sovereigns are required to include CACs allowing either series-by-series or two-limb aggregated procedures.
- Empirical uptake (based on information available as of July 31, 2015):
  - Since October 1, 2014 there have been 73 international sovereign bond issuances, by 37 sovereign issuers, for a total nominal principal amount of approximately US$ 86 billion.
  - Of these 73 issuances, 42 issuances, representing about 60 percent of the nominal principal amount of total issuances, have included the enhanced CACs.
  - The 21 issuers that have included the enhanced CACs are:
    - Under New York law: Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Indonesia, Jamaica, Mexico, Panama, Turkey, and Vietnam;
    - Under English law: Armenia, Bulgaria, Croatia, Egypt, Ethiopia, Gabon, Kazakhstan, Montenegro, Tunisia, and Zambia.
  - Sample and database notes:
    - Figures based on Perfect Information database for issuances between October 1, 2014 and July 31, 2015, except: euro area sovereign issuances (required by law to include euro area-specific CACs), China’s domestic issuances under Hong Kong law, and GDP warrants.
    - As of July 31, 2015, of total outstanding stock of international sovereign bonds, approximately 50 per cent are governed by New York law and approximately 46 percent by English law (as a share of nominal principal amount).
- Breakdown by issuance type:
  - Two categories of issuances since October 1, 2014:
    - New issuances (stand-alone or under a new “shelf” registration statement or new medium term note program established on or after October 1, 2014): account for approximately 70 percent of all issuances (as a share of total nominal principal amount). About 85 percent of these new issuances included the enhanced CACs (as a share of nominal principal amount).
      - New-issuance exceptions that did not include enhanced CACs: under English law, Cote d’Ivoire, Pakistan and Poland; under New York law, Mongolia, the Philippines and Sri Lanka. Recently issued sukuk by Malaysia, Hong Kong and Turkey (all under English law) did not include the enhanced CACs (Hong Kong and Turkey issuances included series-by-series CACs; Malaysia included a two-limb aggregated CAC).
    - Re-openings or take-downs under programs established prior to October 1, 2014: account for remaining 30 percent of all issuances (as a share of nominal principal amount). None of these re-openings/take-downs included the enhanced CACs.
      - Issuers that conducted re-openings or take-downs under existing programs and did not include enhanced CACs: Under New York law, Colombia, Lebanon, Paraguay, Peru, Turkey, Uruguay; under English law, Poland, Romania, Kenya, Sweden. Namibia’s June 2015 issuance under South African law and Indonesia’s May 2015 sukuk issuance under English law also did not include the enhanced CACs.
  - Market practice explanation: re-openings/take-downs preserve general contractual terms (including CACs) to achieve fungibility and faster execution times and lower issuing costs (in particular, legal costs). Frequent issuers often rely on “shelf” registration statements or medium term note programs for multiple issuances.
- Jurisdictional uptake differential:
  - Uptake of enhanced CACs greater for new issuances under New York law than English law:
    - Of the new issuances, approximately 92 percent of New York law-governed bonds included the enhanced CACs, while approximately 75 percent of English law-governed bonds included the enhanced CACs (as a share of total nominal principal amount).
    - Of the 92 percent New York uptake, approximately 71 percent were issued by Latin American issuers.
  - Reasons for differential not definitive; possible factors:
    - Inertia, lack of awareness or understanding among issuers, lead underwriters and advisors about benefits of enhanced clauses; concerns about pricing impact despite no observed pricing impact at issuance.
    - “Infrequent” issuers may give less importance to aggregated voting procedures because they currently have few outstanding series to aggregate.
    - Latin American issuers may follow Mexico’s lead in including clauses in November 2014 New York-law issuance; English-law issuers were primarily African, Asian and (non-Eurozone) European sovereigns with more varied awareness and acceptance.
- Formulation and market evolution:
  - Issuances that incorporated enhanced CACs included Board-endorsed key features, but formulation evolved to reflect market preferences.
  - November 2014: group of legal advisors formulated a New York law version of ICMA model clauses to reflect New York market stylistic preferences; variations exist (e.g., omission of phrase “on the same terms” in some definitions of “uniformly applicable” beginning with Mexico November 2014 issuance).
    - Some creditors expressed concern that omission could allow offering more favorable terms to certain bondholders even if menu/instrument is same; market participants and issuers indicated omission was not intended to change “uniformly applicable” requirement.
    - A few New York issuers limited the use of two-limb aggregated voting procedure only to offerings that are not “uniformly applicable.”
  - May 2015: ICMA published two different versions of the model clauses—one for English law and another for New York law—to accommodate stylistic differences while ensuring substantive alignment.
    - Both versions clarify that “uniformly applicable” condition would not be satisfied if each exchanging/converting/substituting bondholder is not offered the same amount of consideration per amount of principal and interest (accrued and past due) as each other exchanging/converting/substituting bondholder of any affected bond series (and where electing the same option under the menu, if applicable).
    - New York law model clauses clarify that two-limb voting procedure use is not limited to situations where the “uniformly applicable” condition cannot be met, consistent with English law approach.

### ENHANCED CONTRACTUAL PROVISIONS — B. Pari Passu
- Board endorsement: inclusion of a modified pari passu clause that explicitly excludes the obligation to effect ratable payments.
- (Further discussion under this heading begins in the source; no additional details included in the supplied excerpt beyond the heading.)

*Source: PROGRESS REPORT, September 17, 2015 — INTERNATIONAL MONETARY FUND*

### 14.      As discussed in the 2014 paper, recent litigation has highlighted the need to modify

### _091715 - 14.      As discussed in the 2014 paper, recent litigation has highlighted the need to modify

### Pari passu clause and recent litigation
- NML v. Argentina (New York courts) found Argentina in breach of the pari passu clause in its New York-law governed sovereign bonds and issued an injunction requiring Argentina to pay the holdout creditors on a ratable basis with bondholders holding restructured bonds.
- The New York courts’ decision is final, but litigation between holdout creditors and Argentina stemming from the decision continues.
- The English High Court (judgment of February 13, 2015) did not address the viability of the U.S. District Court’s construction of the pari passu provision; prevailing view is that English courts would not follow the New York interpretation nor grant similar remedies.
- The extent to which the New York courts’ interpretation will apply to other sovereigns remains unclear.

### Modified pari passu clause: rationale and Board support
- The Executive Board supported the widespread use of modified pari passu provisions in international sovereign bonds to mitigate the risk of courts adopting the interpretation in the Argentine litigation.
- The modified pari passu provision explicitly states that the clause does not require the issuer to pay external indebtedness on an equal or ratable basis.
- Widespread use could help enhance legal certainty and consistency across jurisdictions.

### Adoption patterns and legal packaging
- Staff analysis indicates the modified pari passu clause is being incorporated as a package with the enhanced CACs:
  - All post-October 1, 2014 issuances that included enhanced CACs also include modified pari passu clauses.
  - Cote d’Ivoire (English law) and Mongolia (New York law) did not include enhanced CACs but did include modified pari passu clauses.
  - No issuers declined to include modified pari passu clauses but included enhanced CACs.
- Euro area sovereigns (required under the ESM treaty to include the two-limb euro area CACs) have generally not included modified pari passu clauses.
- Variations exist in formulation, but all modified clauses specifically disavow an obligation to make ratable payments.
- Consultations indicate market participants generally view modified pari passu clauses favorably.
  - Some creditors expressed concerns that bonds with modified provisions may be considered subordinate (de facto) to legacy debt without the modified provisions, but there is no evidence this is inhibiting incorporation.
  - There were issuances that incorporated the modified pari passu clause without enhanced CACs; none observed that incorporated enhanced CACs without the modified pari passu clause.

### Market impact and pricing
- Market acceptance of the enhanced contractual provisions has been strong with no observable impact on pricing.
- No published study on market impact of enhanced clauses; public debt managers and market participants indicate no material impact on pricing at the time of issuance.
- Empirical analyses of traditional, series-by-series CACs have not shown a consistent causal relationship between inclusion of CACs and market prices:
  - Bardozzetti and Dottori (2013) find CACs have little impact for high- and low-rated issuers, but generally reduce cost for mid-rated issuers.
  - Bradley and Gulati (2013) found inclusion of CACs is associated with a lower cost of capital, especially for financially-weak issuers.

### Outstanding stock of bonds (magnitude and composition)
- The large outstanding stock of debt remains unaffected by inclusion of enhanced clauses in new issuances.
- As of July 31, 2015, the outstanding stock is estimated at approximately US$ 915 billion, compared to approximately US$ 900 billion as of September 2014.
  - The difference reflects factors including that new bond issuances since September 2014 exceeded bonds maturing in the same period.
- Governing-law composition:
  - Approximately 46 per cent of the outstanding stock are governed by English law.
  - Approximately 50 percent are governed by New York law.
- Enhanced CACs coverage:
  - Approximately 6 percent of the outstanding stock includes enhanced CACs.
  - Of that, New York law governed bonds account for approximately 4 percent.
- Maturity profile:
  - Approximately 71 percent of the total stock will mature within the next ten years.
  - The remaining 29 percent will take 10 years or more to mature.
  - For New York law governed bonds, approximately 39 percent will take ten years or more to mature.

### Liability management and outstanding stock remediation
- No sovereign issuer is known to have engaged in liability management operations solely to accelerate incorporation of enhanced contractual provisions.
- Issuers and investors expressed little appetite historically for liability management operations (bond buybacks, bond swaps) to accelerate turnover.
- With the “first mover” problem diminished and no observed pricing impact at issuance, issuers remain reluctant to conduct liability management solely to adopt enhanced clauses unless it aligns with their financial interests (cost of funding).
- Mexico stated in the Fund’s Debt Managers Forum it would be evaluating a liability management exercise in the future.
- Consideration could be given to legislative solutions if courts interpret New York court decisions broadly in ways that seriously undermine restructuring.

### Bond governance structures: FAAs versus trust structures
- International sovereign bonds are typically issued under either fiscal agency agreements (FAAs) or trust structures (trust indenture under New York law; trust deed under English law).
- FAAs:
  - Fiscal agent acts as an agent of the issuer; main responsibility is making principal and interest payments.
  - FAAs are marginally cheaper and easier to implement than trust structures; hence FAAs often used for New York- and English-law governed bonds.
  - Some FAAs allow each individual bondholder to accelerate its own bond without limitation.
  - Under some FAAs, acceleration is automatic upon receipt of notice to the fiscal agent and issuer.
  - Under FAAs permitting individual litigation, proceeds from litigation remain with the individual bondholder.
- Trust structures:
  - A bond trustee acts on behalf of, and has responsibilities to, bondholders as a group.
  - Trustees typically require bondholders holding a minimum principal amount (normally 25 percent) to request acceleration; the trustee usually has discretion to accelerate on behalf of all bondholders.
  - Trustees commence litigation on behalf of bondholders only if: (i) requested by bondholders holding a requisite percentage (typically 25 percent) and (ii) adequate indemnification has been provided.
  - Trustees ensure pro rata distribution of any amounts recovered through litigation to all bondholders.
  - Trust structures effectively restrict individual bondholders from initiating litigation while restructuring negotiations are ongoing, reducing disruption risk and protecting sovereign assets during negotiation.

### Acceleration, initiation of litigation, and sharing of proceeds
- Acceleration:
  - Trust structures typically require collective request (normally 25 percent) for trustee to accelerate; trustee has discretion.
  - FAAs can permit individual bondholders to accelerate their own bonds; some FAAs have automatic acceleration upon notice.
  - In practice trustees rarely refuse to accelerate when requested.
  - Acceleration may typically be reversed by bondholders holding a requisite percentage of outstanding principal (typically 50 percent) if defaults have been cured or waived.
- Initiation of litigation:
  - Under trust structures, the trustee normally initiates litigation on behalf of bondholders subject to conditions noted above; individual bondholders can only initiate if trustee fails to act after conditions are met.
  - Under FAAs, individual bondholders can initiate legal proceedings for amounts due and payable.
  - Centralizing litigation rights in a trustee can deter minority creditors from disrupting restructurings.
- Sharing of proceeds:
  - Trust structures require pro rata distribution of litigation recoveries among bondholders, reducing incentives for minority holders to litigate.
  - Under FAAs that permit individual litigation, litigation proceeds remain with the litigating bondholder.

### Recent experience and policy views
- The Executive Board discussed benefits of trust structures for orderly restructuring in the early 2000s; Directors’ views were mixed on whether the costs justified inclusion.
- Many Directors noted trust deeds or equivalent structures can play an important role and potential benefits may justify limited financial cost; others felt costs may outweigh benefits and left the decision to issuers and investors.
- Trust structures are more common in common law jurisdictions; civil law jurisdictions may use alternative devices to represent bondholders as a group (e.g., commissioned company for bondholders under the Japanese Commercial Code).

*Source: _091715 - 14.      As discussed in the 2014 paper, recent litigation has highlighted the need to modify (IMF Progress Report content supplied).*

### 27.      Since then, there has been an increase in the use of trust structures, primarily under

### _091715 - 27.      Since then, there has been an increase in the use of trust structures, primarily under

### Use of trust structures and uptake statistics
- Approximately 45 percent of international sovereign bond issuances between October 1, 2014 and July 31, 2015 used trust structures.
- Approximately 83 percent of trust-structured issuances were under New York law.
- Large emerging market issuers, such as Mexico and Chile, have recently switched to using trust indentures in their New York law governed bonds.
- Issuers under English law appear to prefer FAAs; market participants indicate this may reflect lack of awareness and sensitivity to higher costs associated with trust structures among many lower income countries.

### Limitations and role of trust structures in restructurings
- Trust structures can help alleviate collective action problems in sovereign debt restructurings by limiting individual enforcement action after default and prior to a restructuring agreement, thereby helping to prevent a minority of bondholders from undermining negotiations.
- This benefit exists even if bonds contain enhanced CACs, as trust structures help support an orderly restructuring process to facilitate reaching an agreement with the sovereign debtor by the qualified majority of bondholders across affected series.
- If a restructuring agreement has been reached but holdout creditors remain:
  - Benefits of trust structures are limited because holdouts control the full amount of the unresstructured bonds and can instruct the trustee to accelerate or commence litigation against the debtor.
  - The fact that proceeds of litigation are shared among all bondholders would no longer be a disincentive since the holdout would be the exclusive beneficiary.
- Inclusion of enhanced CACs is particularly important because it reduces the likelihood of holdouts remaining after the qualified majority of bondholders have agreed to restructure the bond.
- Note: It has been argued that concentration of individual enforcement rights in the trustee may reduce market discipline and increase incentives for sovereigns to strategically default; empirical research does not reveal any meaningful impact on sovereign bond default risk from using trust structures (Häseler, Sönke, 2010).

### Staff actions and policy recommendations (Next steps)
- Staff will continue to promote the inclusion of modified pari passu clauses and enhanced CACs in international sovereign bonds using the three-pronged approach endorsed by the Board, and will continue to:
  - (i) collect information on the stock of existing international sovereign bonds, including the use of CACs and pari passu provisions, residual maturities, and authorities’ intentions regarding future issuances;
  - (ii) engage on related issues with the membership through various fora, including the Fund’s Public Debt Management Forum and meetings of the IMFC and the G20; and
  - (iii) inform the Board and the public periodically on the status of sovereign issuers’ inclusion of the enhanced contractual provisions in international sovereign bonds.
- In light of lower uptake rates in certain jurisdictions and regions, staff will conduct more targeted engagement, notably with debt management offices, underwriters, and legal advisors in:
  - Africa,
  - Asia,
  - non-euro area Europe.
- Consideration could be given to amending existing bond documentation for re-openings or take-downs to include enhanced contractual provisions; however:
  - Incorporating enhanced clauses in re-openings/take-downs may undermine fungibility with existing bond series and harm liquidity and trading.
  - Amending terms may not be practical for re-openings, which are often conducted within a short time frame.
  - Consultations indicate issuers may be more willing to incorporate clauses if amending existing programs for other debt management reasons.
- Building on increasing market acceptance of trust structures in the New York market, staff will engage with membership to increase understanding of benefits of trust structures.
- Staff will closely monitor and assess whether liability management represents a viable solution for accelerating turnover of the outstanding stock of bonds; Mexico’s anticipated evaluation of liability management operations will act as an important indicator of viability.

### Annex: Timeline highlights and dataset findings (October 1, 2014 – July 31, 2015)
- Key timeline entries:
  - October 11, 2014: IMFC communiqué calling on IMF, members, and private sector to promote use of enhanced contractual clauses.
  - November 16, 2014: G20 welcomes international work on strengthened collective action and pari passu clauses.
  - March and June 2015: IMF staff survey received responses from 32 members; all were aware of enhanced contractual clauses and acknowledged benefits of including them.
  - September 4-5, 2015: G20 welcomed increased adoption and stressed importance of accelerating implementation.
- Dataset scope and caveats:
  - Dataset is based on information available to staff and includes international sovereign bonds whose issuances were announced between October 1, 2014 and July 31, 2015, except: euro area sovereign issuances; China’s domestic issuances under Hong Kong governing law; and GDP warrants.
  - There may be international sovereign bond issuances (e.g., private placements) not captured by the database and thus not reflected in staff’s findings.
- Representative dataset observations:
  - Annex II (A) lists multiple issuances that included the enhanced clauses across a range of countries, sizes, tenors, governing laws, and structures (e.g., Kazakhstan Oct 2014 US$ 1.5 bn 10Y English FAA; Mexico Nov 2014 US$ 2 bn 10Y New York Trust Indenture; Chile Dec 2014 US$ 1.06 bn 11Y New York Trust Indenture; Indonesia Jan 2015 US$ 2bn 10Y New York Trust Indenture; Mexico Apr 2015 EUR 1.5bn 100Y (US$ 1.6bn) New York Trust Indenture).
  - Annex II (B) documents issuances without the new clauses, distinguishing new standalone issuances and take-downs under new note programs (B1) and re-openings/take-downs under pre-October 1 2014 note programs (B2). Examples include Turkey (Sukuk) Nov 2014 US$ 1bn 10Y English Trust deed – No – Series by series – No; Philippines Jan 2015 US$ 2 bn 25Y New York FAA – No – Series by series – No; Colombia Oct 2014 US$ 0.50 bn 10Y New York FAA – No – Series by series – No; Sweden Nov 2014 US$ 3bn 3Y English FAA – No – Series by series – No.

*Source: IMF staff Progress Report (October 1, 2014 – July 31, 2015).*

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