Transcript of a Conference Call on Addressing Collective Action Problems in Sovereign Debt Restructuring

October 9, 2014

Washington, D.C.
Monday, October 6, 2014

Sean Hagan, General Counsel
Ángela Gaviria, Communications Department

MS. GAVIRIA: Good morning, everyone. Welcome to this conference call on the staff paper entitled “Strengthening the Contractual Framework to Address Collective Action Problems in Solving Debt Restructuring.” The staff paper was discussed by our Executive Board on October 1, and the views of the Board members are summarized in the press release that you may have seen under embargo. Now let me introduce the main speaker today, Sean Hagan, General Counsel at the IMF. He will make some brief remarks, and then he will be happy to take your questions.

MR. HAGAN: Thank you, and thanks for joining this call.

I think it’s helpful to put the paper that is about to be published and the summing up of the Board discussion in the broader context of the Fund’s work program in sovereign debt restructuring area.

You may remember that there was a Board paper and discussion regarding the reform of the Fund’s lending framework, which, as discussed in that paper, has a significant impact when a sovereign debt restructuring is initiated.

I think it’s fair to say that the reforms that are outlined in this paper are really designed to ensure that, once the restructuring is initiated, it’s actually concluded in an orderly manner.

The underlying problem that this paper is designed to address are collective action problems. This is a familiar problem, but there is greater urgency in addressing it as a result of the decisions that have been reached by the New York Courts in the context of Argentina.

And the concerns are that those decisions may make the holdout strategy a more viable one, which firstly will increase the number of holdouts, and, secondly, that creditors that would otherwise be willing to cooperate may be nervous about doing so, because they may find that payments to them under the restructure instruments could be interrupted.

So, this paper deals with those issues. The Board had asked us to work on a framework that is market-based. And, therefore, we have been focusing on one that is based on contract. And, as a consequence of that approach, it’s important to understand that the Fund’s role is necessarily limited, but important.

First, we are trying to facilitate agreement on the design of the clauses that would address these issues, and, secondly, we will be involved in promoting their use. On the design, for the last 18 months we have been discussing the design of these clauses with market participants, issuers, and the official sector. We understood that, since this approach is market-based, not surprisingly, it requires a consultation with the market. So, that is what we’ve been doing.

A number of the ICMA provisions that have been recently announced reflect the outcome of these discussions. The ICMA announcement, coupled with the Board endorsement that has been given, represent a key step forward. As you know, there are two separate provisions that we are looking at: the pari passu provision and a new collective action clause that includes what we refer to now as a single-limb voting procedure, which is new.

A key additional step that has been taken is the fact that Kazakhstan has now issued bonds that include both of these features. We had already had sovereigns that included revised pari passu provisions, but Kazakhstan’s bond issuance now includes the type of collective action clause that had been endorsed by ICMA and now endorsed by our Board, which we think is really important in addressing the collective action problems .

I want to emphasize that the degree to which these provisions have been embraced by the market reflect the fact that creditors understand that it’s in their interest for these two provisions to be in place.

One of the disadvantages, for example, of a series by series voting procedure is that a creditor can be bound by a vote in a particular series, while other series are actually neutralized by a holdout, raising inter-creditor equity issues. That can create uncertainty. The advantage of a single limb voting procedure is that everyone is either in or nobody is in.

And the other thing I want to mention is that, from a legal perspective, these collective action clauses don’t shift legal leverage from the creditors to the debtor. Rather, they can be understood as shifting legal leverage from individual creditors to creditors as a group. So it gives creditors, as a group, greater control over the process.

Now the paper points out that a key issue is the outstanding stock. One of the limitations of a contractual framework is that, by definition, it is in place with respect to new contracts. And this is an issue primarily for bonds governed by New York law, which are most directly affected by the New York decisions.

The extent to which outstanding stock is going to be subject to the type of strategy that we’ve seen in the case of Argentina is not clear, because, as the paper discusses, the extent to which these decisions create a precedent is not entirely clear.

At this stage, there’s really no appetite amongst either issuers or market participants for an accelerated turnover of existing stock; what we would call liability management. But that may change, depending on the prevailing circumstances.

So, I’ll close there, and I’m happy to take any questions.

QUESTIONER: A couple questions. I’m not sure I understand the single-limb voting procedure. You’re saying that you recommend that it be across all issuances, not series by series? And, secondly, the amount of debt stock -- are you saying that the risk only applies to those bonds under New York law, or are you saying that other bonds outside of New York law, English law, are also at risk?

MR. HAGAN: The way traditional collective action clauses work is that they require a majority vote for each bond series, which means that if you have a restructuring with multiple series, there is a risk that a holdout can take a blocking position in a particular series, and neutralize the operation of the collective action clauses in that series.

QUESTIONER: Just for that series, though.

MR. HAGAN: Exactly, for that series. But it can undermine the willingness of bond holders as a whole to go forward because they don’t have certainty that everybody is going to be in. The advantage of a single-limb voting procedure is that it now has a single vote across all of the affected series. So, the ability of a holdout to essentially control or neutralize the collective action clause has just become much more difficult because they have to acquire a blocking position in the entire debt stock that is subject to aggregation.

I think that there is a recognition that if we have bonds that include these voting procedures , they basically make it much more difficult and costly for that type of strategy to be implemented. That’s the first point.

The second one is, you are absolutely correct. The paper basically sets forth the view that, with respect to the outstanding stock, the risk is much greater with New York law-governed bonds. We explain in the paper that bonds governed by English law are less vulnerable, because the prevailing view -- although there is not a controlling decision on this point -- is that English courts would not give an interpretation of the standard pari passu clause that is aligned with the interpretation that was given by the New York Courts. And, yes, our concern is primarily with New York law-governed bonds.

QUESTIONER: When you say that it’s not established that Argentina is going to be a precedent in our restructuring of the debt, could you elaborate a little bit on why not? I think that one of the arguments is that the Appeals Court decided that it was a unique case, but it gives me the impression that all this paper is done because it’s going to be a precedent. So I wanted you to explain a little bit more the position of the IMF on that point.

MR. HAGAN: That’s an excellent question. And the paper goes into considerable depth on this issue, precisely because the extent to which it’s a precedent has a huge impact on the outstanding stock issue.

To summarize, going forward there is a consensus within the legal community that the New York Court decisions may be interpreted broadly, based on the Court of Appeals’s interpretation of the pari passu clause -- which would appear to support what we refer to as the ratable payment interpretation. That part of the decision seems to be broad, and would lend itself to broad interpretation.

On the other hand, there are other parts of the decision which state that Argentina only violated the clause because of its course of conduct.

So the question is, what is the course of conduct that is needed to violate that provision? If the court of conduct is limited to, for example, the type of legislative measures that were adopted by Argentina, such as the Lock Law, then maybe this precedent is narrow. A country would need to adopt similar type of legislation.

If, on the other hand, the course of conduct is interpreted going forward to mean a failure over a period of time to pay the holdout creditors, this will have a broader impact. The paper concludes -- and it reflects the prevailing views within the legal community -- that there is uncertainty on the breadth of the precedent. We will find out in the context of future litigation in other countries, where New York Courts are going to come out on this issue.

But from the very beginning, we were concerned about this precedent, because, one way or the other, it is creating a tremendous amount of uncertainty. How significant the risk for future debt restructurings is still to be determined.

QUESTIONER: My question was also regarding Argentina and the precedent. Isn’t it already a precedent? I mean, it can take a long time to see if this can be interpreted in one way or the other. So, wouldn’t it be too late, then, when you can see if this is a precedent or not?

MR. HAGAN: Yes, that is a good point. I think we all agree that it creates a precedent. The question is, what precedent does it create? Is it a very broad precedent that means every pari passu clause that is similar to Argentina can result in a similar strategy? Or does it mean, more narrowly, that, in addition, there have to be specific types of legislative measures, along the lines adopted by Argentina? I agree that it does create a precedent. But the question is, what type of precedent?

QUESTIONER: Yes. But are you keen on making a decision at some point? Because this case can take years. Wouldn’t it be too late when you just say, “Okay, it goes to this way or to the other”?

MR. HAGAN: Yes. I think what the paper says is that we will find out, based on what we refer to as copycat litigation. There will be litigation involving other countries on this issue. There is currently litigation, for example, involving Grenada pending in the New York court.

And if it turns out that the precedent is, in fact, a broad precedent, I think the Fund’s Executive Board will need to consider the implications of that, in terms of how to address the outstanding stock. As I have indicated, right now, the Board wants to follow a market-based approach, which would suggest that we would try, for example, to catalyze a more aggressive liability management operation to exchange the existing stock. That would be one possible avenue. Those are discussed in the last section of the paper.

QUESTIONER: I wanted to ask what you think of the moves by Argentina and others -- the group of 77 -- in the UN, to try to get the issue addressed in the General Assembly? There’s some discussion around UNCTAD. I understand yours is a market-based solution, but what do you think? Could these two approaches be complementary? Also, President Kirchner, when she gave her speech at the UNGA recently, said that the IMF tack on the issue is less than ideal, given the lack of quota reform and perceived lack of legitimacy in terms of each country having one vote, or one country not having a veto. Do you think that impacts the way that your approach is viewed, or your approach in any way?

MR. HAGAN: On the UN General Assembly resolution, clearly, how that is taken forward by the UN and its members is for them to determine. I would make a number of observations.

First of all, it is based on a convention, which is a treaty. The Executive Board discussed last year whether or not they wanted to pursue such an approach -- a treaty-based approach. As you know, the Fund had a discussion about a treaty-based approach over 10 years ago, with the SDRM. And there was insufficient support in our membership to support that approach.

There has been really no change in the attitude of our members when we discussed this last year. So, it’s in light of that that we have been pursuing a contractual approach. Unless and until the Executive Board were to change the directions given to staff, we will continue to pursue this contractual-based approach.

As the lending paper indicates, central to the way the Fund handles these issues is the Fund’s own determination of debt sustainability, and the impact that these judgments have on the debt restructuring process.Quite frankly, in terms of how this interacts with the UN approach, clearly, there’s a different legal basis.

Secondly, I think the Fund feels that it’s making, actually, quite a lot of progress on the approach that we are taking. We have had significant support for the lending proposals. We now have not only a consensus among the market, issuers and the official sector on a market-based approach; we actually have a country that is already implemented it, Kazakhstan. We are making progress, and my sense is that the Fund is going to continue along the lines that we are making progress on.

QUESTIONER: Are you going to discuss, in any sense, this paper during the Annual Meetings taking place this week? Is there going to be any opportunity to discuss or to exchange ideas with the participants about this problem?

MR. HAGAN: Well, I can tell you that there will be a couple of panel discussions this week. There is a CSO forum, organized jointly with the World Bank, that includes civil society organizations. My colleagues in the Communications Department can tell you which organizations are involved. I will be participating on that panel, and I would be surprised if there wasn’t a discussion about the relationship between this proposal and the one that is currently before the UN

Secondly, the IIF -- the Institute for International Finance -- is having a separate discussion on the sovereign debt restructuring. I’ll be participating on that as well.

So, I think there will be opportunities this week for members to make their views known, for participants to make their views known, for civil society to make their views known. The purpose of the Annual Meetings is to bring together as many stakeholders as possible. And since this paper has just been issued, I think this will indeed be on many people’s minds.

QUESTIONER: I was also going to ask about the UN vote. But my other question was a slightly smaller subject that somebody had raised with me -- this point about credit committees. They were questioning why that’s not mentioned in your paper; why you chose not to support the idea of that.

MR. HAGAN: That’s a good question. The objective of this paper was to get the Board to endorse an agreed framework for addressing collective action problems. That has been the focus of our discussion with ICMA over the past 18 months to basically address the leverage that holdouts have: how to design a collective action clause and how to modify the pari passu to address collective action problems.

There is a separate but important issue about the nature of the dialogue between the sovereign debtor and its creditors. That is a subject that we will be taking up at the Board. It’s actually part of our workflow. We did not discuss those issues in this paper and the Board has not yet discussed those issues, and we note that ICMA has included a discussion of creditor committees, It’s something which we need to discuss with our Board, because we do need to have clarity on the Fund’s position on this issue.

QUESTIONER: You mentioned Congressional nullification. That seems to be, if there were the political will, a pretty easy route. Can you assess that for me? And, if I understood you correctly, I believe you said that a major item that differs in this proposal from the ICMA proposal is the single-limb voting procedure? Is that correct?

MR. HAGAN: If I could just take the last point first… no. In fact, the real breakthrough is ICMA’s acceptance of the single-limb voting procedure. Their membership has embraced it because of the advantages that it gives to creditors. We welcome that embrace because we think it’s very important.

QUESTIONER: But are they also backing the other two, the CAC and pari passu changes?

MR. HAGAN: Just to be clear, you have got the pari passu change, right?


MR. HAGAN: And then you have got ICMA’s endorsement of a collective action clause, that is a clause that has a menu of different voting procedures. What is critical is that the menu now includes a new item, which is the single-limb voting procedure. That is the new item on the menu that we think is critically important, and which occupied, I would say, almost 90 percent of our discussions with ICMA. That’s the critical breakthrough, and that’s, of course, what Kazakhstan has included.

QUESTIONER: But in presenting to the public that the IMF is backing a particular plan, I would like to be able to say that the proposal the IMF is putting forward is in line with the ICMA proposal, as well -- not only in terms of the pari passu and CACs, but also the single-limb voting procedure.

MR. HAGAN: Right. But the single-limb voting procedure is part of the CAC.

QUESTIONER: Gotcha. Okay.

MR. HAGAN: That’s the point. If you were to summarize it, I would say that it’s backing the key aspects of ICMA provisions, which is the pari passu modification and the single-limb voting procedure.

QUESTIONER: Okay. Thank you.

MR. HAGAN: Those are the two elements that are critical, and -- Kazakhstan bonds included -- that’s the breakthrough.

On your second point, with respect to U.S. legislation, what we have done is to very carefully follow the US authorities’ own views as to how the Foreign Sovereign Immunities Act should be interpreted. And we were just suggesting a legislative clarification that would reflect that view. We think it’s very narrow. However, whether or not it’s politically feasible is a question which you would have to address to the US authorities. Our job as Fund staff is just to present the technical range of options, and we view that as an option which would, if carried out, address the problem of outstanding stock for bonds governed by New York law.

QUESTIONER: And the fact that the Directors in the press release, which covers the Directors’ range of responses, didn’t address this issue… should we read into that that it is not seen as a particularly viable avenue?

MR. HAGAN: Not necessarily. I think you need to take into account the fact that whether or not we consider and pursue that avenue would depend on the evolution of the litigation. We point out in the paper that that is an option that may need to be considered, if, in fact, the courts interpreted these clauses broadly. At this stage, it’s kind of hypothetical.

QUESTIONER: Wait and see, okay.

MR. HAGAN: Wait and see. Wait and see.

QUESTIONER: At the end of your presentation you spoke about acceleration, and you said that for the moment there is no appetite for it, but that this might change. Can you tell me what you meant by that, and what can change, so that acceleration can take place? Were you referring to the Argentinean bonds in particular -- you know, that there is this alternative that the exchange bondholders have to accelerate now that they are in the court? Were you referring to that or something else?

MR. HAGAN: No, I wasn’t referring to that. And given the fact that acceleration is now being used in the press, I probably should have avoided that term. I don’t mean acceleration with respect to Argentina’s bonds. I mean acceleration in a broader sense. We have an outstanding stock of debt. A large portion of it is governed by New York law. The paper points out that, of the New York law-governed debt, almost 40 percent of it will mature beyond 10 years.

So, is there any way we could accelerate the turnover of that outstanding debt, so that we could get it out of the market and replaced by new debt? And you can do that by different countries going to the market, and exchanging their existing bonds for new bonds?

QUESTIONER: With the new clauses?

MR. HAGAN: With the new clauses. And so the question is, would they be willing to accelerate that turnover -- what we call liability management -- or not? Right now, there’s no appetite or interest in doing that. But maybe that will change over time.

QUESTIONER: Tell me if I understand it correctly: when the Board discussed this situation one year ago, and you issued the first paper, the impression was that the case of Argentina could be a very strong precedent. Today you said that it’s going to be a precedent, but we don’t know which kind of precedent. I wanted to check if the impression is correct. Maybe we are moving to an understanding -- meaning that the Argentinean case is (inaudible) showing or increasing that (inaudible) specific one, and maybe it’s not going to have the big impact that was thought in the beginning it could have. Are we moving to an idea of that kind, or is that my impression?

MR. HAGAN: Yes, and no. I think that it’s fair to say that the Fund continues to be very concerned about the precedent created by Argentina, so this paper goes into greater detail on how concerned we should be. This concern that we have is clearly shared by the market, because the market has just agreed upon new provisions that are designed to address this concern. If, in fact, there was a consensus in the market that the Argentina precedent was for sure clearly not a broad precedent, I don’t think there would’ve been the same interest in modifying the pari passu clause.

The very fact that the pari passu clause is being modified suggests that people are very concerned. What we don’t know with certainty is how broadly this decision will be applied. But we are concerned, and our concern, I think, is shared by many others, as is evidenced by the fact that ICMA has now revised its provisions.

MS. GAVIRIA: Thank you all for participating. We end this conference call here. Goodbye.

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