IMF Survey : IMF Supports Reforms for More Orderly Sovereign Debt Restructurings

IMF News, October 6, 2014

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IMF’s Executive Board supports reforms to international sovereign bond contracts to address collective action problems in sovereign debt restructurings.
Work reflects outcomes of intensive discussions over an 18-month period with the private sector, sovereign issuers, and the official sector; proposals are consistent with features adopted by the International Capital Market Association (ICMA).
Motivation: reduce costs of sovereign debt restructurings for debtors, creditors, and the system more generally, and address legal vulnerabilities highlighted by recent litigation involving Argentina.

Definition and mechanism:
- Individual creditors may decline to participate in a restructuring hoping to recover the full value of their claims (holdout creditors).
- If holdouts can recover in full, other creditors become less willing to consent to restructurings, creating a collective action problem.
Systemic effects:
- Uncertainty and holdout strategies can delay restructurings and may push countries into default unnecessarily—detrimental to debtor, creditors, and the system.

Focused provisions:
- Collective action clause (CAC): enables a qualified majority of creditors to take a decision on restructuring terms binding on the minority.
- Pari passu provision: clarifies legal meaning to prevent the pari passu clause being interpreted as requiring ratable or pro rata payments.
Specific reforms and features:
- Single voting procedure across all bond issuances:
- Replaces issuance-by-issuance voting that allowed holdouts to block restructuring by concentrating holdings in a single issuance.
- “Either no one is in or everybody is in.” — creates certainty and reduces holdout leverage.
- Includes safeguards to ensure inter-creditor equity across different issuances.
- Allows flexibility for more traditional voting procedures when sovereign and creditors deem appropriate.
- Modified pari passu proviso:
- Clarifies that pari passu requires only equal legal ranking, not ratable payment to all creditors.
- Seeks to prevent court interpretations that would block payments to restructured creditors unless holdouts are paid in full.

Market-based approach: inclusion and design of clauses ultimately decided by creditors and debtors.
IMF actions:
- Board endorsement is first stage; staff will engage with IMF membership to promote the reforms in dialogue with member countries issuing bonds governed by foreign law.
- IMF intends to encourage use of these provisions as it did in 2003 for CACs in bonds governed by New York law.
- Monitoring and promotion: IMF will encourage and monitor the inclusion of strengthened clauses in new sovereign debt contracts.
Early adoption signals:
- Modified pari passu clause already used by some sovereign issuers.
- Kazakhstan recently issued a Eurobond including key CAC features endorsed by the Board.

Significant outstanding stock of bonds without the new clauses remains and will not mature for some time.
IMF explored accelerating turnover through liability management exchanges (exchanging existing bonds for new bonds without problematic provisions).
Current market appetite for liability management is limited; may increase if Argentine litigation has broader impact.
IMF will continue to monitor risks posed by outstanding stock and consider additional steps as needed.

Adopt and promote CACs with single cross‑issuance voting to limit holdout strategies and create greater certainty in restructurings.
Clarify pari passu to ensure it requires only equal legal ranking, not ratable payments, to prevent litigation that undermines restructurings.
Pursue market-based adoption through engagement with sovereign issuers, creditors, and market bodies such as ICMA.
Monitor outstanding stock and encourage liability management exercises where feasible; remain prepared to assess further measures if litigation dynamics change market incentives.

IMF Survey : IMF Supports Reforms for More Orderly Sovereign Debt Restructurings — October 6, 2014