ICMA publishes clauses to facilitate sovereign debt restructurings

By Angela McDaniels

Tacoma, Wash., May 11 – The International Capital Market Association said it published collective action, pari passu and creditor engagement clauses for sovereign debt securities issued under New York governing law, including a refined “uniformly applicable” condition.

The use of these new terms in government bonds is intended to facilitate future sovereign debt restructurings.

The uniformly applicable condition was refined to say that the condition will not be satisfied if each exchanging, converting, substituting or amending bondholder is not offered the same amount of consideration per amount of principal, the same amount of consideration per amount of accrued interest and the same amount of consideration per amount of past-due interest as that offered to each other bondholder or, where a menu of instruments or other consideration is offered, each bondholder is not offered the same consideration offered to each other bondholder electing the same option from the menu.

The condition was refined in both the English and New York governing law collective action clauses “so as to provide greater clarity as to the application of this term in the context of cross-series modifications with single aggregated voting,” Leland Goss, ICMA’s general counsel, said in a news release.

Collective action clauses allow a supermajority of bondholders to agree to changes in bond payment terms, for example to extend maturities or reduce principal, that are legally binding on all holders of the bond, including those who vote against the restructuring. ICMA said its model collective action clauses provide a practical solution to the problem of blocking minorities through an aggregation mechanism that allows voting across multiple bond issues.

The interpretation given to the pari passu clause in the Argentina litigation has caused considerable uncertainty for future sovereign debt restructurings, the ICMA said. According to the association, its model pari passu provision reduces the risk of the pari passu clause being a basis for obstructing future sovereign debt restructurings.

“Following publication of ICMA’s sovereign debt contract reforms and their endorsement by the IMF and G-20 last year, further work has been undertaken to develop model terms that operate the same way in substance, but that are more suited in their written format and style, to the terms and conditions customarily found in sovereign bond contracts governed by New York law. We are ... publishing the result of this work today [Monday],” Goss said in the release.

“We are also publishing a slightly updated version of the corresponding set of clauses intended for use under bond contracts governed by English law, which are substantially the same as the clauses that ICMA published last year.

The revised standard collective action clauses and new pari passu clause will be included in the ICMA Primary Market Handbook for syndicated issues of sovereign debt securities lead managed by one or more ICMA members with cross-border distribution that are not otherwise subject to the mandatory euro area model collective action clause introduced in January 2013.

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