Single-limb collective action clauses: A short introduction

05-07-2019

Sovereign bonds, the most common form of sovereign debt, have specific characteristics. They are issued by national debt management offices on the primary market and subsequently traded on secondary markets. Loan agreements signed at the issuance of sovereign bonds on the primary market may include collective action clauses (CACs) aimed at making restructuring more orderly and predictable. CACs have been included in loan agreements and bond contracts since the 1990s. These clauses enable a 'supermajority' of creditors to modify essential payment terms of the contract, thus overcoming the problem posed by holdout creditors. Indeed, while debt restructuring involves benefits for both debtor countries and their creditors, there are also incentives for both parties to delay the process. Certain creditors, for instance, are tempted to hold out, and are therefore referred to as holdout creditors. Their incentive for holding out is the chance that they might recover their investment either in full or in a higher amount than the debtor country has offered in the restructuring agreement. While a holdout can bring creditors great gains, it has significant negative consequences for debtor countries and, in the worst case, can jeopardise the restructuring process. CACs can have one or two 'limbs'. While the EU Member States that are in the euro area decided in 2011 to include two-limb CACs in sovereign debt issued after 2013, the Greek restructuring experience and recent New York court decisions relative to sovereign debt have shown that such CACs can protect sovereign debtors only up to a certain point. Therefore, in the context of the euro-area governance reform, the Eurogroup has proposed that euro-area leaders should work for the introduction of single-limb CACs by 2022, and included this commitment in the draft revised text of the European Stability Mechanism Treaty.

Sovereign bonds, the most common form of sovereign debt, have specific characteristics. They are issued by national debt management offices on the primary market and subsequently traded on secondary markets. Loan agreements signed at the issuance of sovereign bonds on the primary market may include collective action clauses (CACs) aimed at making restructuring more orderly and predictable. CACs have been included in loan agreements and bond contracts since the 1990s. These clauses enable a 'supermajority' of creditors to modify essential payment terms of the contract, thus overcoming the problem posed by holdout creditors. Indeed, while debt restructuring involves benefits for both debtor countries and their creditors, there are also incentives for both parties to delay the process. Certain creditors, for instance, are tempted to hold out, and are therefore referred to as holdout creditors. Their incentive for holding out is the chance that they might recover their investment either in full or in a higher amount than the debtor country has offered in the restructuring agreement. While a holdout can bring creditors great gains, it has significant negative consequences for debtor countries and, in the worst case, can jeopardise the restructuring process. CACs can have one or two 'limbs'. While the EU Member States that are in the euro area decided in 2011 to include two-limb CACs in sovereign debt issued after 2013, the Greek restructuring experience and recent New York court decisions relative to sovereign debt have shown that such CACs can protect sovereign debtors only up to a certain point. Therefore, in the context of the euro-area governance reform, the Eurogroup has proposed that euro-area leaders should work for the introduction of single-limb CACs by 2022, and included this commitment in the draft revised text of the European Stability Mechanism Treaty.