Queen Mary University of London
3 Experts
4 Contributions by Queen Mary University of London Experts
PRACTICE NOTES
Mounting piles of debt and their steady rise have caused repayment difficulties and, in certain cases, default. Thus, when countries build up unsustainable debt loads (ie when the ratio of debt to gross domestic product (GDP) climbs so far that policy measures cannot reverse it), the need to restructure existing liabilities increases. With many banks and retail bondholders now involved, private creditors have become more numerous, largely anonymous and harder to co‑ordinate (see Practice Note: Identifying bondholders and effective communication).
Types of collective action clauses (CACs)
These are provisions sometimes included in a bond issuance’s indenture and prospectus, requiring bondholders to act together to facilitate the restructuring of such instruments by overcoming co‑ordination problems (also see Practice Note: Intercreditor payment priorities and requisite majorities). There are four different types of CACs. These are:
collective representation clauses (clauses intended to co‑ordinate
Restructuring & Insolvency
PRACTICE NOTES
Accumulated debt, coupled with economic upheaval or a climatic or other external jolt to a nation, can precipitate a crisis severe enough to push creditors to explore legal avenues for recovery. In the language of finance, such disruption will typically amount to an event of default.
Where to sue?
Following an event of default on, for instance, bond obligations, sovereigns commonly formalise the existence of a public emergency by passing legislation or issuing an executive order or decree. By way of illustration, amid Greece's crisis, Parliament adopted the Bondholders Act 4050/12. In those circumstances, domestic courts would refrain from striking down the default and the extraordinary steps taken by the sovereign's government in light of the national emergency confronting the country. Even where the debtor has waived sovereign immunity, that waiver is often circumscribed within its own
Restructuring & Insolvency
PRACTICE NOTES
Sources of financing
Sovereign borrowers, whether emerging or advanced, raise funds via multilateral, bilateral, or private channels. The first two typically take the form of loan agreements. Private funding most often relies on bond placements and is the predominant avenue; at times it may involve commercial loan contracts, but because creditor groups are small these are negotiated discreetly and largely pass unnoticed. As bond issuance has surged, and virulent financial crises have become more frequent, bond restructurings have taken on greater prominence, particularly for sovereign issuers.
Difficulties with sovereign debt restructuring
Reliance on bonds to cover sovereign deficits has broadened and deepened capital markets. Yet major drawbacks emerge when obligations turn unsustainable. These include:
a growing, anonymous creditor base that is hard to co-ordinate
multiple instruments and issuance across diverse legal venues, with no unified statutory regime, which strengthens creditors’ capacity to hold out or
Restructuring & Insolvency
PRACTICE NOTES
Sovereign debt restructuring techniques
The build-up of public liabilities and their steady rise have triggered repayment difficulties and, in some instances, default. Consequently, as states accumulate untenable debt loads (i.e. when the debt-to-gross domestic product ratio climbs so high that policy measures cannot reverse it), the imperative to reorganise their sovereign obligations intensifies. In broad terms, sovereign debt restructuring refers to the set of methods employed by sovereigns to avert or address financial and economic turmoil and to restore debt to sustainable levels. The bulk of sovereign borrowing is evidenced through bond issues (domestic or international) and, on occasion, commercial loans. Multilateral liabilities are not subject to restructuring (at most, rolled-over), while bilateral exposures are typically rescheduled or reworked under the auspices of the Common Framework or the Paris Club. Sovereign debt workouts comprise two dimensions: procedural and substantive. The procedural limb concerns how the
Restructuring & Insolvency
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