PUBLISHED:July 23, 2020

Gulati, Buchheit say sovereign nations should retain collective action clauses to avoid higher future borrowing costs

From International Financing Review:

Buchheit backs Argentina over CACs dispute

By Christopher Spink

Sovereigns should resist calls to get rid of their bonds’ aggregated collective action clauses, which have proved controversial during Argentina’s restructuring talks, as doing so could increase future borrowing costs by raising litigation risks, according to leading sovereign debt lawyer Lee Buchheit.

“Such a retrograde movement would, in our opinion, inflict significant damage and cost on the market for emerging market sovereign bonds,” wrote Buchheit, who advised Argentina in 2016 when at law firm Cleary Gottlieb, in a paper with Duke University professor Mitu Gulati.

In the current stand-off between Argentina and its creditors, some of the country's bondholders initially demanded that only earlier iterations of collective action clauses, used in the country’s 2005 and 2010 exchange offers, should be put in any new instruments coming out of the exchange.

This was prompted by Argentina’s proposal that it could effectively choose which bonds to include in any new offer, should its initial exchange fail to get sufficient support under its aggregated collective action clause. This discretion only applies to bonds issued in 2016 and afterwards.

This week, three creditor groups said they now merely wished to amend the 2016 CACs, without precisely specifying how. That could be along the lines of Ecuador’s current restructuring, allowing creditors to change their minds and withdraw initial supportive votes before any offer reopening.

Gulati and Buchheit, who also advised Greece in 2012 on its €200bn restructuring that imposed a retroactive aggregated CAC across all its domestic bonds, said the latest version of CACs had been an important tool to try to ensure restructurings were not hampered by hold-out bondholders.

“The willingness of the hold-outs from Argentina’s last restructuring to deploy a pari passu weapon on their quondam fellow bondholders illustrates that hold-outs pose a potential threat to all of the other parties caught up in these affairs,” they said.

Aggregated CACs get around this by ensuring any modifications of repayment terms obtain “broad support of the holders of the instrument” and “reduce the risks posed by any minority hold-outs to the issuer and the supermajority of holders who accepted the modifications”.

However, they accepted that CACs, as recommended by the International Capital Markets Association, should not be abused.

“A healthy financial system must start with an assumption that contracts will be performed as they are written. Only extraordinary circumstances can excuse that performance and collective action clauses in sovereign bonds were not meant to give sovereign issuers the unilateral ability to change the terms of their bonds,” they said.

“The group of experts that drafted the model ICMA CAC, comprising individuals from both the debtor and creditor sides of the spectrum, attempted to strike this balance. Their handiwork has enjoyed overwhelming acceptance by the market and should not now be abandoned.”

Ecuador has suggested that it can only change the series of bonds in any proposed aggregation after holders are first given five days to withdraw their existing votes and if at least two-thirds of the original aggregated voting group by value has approved the offer.