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SOVEREIGN DEBT RESTRUCTURING
L l A tLegal Aspects of
Sovereign Debt Restructuring
Dr Rodrigo Olivares-Caminal
London,
February 2012
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SOVEREIGN DEBT RESTRUCTURING
C di
UNDERSTANDING THE DYNAMICS OF SOVEREIGN DEBT RESTRUCTURING
IFI
Creditors
- The relationship O pbetween each type of creditor and the debtor is governed
LOA
FICI
Sovereign(Debtor)
Bilateralby a different set of rules
U tFINANCING
N IAL
( )- Upon an event of default, the interest of each type of creditor is
BPR
Private Investorstype of creditor is different (inverse to the pre-Brady era)
OND
IVAT
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era)TE
SOVEREIGN DEBT RESTRUCTURING
Borrowers Perspective
MultilateralLendingLending
PrivateBilateralLendingLending
Lenders Perspective
Ex-ante Ex-post
SOVEREIGN DEBT RESTRUCTURING
One picture is worth a
thousand words (thiswords ... (this one, probably
more!)more!)
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SOVEREIGN DEBT RESTRUCTURING
R t R t t i E iRecent Restructuring Experiences
Relevant Aspects Ukraine Ecuador Pakistan Uruguay Argentina Belize
Amounts Amounts Restructured
(in USD)
2.6 bn 6.5 bn USD 0.6 bn USD 5.3 bn USD 87bn USD 0.4 bn
No of Bonds to be 5 6 3 62 152 7No. of Bonds to be restructured
5 6 3 62 152 7
New Bonds Issued2 2 1 34 4 1
Cash Payment/Incentive
No Yes No Yes Yes + CLNs Yes
Exchange Offer Acceptance
95% 97% 99% 93%93%
(76 + 17)97%
3 2 1 6 8 2Applicable Laws
3 2 1 6 8 2
Duration of the Default (months)
3 11 2 0 38 6
5
Default (months)
Face Value Reduction
0% 40% 0% 0% 75% 0%
SOVEREIGN DEBT RESTRUCTURING
There is an informal legal framework built on previous restructuring experiences and mainly NY case law. No formal regime.
Sovereign Debt Restructuring
NY Law UK Law
NY Approach London ApproachNY Approach London Approach
Court Supervised Contractual Terms
SDRMClass Action Exchange Offer
CACs
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ExitConsent
SOVEREIGN DEBT RESTRUCTURING
UNDERSTANDING THE DYNAMICS: RESTRUCTURING AIMS
Obtain debt sustainability by reducing debt burden in an orderly manner.debt burden in an orderly manner.
Protect the value of the assets and the rights of the creditors to minimise litigationrights of the creditors to minimise litigation.
Achieve a restructuring over a short period of time to reduce disruptions and re-gain access to the capital markets.
All parties involved should share part of the effort (exceptions).
7Chicago Mercantile Exchange
SOVEREIGN DEBT RESTRUCTURING
EFSM€60bn
Available to all 27 EU member states
EFSF€440bn
states
€440bnFor EAMS
EAMSEAMS
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€250bnUp to half the amount drawn
from EFSF and EFSM
SOVEREIGN DEBT RESTRUCTURING
EFSM€60bn
Available to all 27 EU member states
EFSF€440bn
states
ESM€700bn€440bn
For EAMS
€700bnfor EAMS
EAMSEAMS
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€250bnUp to half the amount drawn
from EFSF and EFSM
SOVEREIGN DEBT RESTRUCTURING
BUSTING SOME MYTHS ... Countries can be insolvent.
A t t i i li d f ltA restructuring implies a default.
A restructuring will trigger CDS.
After default a country cannot re-access the capital markets.
A EAMS can leave the euro.
Some of the debts of Greece Portugal and/orSome of the debts of Greece, Portugal and/or Ireland are odious debts.
l f d b d
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Vulture funds are bad.
Due to the pari passu clause, when a paymentis made I will also receive a share.
EFSF debt has priority.
SOVEREIGN DEBT RESTRUCTURING
Any Questions ?Any Questions ?
谢谢. Cam rá. Efharisto. Obrigado. Gracias. Grazie. Thank You.
Merci. Dankeshen. Etc.
olivares caminal@gmail [email protected]
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SOVEREIGN DEBT RESTRUCTURING
CACs are clauses whereby, if they are included in the prospectuses of the bonds, the
DEFINITIONS
y y p pinteraction of the bondholders is required. There are four different types of CACs. These are:(1) collective representation clauses; (2) majority action clauses; (3) sharing clauses; and (4)acceleration clauses. Within CACs, majority action clauses are the type of clauses that havebeen strongly pursued by the official sector and many academics and they were effectivelybeen strongly pursued by the official sector and many academics, and they were effectivelyincorporated in bond issuances. Majority action clauses enable the amendment of any of theterms and conditions of the bonds, including the payment terms, if the required majoritytherein established is obtained. So far, the required threshold to amend the terms of theqbonds containing majority action clauses has been 75% in aggregate principal amount of theoutstanding bonds (e.g. Egypt, Lebanon, Mexico, Qatar, Uruguay, etc). Brazil and Belize havebeen the only cases where 85% has been required.
Exit consent is the technique, by which holders of bonds in default, who decide to accept anexchange offer, at the moment of accepting the said offer, grant their consent to amendcertain terms of the bonds that are being exchanged. By using the exit consent technique, theexchange offer is conditioned to a minimum threshold of creditors’ acceptance and theamendments to the terms are performed once the required majority has been obtained. Bymeans of these amendments, the defaulted bonds subject to the exchange offer become lessattractive (in legal and financial terms) forcing a greater number of bondholders to accept the
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attractive (in legal and financial terms), forcing a greater number of bondholders to accept theexchange offer. Otherwise, if holdout bondholders do not accept the exchange offer, they willbe holding an impaired bond not featuring some of the original contractual enhancements.