A timely paper from the International Capital Markets Association has just hit our inbox.
The title: “ICMA SOVEREIGN BOND CONSULTATION.”
It might sound dry, but you can readily guess the reasons for it.
For instance, while there’s lots of talk about transparency in the document, there’s also a lot about jurisdiction, governing law and Collective Action Clauses (CACs) — both of which are likely to become important in any eurozone debt restructuring.
First on those CACs:
Collective Action
Aggregated voting can contribute to more orderly and expeditious debt restructuring because it reduces the risk that a group of hold-out investors can take control of an individual bond issue and vote against a restructuring of that bond, even though the restructuring may be acceptable to a qualified majority of holders of all other bonds. It is contemplated that such a bond amendment could be made with an 85 per cent majority. We would welcome views on: whether creditors should be willing to accept the idea of aggregation of their voting rights with the holders of other bonds that are also subject to a vote; and whether 85 per cent is the appropriate percentage majority for bond amendments of this kind. In addition, we would welcome views on whether aggregation should also be used to accelerate payment or reverse an existing acceleration.
And going back to that governing law point, as the ICMA itself notes in the paper, this has never really been much of an issue before. With the start of the euro, in particular, the distinction between the bonds of different eurozone members sort of fell away.
Indeed, there’s a suggestion by ICMA that there are still plenty of investors and traders out there who have no idea which law actually governs their bonds. And — as some commenters have suggested — this may well turn out to be a pivotal point.
From Annex 1 of the paper:
… It is very important for an investor in a bond to know which governing law applies to any sovereign bonds it may hold. If a bond is governed by the sovereign issuer’s own law, the investor will be subject to the risk that any of the terms of the bond could be changed by the Issuer without the consent of the investor, even though most states understand that, if they amend the terms of bonds governed by their domestic law by passing domestic legislative measures, this will have significant consequences in terms of future accessibility to the capital markets, apart from domestic consequences, and it is therefore not something that many are likely to undertake lightly. On the other hand, if laws other than those of the sovereign issuer govern the issue, the Issuer’s ability to change the terms of the issue unilaterally will generally be constrained. Whether, and to what extent, any such constraints might apply will depend on the governing law of the issue and its interpretation by any competent court or tribunal …
Watch out though, because there are sometimes caveats to go along with the above.
International law, for instance, often grants sovereigns immunity from lawsuits being brought against them (or their assets being seized as a result of those lawsuits). There’s also the possibility of states using withholding taxes (instead of outright defaulting) to clawback some money — which has also been mentioned for Ireland.
Both these points are explicitly discussed in Annex 1 of the ICMA doc.
No surprise then, that ICMA is recommending the following:
Governing law and jurisdiction
The Concept relating to governing law contemplates that the chosen legal system must provide effectively for the submission of the sovereign issuer to its courts (that is, the ability to waive immunity from jurisdiction) and for the enforcement of any judgement that may be awarded by such courts against the assets of the Issuer. As these matters are usually qualified, even in jurisdictions whose law provides the most liberal waiver provisions, the Concept does not require absolute waiver of jurisdiction and agreement to execution, but permits qualifications, provided these are set out in legal opinions that will be provided to the Managers prior to the signing of the Subscription Agreement. The Concept also provides for disclosure, where the chosen legal system is that of the Issuer itself. We would welcome views on: how this proposal would be received by governments that currently enjoy the highest credit status; and whether an alternative would be to say that the governing law should be one customarily chosen to govern bonds issued in the international capital markets.
Did you catch that?
Bondmarket association says bondholders should be able to sue sovereigns and have recourse to their assets. Not surprising in any way — but indicative of how debt investors (especially senior ones) intend to deal with this burden sharing concept.
Whether governments will pay them any mind is of course another matter…
Related links:
Setting sights on senior (Irish bank) investors - FT Alphaville
A senior slaughtered credit cow - FT Alphaville
Burdensharing, then and now - FT Alphaville