Kazakhstan’s full adoption of the International Capital Market Association’s collective action clause was met with praise this week. Market participants hope the new recommendations will prevent a repeat of the Argentina restructuring that dragged on for decades.
ICMA's intention is to make it easier for restructurings to be resolved by stopping small holdout groups from blocking changes to terms. The recommendations were only finalised at the end of August and are voluntary.
Though the new documentation would only help borrowers in a restructuring, many issuers have wanted someone else to go first to show that pricing would not be affected, rather than create a two tier market in their own deals. Ghana, El Salvador and Panama all adopted the pari-passu part of the new recommendations, but Kazakhstan was the first to adopt the recommendations fully.
ICMA has been arguing that the adoption of the new legislation would not be punitive for borrowers. They say that investors in the primary market are not the same as the 'vulture funds' that typically form the holdout groups that this would affect, so pricing in a new issue would not budge.
Others argued that this may not be the case — harming the interests of any potential investor may impact the pricing of the deal.
On Monday, Kazakhstan, with its $11bn book at initial guidance and undeniably tight pricing against comparables, may have assuaged borrowers’ concerns about there being an effect on pricing. But Kazakhstan was a special case and other borrowers should not treat it as an example.
Firstly, Kazakhstan had no outstanding deals, so it is impossible to see whether a premium was paid, despite the tight pricing to state-owned corporate comparables. Secondly, investors have been champing at the bit for a Kazakhstan bond — the second largest economy in the CIS — for nearly a decade.
The demand for this deal says much more about investors’ desire for Kazakhstan paper than their feelings about an appropriate premium for an ICMA Collective Action Clause.
Other borrowers may follow Kazakhstan in pricing deals with ICMA’s full set of recommendations for a collective action clause, and that is a good thing for the market as a whole. But Kazakhstan has not closed the question of whether they will need to pay up to do so.