Kazakhstan this week became the first sovereign to fully adopt International Capital Market Association recommendations on collective action clauses (CAC) in its bond documentation.
The new measures should help prevent protracted sovereign debt restructurings like those seen in Argentina. Meanwhile, the Institute of International Finance is planning talks on how to insert the new clauses into older outstanding bond documentation.
Kazakhstan ended an absence of almost 14 years from international capital markets with a $2.5bn dual tranche deal on Monday. Bookrunners Citi, HSBC and JP Morgan drew a final order book of $10bn for the deal.
“So far this year 10% of all sovereign bonds issued have used the clarified pari-passu clause,” said Hung Tran, executive managing director of the IIF, which helped draft the recommendations. “We’re pleased to see Kazakhstan took on board all three of the new ICMA elements.”
The new pari-passu clause — which Ghana, El Salvador and Panama have also adopted — clarifies that the term pari-passu refers only to equal legal ranking with other external debt, rather than inferring any equality of payment obligation.
The IMF, which participated in the ICMA CAC discussions, is calling for pari-passu reform after New York courts interpreted the term to mean Argentina had to make pro rata payment to all creditors, Sean Hagan, the IMF’s General Counsel, said in an IMF discussion published on Monday.
Kazakhstan also adopted a clause that allows sovereign bondholders to decide on the restructuring of all separate sovereign bond series in one vote. This makes it easier to have a conclusive majority vote on a restructuring process, and more difficult for one small group to corner one small series of bonds and block the whole restructuring, said Tran.
A third clause adopted by Kazakhstan involves greater engagement with investors. This details how a country in financial difficulties should “reach out to investors in a timely way to engage in discussions about how these difficulties could be resolved,” he added.
Going back in time
One problem is that the new recommendations only benefit freshly sold sovereign debt. Tran said the IIF will hold talks with issuers, investors and intermediaries to discuss how to insert the ICMA recommendations into existing sovereign bond documentation.
Whether investors will be willing to allow this to happen, however, depends partly on whether they view the new ICMA additions as punitive. Tran, along with bankers involved in the Kazakhstan deal, said investors had no issue with the ICMA additions in that transaction.
“Kazakhstan was in discussion with a variety of issuers and underwriters and collectively everyone realised that it was beneficial to include the CACs,” said Tran. “There was no pushback from investors.”