CACs – a welcome look at the fine print
The agreement on collective action clauses (CACs) reached by Argentina, Ecuador and their creditors is highly complex. But it is hugely encouraging that major investors are actively participating on an issue that is crucial to the health of the market.
CACs represent the triumph of some of the best minds in finance working on an evolving set of rules to make sovereign bond markets a fairer place. They have evolved to protect both issuers and bondholders who negotiate in good faith from opportunistic, unscrupulous holdout creditors.
They provide a framework for swift resolutions that should prevent financial disputes between investors and issuers from leading to crippling, multi-year defaults that, above all, hurt the everyday citizen.
The overriding conclusion from both Argentina’s and Ecuador’s processes is that CACs do their job very well. Ecuador’s negotiations took place in record time, and eight months — for Argentina — is also an exceptionally short time frame.
Yet CACs were also the source of high tension between Argentina and its creditors in recent months, and could have caused the breakdown of negotiations. Creditors saw the country’s interpretation of the wording as an affront to good taste, while many independent observers were horrified at the reaction of bondholders who wanted to do away altogether with the latest incarnation of CACs (as written by the International Capital Market Association in 2014).
The fact a compromise was found is crucial. If either side’s extreme position had prevailed, it would have seriously debilitated debtor and creditor faith in the CACs framework. Both sides ended up offering an olive branch, and the market will reap the benefits.
Moreover, the CAC enhancements were shaped on one side by major real money investors, many tasting restructuring negotiations for the first time.
It will be hugely positive for the evolution of CACs if these investors — who own the bulk of EM debt and thus have a genuine interest in the long-term health of the market — begin to take greater notice of this important aspect of the fine print.