4. The Anti-holdout model
4.2 A General Theory of the Anti-holdout model
4.2.1 Majority Decision-Making during Restructuring
4.2.1.1 Majority Decision Making: Overview
The first component of the anti-holdout model is majoritarian debt restructurings. Acceptance of the restructuring proposal under the anti-holdout model is not decided by each creditor for themselves, but by a majority or qualified majority of creditors, binding the minority to their decisions658.
Majoritarian debt restructurings provide several advantages. First, because a minority of bondholders is bound by the decision of the majority, the possibilities for holdout litigation are limited659. This, logically, fosters certainty as the results of the restructuring negotiation cannot be challenged.
Second, majoritarian restructurings incentivise sovereigns and their creditors towards negotiated solutions to sovereign debt crises660. If support by a qualified majority of creditors is required for a debt restructuring to go forward, States have to negotiate with their creditors in order to garner sufficient support for their restructuring offer to be accepted661. Moreover, these negotiations also strengthen the legitimacy of the restructuring process662. Indeed, under the previous system for debt restructurings States have on occasion contented
658 Majoritarian debt restructuring was already one of they components of the SDRM system pushed forward
by the IMF see Krueger (n 76).
659 This, inherently, is the logic behind the insertion of collective action clauses.
660 See Goldmann, ‘Putting Your Faith in Good Faith: A Principled Strategy for Smoother Sovereign Debt
Workouts’ (n 651).
661 ibid 131.
662 Such legitimacy would stem from the participatory nature of the negotiation process as well as its perceived
democracy. On issues of legitimacy within the current “non-system” of sovereign debt workouts see Odette Lienau, ‘The Challenge of Legitimacy in Sovereign Debt Restructuring’ (2016) 57 Harvard international law Journal 151. See also Terence Halliday, ‘Legitimacy, Technology, and Leverage: The Building Blocks of Insolvency Architecture in the Decade Past and the Decade Ahead’ (2007) 32 Brooklyn Journal of international law <https://brooklynworks.brooklaw.edu/bjil/vol32/iss3/13>.
The Anti-holdout model 137 themselves with providing their creditors with ‘take it or leave it’ offers, threatening not to pay any creditors who refused to take the haircut on their bonds663.
It should be noted that the majority here is not understood as being calculated on a per virem
basis, but on a bond-by-bond basis. The fact that, under the anti-holdout model, majorities are estimated on such a basis further enhances the likelihood of prompt and efficient restructurings. Essentially, in any given restructuring scenario it is likely that the bulk of a sovereign’s bonded debt is held by large financial institutions664 with vulture fund and
individual holdings being comparatively marginal. As was pointed out during this thesis’ analysis of the syndicated loan market, large financial institutions benefit from a fast return of the sovereign to debt sustainability as said return provides them with future benefits.
When those large creditors are banking institutions, regulatory capital adequacy requirements enable them to withstand the costs engendered by a haircut on their sovereign debt holdings665, ensuring that said institutions will not be threatened by sovereign failure. This further ensures that they will agree to reasonable restructuring offers. Moreover, larger creditors can purchase credit default swaps (CDS) on their sovereign bonds666. Sovereign CDS enable their buyer to obtain payment from the seller to off-set the default risks attached to the bonds of a sovereign. In practice this means that institutional investors667 have
663 See e.g. Argentina’s first offers to its creditors during its 2000s crisis discussed in Miller and Thomas,
‘Sovereign Debt Restructuring’ (n 73) 1492.
664 IMF, ‘Sovereign Investor Base Dataset for Emerging Markets’ (n 3).
665 Within the EU, capital adequacy requirements are implemented via directive. See ‘Directive 2013/36/EU
of the European Parliament and of the Council of 26 June 2013 on Access to the Activity of Credit Institutions and the Prudential Supervision of Credit Institutions and Investment Firms, Amending Directive 2002/87/EC and Repealing Directives 2006/48/EC and 2006/49/EC Text with EEA Relevance’ <https://eur- lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32013L0036>; Katarzyna Sum, ‘Basel III: Assessment of the Guidelines for Regulatory Reform’ in Katarzyna Sum (ed), Post-Crisis Banking Regulation
in the European Union: Opportunities and Threats (Springer International Publishing 2016)
<https://doi.org/10.1007/978-3-319-41378-5_2> accessed 26 September 2019; Mark Petersen and Janine Mukuddem-Peterson, Basel III Liquidity Regulation and Its Implications.
666 Credit default swaps are financial derivatives in which a “seller of protection (…) agrees to pay the buyer
of protection (…) an amount if during an agreed period a prescribed credit event occurs (…) in relation to an greed reference obligation of a reference entity.” Wood, Law and Practice of International Finance (n 253) 433. To put it simply a credit derivative is a financial instrument whose function is to provide it buyer a quasi- insurance or guarantee if during an agreed period of time the obligations of an agreed issuer are subject to a downgrade in credit-worthiness, an event of default and/or a restructuring. There are differences between a CDS and an insurance or a guarantee. Notably, as opposed to guarantees, CDSs apply to events beyond mere non payment. As opposed to both guarantees and insurance contract, the holder of a CDS need not be the holder of the reference transaction and there is no automatic subrogation of the protection seller to the protection buyer once the transaction has been settled. ibid 434.
667 The Over the Counter (OTC) credit derivatives market is largely regulated under ISDA master agreement.
The ISDA master agreement is a standard agreement covering derivatives trading (except repos and stocklending), as well as the netting and the set-off linked to derivatives transactions. Participation to transactions under the ISDA Master Agreement are typically limited to entities demonstrating that they possess the financial ability to withstand the losses that derivative trading can lead to. Ths fundamentally excludes most retail investors from the OTC derivatives market. On the ISDA master agreement see Wood, Law and Practice of International Finance (n 253) 440–442.
The Anti-holdout model 138 financial tools available to off-set the costs of debt restructurings, thus further incentivising them to collaborate with the debtor668.
4.2.2.2 Majority Decision Making in Sovereign Debt Contracts: Collective Action Clauses
Collective action clauses (or CACs) are contractual clauses allowing for modifying payment terms (either the amount or the maturity of the bond) across several bond issuances via a vote by bondholders, usually requiring a qualifying majority669. The scope of CACs varies,
ranging from encompassing a single bond issue, aggregating several of them670, or binding the entirety of the bondholders of a sovereign671. Their introduction in sovereign bonds
predates the model shift to restructuring protection, with the first clauses of this type in US bonds being introduced as early as 1997 in Kazakh bonds672.
However, following vulture fund litigation CACs became widespread, with the US treasury673, the IMF674 and the European Stability Mechanism675 pushing for their insertion in all bonds676. Moreover, CACs have been a central element of the Greek restructuring
668 Following the Greek financial crisis notably, purchase of sovereign CDS on southern European debtors has
dramatically risen, seemingly indicating a desire by financial institutions to hedge their positions on bonds emitted by those sovereigns. See IMF, ‘Global Financial Stability Report, Chapter 2: A New Look at the Role of Sovereign Credit Default Swaps’ <https://www.imf.org/~/media/Websites/IMF/imported-flagship- issues/external/pubs/ft/GFSR/2013/01/pdf/_c2pdf.ashx+&cd=4&hl=fr&ct=clnk&gl=uk>.
669 Bratton and Gulati (n 650); Buchheit, ‘Restructuring a Nation’s Debt Capital Markets’ (n 79).
670 Gelpern, ‘How Collective Action Is Changing Sovereign Debt Cover Story’ (n 302); Liu and others (n 90);
Leland Goss, ‘Sovereign Debt Restructuring Made Easy Special Focus: Debt Capital Markets in Association with the ICMA’ (2013) 32 International Financial Law Review 62. Technically, collective action clauses can be divided in four main types: majority action clauses, which enable a majority of bondholder to alter contractual dispositions, collective representation clause, which establish a representative forum for debtor- creditor cooperation, sharing clauses share proceeds obtained from the debtor amongst creditors and acceleration clauses requiring a minimum creditor support for payment acceleration in case of default. Olivares-Caminal, Legal Aspects of Sovereign Debt Restructuring (n 5) 111. When this thesis refers to CACs it only focuses on majority action clauses since they have been the most discussed type of clause, both in the legal scholarship on sovereign debt and in the public sector. Moreover, it seems that market practice similarly has opted for this type of CAC. ibid 111–112. For an early scholarly writing in favour of using CACs see John Taylor, ‘Sovereign Debt Restructuring: A US Perspective. Speech at the Conference “Sovereign Debt Workouts: Hopes and Hazards”. Institute for International Economics’ <https://www.piie.com/commentary/speeches-papers/sovereign-debt-restructuring-us-perspective>.
671 Anna Gelpern, Ben Heller and Brat Setser, ‘Count the Limbs. Designing Robust Aggregation Clauses in
Sovereign Bonds’, Too Little Too Late: The Quest to Resolve Sovereign Debt Crises (Columbia University Press 2016).
672 Megliani, Sovereign Debt (n 50) 59. Prior to this push, CACs had been a usual feature of English law bonds.
Olivares-Caminal, Legal Aspects of Sovereign Debt Restructuring (n 5) 111.
673 Mark Sobel, ‘Strengthening Collective Action Clauses: Catalysing Change—the Back Story’ (2016) 11
Capital Markets Law Journal 3.
674 International Monetary Fund, ‘Strengthening the Contractual Framework to Address Collective Action
Problems in Sovereign Debt Restructuring’ [2014] IMF Policy Paper <https://www.imf.org/external/np/pp/eng/2014/090214.pdf>.
675 Treaty Establishing the European Stability Mechanism (Brussels).
676 Prior to this push, CACs had been a usual feature of English law bonds. Olivares-Caminal, Legal Aspects
The Anti-holdout model 139 process, with large creditors requiring their introduction in Greek domestic bonds before accepting any restructuring offer from the Hellenic State677.
The ICMA has issued a standardised version of the CAC678, allowing for three different voting techniques. The standard clause provides norms regarding the convening and conduct of a meeting of bondholders in order to allow a vote. It also gives guidance regarding the production of written resolutions by bondholders for the same purpose. Under the standard drafting, a restructuring of a single bond issue can be achieved by a “a Single Series Extraordinary Resolution or a Single Series Written Resolution”679 of the bondholders.
The ICMA standard clause defines a Single Series Extraordinary Resolution as:
“a resolution passed at a meeting of Noteholders duly convened and held in accordance with the procedures prescribed by the Issuer and the [Fiscal Agent/Trustee/other bondholder representative] pursuant to paragraph (a) (Convening Meetings of Noteholders; Conduct of Meetings of Noteholders; Written Resolutions) by a majority of:
A. in the case of a Reserved Matter680, at least 75 per cent. of the aggregate principal amount of the outstanding Notes; or
B. in the case of a matter other than a Reserved Matter, more than 50 per cent. of the aggregate principal amount of the outstanding Notes.”681
It defines a Single Series Written Resolution as “a resolution in writing signed or
confirmed in writing by or on behalf of the holders of:
677Mamatas et autres v. Greece (n 18); Boudreau (n 90); Buchheit, ‘Restructuring a Nation’s Debt Capital
Markets’ (n 79).
678 International Capital Market Association, ‘Standard Aggregated Collective Action Clauses (“CACS”) for
the Terms and Condictions of Sovereign Notes’ <https://www.icmagroup.org/Regulatory-Policy-and-Market- Practice/Primary-Markets/primary-market-topics/collective-action-clauses/>. The ICMA is a self-regulatory organisation tasked with providing financial actors, (especially European ones) with standardised contractual provisions in order to improve the overall efficiency of financial market. Ramanna Vishwanath and Chandrasekhar Krishnamurti, Investment Management: A Modern Guide to Security Analysis and Stock Selection (Springer Science & Business Media 2009) 43.
679 International Capital Market Association (n 678).
680 Reserved matter is understood inter alia¸ as any changes to the payment conditions of the bond (payment,
interest rates, principal, maturity, currency), a change on the condition of the vote by bondholders, a change of governing law or competent jurisdiction regarding the bonds, a debt swap or debt conversion, a change to the definition of Reserved Matter, or the issuance of securities or guarantees by the debtor.
The Anti-holdout model 140 A. in the case of a Reserved Matter, at least 75 per cent. of the aggregate principal
amount of the outstanding Notes; or
B. in the case of a matter other than a Reserved Matter more than 50 per cent. of the aggregate principal amount of the outstanding Notes.
Any Single Series Written Resolution may be contained in one document or several documents in the same form, each signed or confirmed in writing by or on behalf of one or more Noteholders.”682.
Thus, payment conditions on a single bond issue can be modified either by obtaining a written agreement by 75% of the bondholders683 or by convening a meeting of the
bondholders during which a vote is issued.
For a restructuring across several issues, the ICMA model clause offers two voting models: Single-limb voting and double-limb voting. Under the first option, modifications to a Reserved Matter across several bond issues requires either obtaining a two-thirds majority of votes across all bonds, organising separate meetings of bondholders for each bond issue or, obtaining a written agreement from 75% of the bondholders684.
Finally, several bond issues can be restructured, under the standardised ICMA CAC via a Multiple Series Two Limb Extraordinary Resolution. A Multiple Series Two Limb Extraordinary Resolution means:
“a resolution considered at separate meetings of the holders of each affected series of Debt Securities Capable of Aggregation (…) which is passed by a majority of:
A. at least 662 /3 per cent. of the aggregate principal amount of the outstanding debt securities of affected series of Debt Securities Capable of Aggregation (taken in aggregate); and
682 ibid.
683 Under the clause, the votes are computed by bond and not by bondhoder. In other words, the rule for CAC
sis one bond = one vote, and not one man = one vote. It should however be noted that certain bonds can be excluded from the count if they are held by the debtor or an entity controlled by the debtor, in order to avoid conflict of interest.
The Anti-holdout model 141 B. more than 50 per cent. of the aggregate principal amount of the outstanding debt securities in each affected series of Debt Securities Capable of Aggregation (taken individually).”685
Several bond issues can similarly via a "Multiple Series Two Limb Written Resolution"686. Under the two limbs voting system a double majority of bondholders need to be reached: a two thirds majority within each bond issue as well as a simple majority across all issues687.
CACs are one of the central features of the contemporary regulatory model on sovereign debt688. Their insertion in the vast majority of sovereign bonds effectively implements
majoritarian debt restructuring at the contractual level. Under the contractual regime inaugurated by CACs, the only way for a bondholder to refuse a modification to their bonds is to acquire a controlling share in bond issues covered by a same collective action clause, a task which, while not impossible, can be extremely costly given the sums involved689.