Missing sovereign bond clauses keep door open to holdouts

International efforts to bolster the legal underpinnings of sovereign bonds are being resisted by some countries, raising the prospect that holdout investors will contest future restructurings of debt.

As Greece and Ukraine inch closer towards possible default, a spotlight has been shone on the recent ambitious transformation of government debt issuance undertaken in an attempt to prevent so-called vulture funds from delaying restructuring efforts.

Last year, a group representing the world's largest banks, investors and debt issuers created a new framework for bonds that they hoped would address problems faced during the Argentine debt crisis and Greece's 2012 debt restructuring when holdout investors resisted deals and demanded full payment.

Governments from Kazakhstan to Mexico began to implement the changes almost immediately and the scheme, backed by the International Monetary Fund and G20, was deemed a success.

However a number of countries appear to have quietly opted out of making all of the changes, including Mexico, Tunisia, the Philippines and Ivory Coast, with little explanation for why.

One independent sovereign debt adviser said: "The question is did the countries miss these changes by accident or on purpose?"

A possible explanation may be issuer fears that certain investors will be put off buying debt that limits their bargaining power in the event of a default and so are reluctant to change their bonds and adopt the new framework. Another is that the countries might not be aware of the changes.

"Every time I encounter a country in trouble that needs to restructure its debt, I am struck by the fact that their debt often includes clauses that no one has paid any attention to until that point and that suddenly can become a big problem for them," said Peter Doyle, economist and former International Monetary Fund official.

Tunisia, which said it had included all the changes bar one, insists it supports the new clauses, but could not provide an answer why not all of the changes had been adopted.

In the case of a recent 100-year bond issued by Mexico, the country opted to make subtle alterations to the proposed changes first spotted in March by Aaron Kim, senior vice-president and counsel at Pimco. The changes mean that the same terms will not necessarily apply across all bonds in the event of a debt restructure.

According to a person close to the sale of Mexican debt, the altered wording was simply the result of translating an idea written in English law to a bond issued under New York law. However, the International Capital Markets Association, which created the new clauses, said a New York version that included the missing words had already been agreed when Mexico sold its debt.

Charles Blitzer of Blitzer Consulting says that by omitting certain words, Mexico has given itself the flexibility to collude with favoured investors to the detriment of others if it restructured its debt.

"It's very hard to imagine key words were unknowingly dropped," he said. "I'm puzzled why countries would not adopt these changes - there has been no pushback from the market. I wonder where this has come from and I doubt it's the countries themselves."

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation