Columbia International Affairs Online: Working Papers

CIAO DATE: 04/2015

Sovereign Bond Contract Reform: Implementing the New ICMA Pari Passu and Collective Action Clauses

Gregory Makoff, Robert Kahn

February 2015

Centre for International Governance Innovation

Abstract

The International Capital Market Association (ICMA) has recently published proposed standard terms for new, aggregated collective action clauses (CACs). Concurrently, ICMA released new model wording for the pari passu clause typically included in international sovereign bond contracts. These new CACs will make it much harder for holdout creditors to disrupt future bond restructurings or to be paid in full after the other bondholders receive haircuts. These announcements and the commencement of issuance of bonds with these clauses are an important turning point in the evolution of sovereign bond markets. This paper discusses the ICMA consultative process to develop the new clauses, explains the workings of CACs and the history of their adoption, analyzes the effect of the new clauses in reducing holdout activity and discusses the use of bondholder meetings and exchange offers to accelerate the conversion of outstanding debt stocks into the new format.