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1、SOVEREIGN DEBT RESTRUCTURINGSearch for an Optimum Voting ThresholdJoy DeyAugust 2008ABSTRACTSovereigns have been defaulting on their debts over decades now. A sovereign debt default necessitates a restructuring of the debt instrument in order to reduce the size of the debt or lengthen the maturity p
2、eriod. One of the methods of debt restructuring is an exchange offer where the old debt instrument, for example the bond, is exchanged for new debt instruments with altered term and conditions, particularly the payment terms. Whereas some investors may agree to such restructuring and accept the exch
3、ange offer, others might have different aspirations for their investments. A successful sovereign debt restructuring takes place when the debtor has acquired the consent of a pre-determined number of creditors, or the restructuring threshold. The restructuring threshold is, however, a function of tw
4、o critical variables (i) investor confidence: low threshold percentage reflects low investor confidence in the issuer; (ii) success of the restructuring: high threshold percentage makes it difficult to achieve the required number of consenting investors. Thus, maintaining a balance between the two b
5、ecomes crucial for the debtor country. In this article, previous sovereign debt restructuring episodes have been analyzed to study the different threshold levels prescribed by different countries, and an attempt has been made to study whether there is a possibility of an optimum threshold level that
6、 can be prescribed as a supra-national code for all sovereign debt restructurings.INTRODUCTIONI. Why Sovereigns Borrow！Borrowing of money has remained a universal phenomenon throughout the history of mankind, and can be traced back to about 9000 years ago when man invented counting tokens to keep tr
7、ack of trades and obligations. With the advancement of trade and commerce, features of debt and credit have become exponentially widespread and complex. Now borrowing is not limited to only individuals or commercial entities, but even sovereign states resort to commercial borrowing to fulfil their f
8、inancial requirements. Until about the 20th century, borrowing by sovereigns was limited to emergency measures for a short-term to cover particular large expenditures (such as natural calamities, war, etc.). Borrowing has become a perpetual feature for most governments, where new loans are also used
9、 to repay old loans. As long as governments are able to keep the countrys level of indebtedness in check, borrowing to service old loans is considered sustainable. This essay is limited only to the study of sovereign borrowings. With the vision to develop and grow, the developing countries have been
10、 in constant need to borrow, and during the last half a century, the largest source of capital flow has been Debt. Due to the frenzy of modernisation and major railroad and industrial projects, there were drastic lending by commercial banks in the 1970s and 1980s. Most lending was by way of syndicat
11、ed bank loans, until the debt crisis of 1980s, when there was a shift from syndicated loans to bonds. Since the outset of the Brady Plan in 1989, Argentina, Brazil, Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Ivory Coast (Cote dIvoire), Jordan, Mexico, Nigeria, Panama, Peru, the Philippin
12、es, Poland, Russia, Uruguay, Venezuela and Vietnam were able to restructure their unsustainable debt mostly in syndicated loans by the issuance of Brady bonds, which has also been the genesis of an era of sovereign bond defaults and restructuring. “In general terms a bond is a loan by one party (an
13、investor or holder) to another party (the issuer)”. The issuer normally undertakes to pay the investor a fixed interest on the loan on a periodical basis, and at the end of a specified time (term), repay the loan amount (principal). Depending on the terms of the loan agreement, a failure to pay any
14、amount of interest or principal on time could be considered an event of default, triggering strict financial and legal penalties, one of them could be bankruptcy of the borrower. One of the worlds leading financial research and analysis firm - Moodys Investors Service defines a sovereign default whe
15、n one or more of the following situations happen:1. There is a missed or delayed disbursement of interest and/or principal, even if the delayed payment is made within the grace period, if any.2. A distressed exchange occurs, where: a. The issuer offers bondholders a new security or package of securi
16、ties that amount to a diminished financial obligation such as new debt instruments with lower coupon or par value. b. The exchange had the apparent purpose of helping the borrower avoid a “stronger” event of default (such as a missed interest or principal payment).Sovereign defaults results in huge
17、costs to both the debtor country and its creditors, in terms of lost economic activities and lost value of claims. The sovereign debtors inability to service its debt may result in loss of market confidence, and eventually lose access to borrowing from financial markets. Defaults may also result in
18、output losses to the domestic economy, and it could also be an important incentive for debt repayment. Creditors have the obvious monetary loss of their investments. Therefore, it is of utmost importance that a bond be serviced continually in order that the debtor does not default on it.II. Need for
19、 RestructuringCountries face various forms of crises from time to time, like war, civil unrest, natural calamity, epidemic, etc. which result in unforeseen financial constraint on the economy, as a result of which default on bonds becomes imminent. At other times, countries amass unsustainable debt
20、burdens which become impossible to service even if there is no sudden and unforeseen crisis. In such circumstances it becomes pertinent for sovereign borrowers to restructure their debt and achieve a sustainable debt levels. Among other things, restructuring involves rescheduling of interest and pri
21、ncipal payments as well as write-down on the debt principal or interest rate. Since bankruptcy or liquidation is not a viable option in the case of a sovereign borrower, therefore, creditors would consider renegotiating with the debtor for the amount owed. Bond and Eraslan illustrate the process wit
22、h an example: “consider a debtor who owes $100 and values staying in business at $100. Suppose moreover that creditors would obtain only $50 from liquidation. The obvious problem for the creditors is that if the debtor defaults on the $100 owed, and then suggests restructuring the debt so that only
23、$50 is owed, it is in the creditors best interests to accept.”In simpler terms, the creditors could consider giving a second chance to the debtor to pay the debt owed (usually a reduced amount), rather than liquidate the debtor and share the proceeds, which carries more often than not a reduced valu
24、e than what the debtor would be worth if it stayed in business. The premise that an ongoing concern has more economical value than a liquidated one (and that a sovereign cannot be liquidated) is a predominant reason for a sovereigns debt restructuring initiative. In any case, a debt restructuring ce
25、rtainly reduces the utility or monetary value of the creditors claim, compared to the existing debt he holds. Some of the recent sovereign debt restructuring processes has been carried out in Russia (1998), Ecuador (1999), Pakistan (1999), Ukraine (1999) and Uruguay (2003).III. Methods of Restructur
26、ing Sovereign DebtUnlike corporate debt restructuring methods, there is no international statute that is applicable to all nations. The two major approaches that have been put forward for sovereign debt restructuring are: A. Establishment of a statutory framework for International Bankruptcy.This co
27、ntemplates an internationally recognised statute in the form of Sovereign Debt Restructuring Mechanism (SDRM) proposed by the International Monetary Fund (IMF). B. Voluntary & Contractual Arrangements such as Exchange offers, Collective action Clauses and other devices.The SDRM proposed by IMF, anal
28、ogous to the Chapter 11 bankruptcy procedure in the US, is still at conceptual stage and seems to be a herculean task, requiring the amendment of the Articles of the IMF and then drafting the proposal and seeking the ratification of all the member states. Even if the SDRM was to see the light of the
29、 day, sovereigns would not be eager to subject themselves to an international statute. Unofficial sources and news reports claim that the SDRM project has been shelved due to the uncertainty of its success. However, the voluntary and contractual methods have been in use and so far are the topics of
30、current debate and analysis revolves around these. These methods have been greatly advocated and discussed widely among international institutions and scholars, and focuses on writing of bond and loan documents to include clauses that would prevent a minority of creditors from blocking negotiations
31、with the debtor.IV. Contractual RestructuringMost sovereign bonds issued by emerging market follow either the New York law documentation or the English law documentation. Contract terms of the bonds issued under the New York law may not be amended unless a near unanimity of the bondholders is achiev
32、ed.However, English law is more flexible in this account and allow greater ease of restructuring (requiring an approval of a supermajority of 66_% or 75%). This poses a distinct problem to sovereign issuers when they need to restructure their bond, where they have to deal with both New York law and
33、English law. In such situations sovereign issuers carry out an exchange offer or debt swap, whereby an offer is made to the creditors of sovereign bonds to exchange their old bonds in return of new bonds in which the restructuring has been carried out. An exchange offer seeks to replace an outstandi
34、ng debt with relatively low-risk securities. Countries like Argentina announced its exchange offer for its bonds in 2005, Ukraine in 1999 and Ecuador in 2000. A restructured bond may therefore include clauses such as collective action clauses and exit consents in order to ward off the problem discus
35、sed above.Collective Action ClauseCollective Action Clause (CACs) are designed in a way which would bind the minoritycreditors, including any holdout creditors / vulture funds to a restructuring agreement which has been arrived at by a pre-established holding majority. Variants of CACs may include M
36、ajority Action Clauses, Collective Representation Clauses and Cooling Off period Clauses. A two step approach is adopted in this method: initiate negotiations with creditors and commit them to a consensus, and implement the terms of the negotiated instrument. Majority action clauses enable a super-m
37、ajority of bondholders to change the payment terms of the contract, and such change becomes binding for all bondholders. Such majority action clauses also regulate the conduct of bondholder meetings and set quorum requirements, which becomes crucial in amending terms of the bonds. Such clauses may a
38、lso be tailored to restrict bondholders from accelerating the bond or taking recourse to litigation.Exit ConsentIn an Exit Amendment or Exit Consent a pre-determined majority of bond holders participating in a debt exchange would be required to consent to amendments of certain terms of the old bonds
39、. This will render the old bonds less attractive, hence discouraging hold out problems. For example, the bonds could be delisted, the legal jurisdiction could be changed, and acceleration or default clauses could be eliminated.In a debt exchange, a super-majority of bond holders is a crucial element
40、 to the debt restructuring. In past sovereign work-outs, the levels of acceptance were different, e.g. Russia 98% (1998-2000), Ukraine 95% (1998-2000), Ecuador 97% (2000), Pakistan 95% (1999), Uruguay 93% (2003) and Argentina 76% (December 2004). Recently, Mexico has sold about US$ 5.5 billion in bo
41、nds prescribing a super-majority of 75%, soon after Brazil, Belize, Guatemala, and Venezuela issued bonds with 85% super-majority threshold, a level closer to the 95% proposed by the private sector trade associations (Emerging Market Credit Association, 2002). Uruguays exchange of the Samurai Bonds
42、required consent of 66_% bond holders of a series to amend the payment terms.The above examples illustrate that although the use of a super-majority vote has been in place, but there is no consensus on a percentage which could be considered as an optimum threshold. This paper analyses previous works
43、 and attempts to determine why sovereigns choose different thresholds in an exchange offer and whether an optimum threshold for sovereign debt restructuring could be devised.THE OPTIMUM VOTING THRESHOLDI. The Holdout ProblemThe creditors are free to decide whether they want to participate in any res
44、tructuring proposed by a sovereign debtor, which means an exchange offer is not binding on all creditors. Thus, non-participating creditors may hold on to their old bonds and claim full payment. Several sovereign debt restructurings have run into trouble during the early 1990s because of such nonpar
45、ticipating creditors, who are called holdout or rogue creditors, who seek preferential settlements by dissenting. It is most probable that there will be some holdout creditors to every sovereign restructuring, and as long as their number is few, the sovereign may carry on with the restructuring, all
46、owing the holdouts to retain the old bonds or settle their claim. But when they are large in number this does not remain as a viable option. In such cases, the only alternative is to bind all creditors to the vote of the majority. And this is where the debate for sovereign debtors optimum choice of
47、voting threshold started, which can be used as a supermajority and bind even the dissenting creditors.Ever since voluntary and contractual methods have been used for sovereign debt restructurings, numerous doubts were raised about the elusive optimum threshold. Hamilton et al describes the threshold
48、 as the magic number to be achieved by sovereign debtors in order to carry out a successful restructuring. Some of the standard threshold limits being adopted have been compiled by Roubini et al and are discussed below.II. Suggested Voting Threshold Limits1. Bond Contracts based on New York Law unan
49、imity for changing key financial terms, like interest payment and principal amount.2. Bond Contracts based on English Law 75% - to be present and voting for the restructuring.3. The G-10 recommendation of 75% to amend financial terms, similar to the English system.4. The G-6 recommendation of 85% bondholders to amend a bonds financial terms, so long as no more than 10 percent of the bondholders object, effectively making it 90%. Roubini et al further goes on to desc
