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.

Under the new contractual form, a supermajority of bondholders can vote to force non-participating creditors into a restructuring, subject to strong protections against the abuse of minority creditors by the majority. At the same time, the new pari passu clause is designed to prevent the kind of rulings that lead to a disruption in payments to investors, as was the recent case with Argentina. Neutralizing holdout creditors in this fashion is of immense economic importance. It should facilitate more predictable outcomes for debtors and creditors, and fairer outcomes among creditors in situations that require debt restructuring. 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.

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CIGI Papers present in-depth analysis and discussion on governance-related subjects. They include policy papers that present CIGI experts' positions or contributions to policy debates, and background papers that contain research findings, insights and data that contribute to the development of policy positions.
  • CIGI Senior Fellow Gregory Makoff is researches issues in international financial policy, including the management of sovereign debt crises. He is an expert in sovereign debt and an experienced debt capital markets professional.

  • Robert Kahn is the Steven A. Tananbaum Senior Fellow for International Economics at the Council on Foreign Relations in Washington, DC. Robert has held positions in the public and private sectors, with expertise in macroeconomic policy, finance and crisis resolution.