MACROECONOMICS, TRADE AND INVESTMENT E Q U I TA B L E G R O W T H , F I N A N C E & I N S T I T U T I O N S N OT E S Potential Statutory Options to Encourage Private Sector Creditor Participation in the Common Framework Blanca Ximena Talero © 2022 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. >>> Contents 1. Background 4 2. Potential Statutory Options 7 The G20’s Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative (DSSI), known as the Common Framework (CF), was launched in November 2020. Its main aim is to strengthen the international debt architecture for the world’s poorest countries. The framework provides a support structure for official creditor coordination to facilitate timely, orderly, and durable debt treatment and to forge the principles of fair burden-sharing across official and private sector creditors. Only three debtor countries have so far requested treatment under the Common Framework (Chad, Zambia, and Ethiopia) and the process for each of these countries has suffered delays. Limited private sector participation has contributed to the delays. This note takes stock of the inherent imbalance in sovereign debt restructurings between debtor countries and commercial creditors, and of the longstanding challenges with commercial creditor participation in international debt initiatives. It distinguishes between the two approaches to alleviate concerns with holdout creditors in sovereign debt restructuring: contractual (voluntary) approaches and statutory (legal and therefore mandatory) approaches. The international community generally favors contractual approaches to resolve sovereign debt problems. Contractual approaches rely on good faith and have focused on the use of collective action clauses (CACs) in sovereign bonds that allow a supermajority of bondholders to impose restructuring terms on minority holdout creditors. Statutory approaches use specifically designed changes to domestic legislation to incentivize private sector creditor participation in sovereign debt restructurings. This note presents four statutory approaches that countries can consider adopting to encourage private sector creditor participation in the Common Framework. These approaches share a common policy basis: they seek to shield taxpayers of CF creditor countries from exploitation by minority holdout creditors. These approaches seek to limit the amounts that a creditor can try to recover in a legal proceeding outside the Common Framework process: (i) legislation to codify a duty on creditors to cooperate in the context of sovereign debt restructuring; (ii) legislation to limit the amount that a creditor can seek to recover in a legal proceeding if an agreement is reached with a majority of creditors; (iii) legislation to immunize the sovereign debtor’s assets from seizure where said sovereign debtor has already initiated an orderly sovereign debt restructuring process with its private creditors in good faith; and (iv) legislation to retrofit collective action mechanisms into existing debt and debt-equivalent instruments. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 3 >>> Background International sovereign debt restructuring involves clauses (CACs) in sovereign bonds that allow a supermajority an inherent imbalance between debtor countries and of bondholders to impose restructuring terms on minority creditors because bankruptcy regimes do not apply holdout creditors. Statutory approaches rely on legislation to to sovereign nations. Bankruptcy regimes offer a new address creditor holdout, and while these are rare, they have start to debtors unable to repay all their debts; some debts been used successfully to improve the contractual approach are extinguished and creditors can obtain some level of of CACs1. Statutory approaches to incentivize private sector repayment. These regimes demand full cooperation from all creditor participation in sovereign debt transactions range creditors and preclude opportunistic, exploitative behavior from specifically designed domestic legislation to proposals for by individual creditors. National bankruptcy courts can centrally managed sovereign bankruptcy frameworks similar impose debt restructuring terms to enforce this mandate to the Sovereign Debt Restructuring Mechanism (SDRM) despite creditor objections (a so called “cram-down”). The proposed by the IMF in 2001. The international community international sovereign debt resolution (ISDR) architecture is has rejected the idea of a centrally managed sovereign not governed by a centrally managed bankruptcy regime, but bankruptcy regime; this note will look at specifically designed rather relies heavily on negotiated outcomes based on norms domestic legislation. and practices that have been informed by outdated financing sources, instruments and techniques. This ISDR architecture Longstanding challenges dominate commercial creditor also requires the willingness of individual creditors to participation in international debt initiatives. The Heavily participate in sovereign debt workouts and does not include Indebted Poor Countries Initiative (HIPC Initiative), adopted a cram-down mechanism. As a result, debtor countries that in 1996 and enhanced in 1999, requires debtor countries to need debt restructuring and their creditors can be left at the seek relief from commercial creditors on terms consistent mercy of individual creditors that decline to join a negotiated with the Initiative’s full delivery of debt relief. Commercial and consensual restructuring (so called holdout creditors). creditor participation has challenged the HIPC Initiative These creditors “hold out” from the main restructuring on the since its inception, and some commercial creditors and expectation that the sovereign will be more likely to pay them distressed-debt funds have even engaged in litigation in full if the sovereign receives debt relief from most of its against HIPC borrowers. other creditors. The G20’s Debt Service Suspension Initiative (DSSI), Approaches to alleviate concerns with holdout creditors launched in April 2020, further illustrates the challenges can be contractual or legal (statutory). The international of private sector participation in international debt community generally favors contractual approaches to resolve initiatives. The DSSI offered debt payment suspension on sovereign debt problems, these focus on good-faith discussions official sector debts for the poorest countries to create fiscal and negotiations, data transparency, and collective action space to respond to the COVID-19 pandemic. The DSSI called 1. Greece in 2012 and Barbados in 2018 amended their laws to retrofit local law that governed debt with collective action mechanisms and thus facilitated restructuring. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 4 on private creditors to provide debt payment suspension representing a minority of claims determining the amount of on comparable terms with official sector bilateral creditors debt relief that a group of private sector creditors holding the but stopped short of requiring debtor countries to seek majority of those claims should provide. comparable terms. The Institute of International Finance (IIF) prepared a comprehensive toolkit to facilitate private sector To obtain buy-in from private creditors, their expectations creditor participation. This included: (i) the basic framework for on recovery need to be aligned up-front with the executing the DSSI between sovereign borrowers and private expectations of official bilateral creditors. To this end, the creditors, (ii) a template waiver agreement, (iii) a framework World Bank has proposed that private creditors engage in term sheet for non-bonded debt, and (iv) a technical note on coordinated and simultaneous negotiations under the CF as consent solicitations2. Despite the international community’s early as possible4. It has also proposed introducing a single call for broad participation and the IIF’s active support for indicator of NPV reduction based upon a common discount implementation, private sector participation in the DSSI was rate as the only measure of comparability of treatment. limited to a national development bank that participated as a private creditor. Even if the CF is adjusted and can secure private sector support, individual creditor participation remains Successful Common Framework debt restructurings will voluntary but the debtor country “is required” to seek require participation by private sector creditors. In many from them debt treatment that is at least as favorable countries, private sector creditors hold a large amount of as the treatment agreed in the MOU. The experience with claims that may be eligible for Common Framework treatment3. the HIPC Initiative, DSSI, and the attempted restructurings This is in stark contrast with the situation of private creditors under the CF shows how some private creditors may when the Heavily Indebted Poor Countries (HIPC) Initiative refuse to participate in the Common Framework and was introduced in the mid-1990s; at that time private claims provide comparable debt treatment or delay the process. It were small (averaging 5 percent of total public external debt also shows how some creditors may undermine equitable eligible for HIPC debt relief) compared to debt owed to official burden sharing by pushing for more favorable repayment creditors. Most, if not all private sector claims were in arrears terms than participating creditors. It is therefore essential to and private sector creditors were not expected to help provide identify additional mechanisms to incentivize private sector external financing following debt restructuring. The CF cannot creditor participation. succeed without the support and participation of private sector creditors. Specifically designed statutory measures have been successfully used to incentivize private creditor Adjustments and mechanisms are needed to incentivize participation in euro area bonds and in sovereign debt private sector participation in the Common Framework. restructurings governed by domestic law. An important The Common Framework requires a CF debtor country example of a statutory approach to mitigate holdout creditor that signs a memorandum of understanding (MOU) with risk is the adoption by treaty of a mandatory standardized participating creditor countries to seek debt treatment from collective action clause (CAC) in all euro area government its other creditors that is at least as favorable as that of the securities5. As a result of Article 12(3) of the Treaty Establishing MOU. This means that official bilateral creditors decide the the European Stability Mechanism (ESM), CACs are now amount of debt relief to be provided by all creditors, and the required for all securities issued by euro area member States debtor country must then obtain comparable treatment from with a maturity greater than one year, and member States private sector creditors. Given the large amounts of debt that have now agreed to amend the ESM treaty to require single- sovereigns owe to private creditors, the current CF approach limb CACs from 2023 onwards. Other examples include could give rise to a group of official bilateral creditors local law amendments in Greece in 2012 and Barbados in 2. IIF published the Terms of Reference for Voluntary Private Sector Participation in the DSSI in May 2020, with a basic framework for how the DSSI could be executed between sovereign borrowers and private creditors. In July 2020, the IIF published a Template Waiver Agreement to be used in connection with bilateral and syndicated loan arrangements to waive default events that could arise from a sovereign creditor’s announcement of its intention to participate in the discussions with the official sector, and any agreement with the official sector. In December 2020, the IIF published (i) an addendum to the TORs, (ii) a Framework Term Sheet for a voluntary debt service suspension framework agreement for non-bonded debt, and (iii) a technical note on consent solicitations to inform sovereign issuers of aspects to be considered prior to embarking on a process of soliciting the consent of bondholders to suspend debt service on DSSI terms. 3. Based on World Bank IDS, as of December 2020 the amount of public and publicly-guaranteed debt held by private sector creditors exceeds that held by bilateral creditors in approximately one quarter of DSSI eligible countries. 4. See recent World Bank note: https://documents1.worldbank.org/curated/en/426641645456786855/pdf/Achieving-Comparability-of-Treatment-under-the-G20-s- Common-Framework.pdf). 5. In general, CACs allow for a supermajority of bondholders to impose restructuring terms on minority holdout creditors. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 5 2018 to retrofit local law governed debt with collective action As part of the Common Framework creditor countries have mechanisms to facilitate restructuring. agreed to reduce or stretch out their taxpayers’ claims against the debtor country. Private sector creditors should not be In addition to adjusting the CF to allow up-front alignment allowed to, in effect, exploit those taxpayer concessions by of recovery expectations, G20 countries could consider insisting on a preferential monetary recovery. Moreover, the enacting legislation to encourage private creditor success of private sector creditors in obtaining a preferential participation in the Common Framework. This legislation recovery will reduce the likelihood that a CF debt workout would seek to inhibit preferential recoveries if a creditor will be successful in restoring the debtor country to debt chooses not to participate in a CF debt restructuring. sustainability and that, in turn, increases the chances that Without broad private sector support of the CF, statutory the debtor country will need to seek further concessions from approaches to incentivize private sector creditor participation those same taxpayers. These statutory options can be viewed could be perceived as an imposition on creditors holding the as measures taken by national legislatures to shield their own majority of claims by creditors representing a minority of those taxpayers from exploitation by third parties — something that claims. CF-based statutory options, therefore, assume that national legislatures do all the time. the CF is adjusted to ensure broad private sector creditor support and would focus on preventing holdout creditors. To Statutory measures adopted in the legislation of financial facilitate consistent adoption and implementation of statutory centers across the world could help protect sovereign measures across key jurisdictions, the Common Framework debtor countries from the actions of a few holdout should also include a straightforward methodology for creditors. Significant volumes of sovereign debt are governed assessing Comparability of Treatment (COT) between the by the laws of key jurisdictions, such as New York and England, debt relief to be provided by official creditors, and the debt and sovereign assets are frequently located in financial centers relief to be provided by commercial creditors6. CF-based across the world. Statutory measures adopted in these key statutory approaches must be carefully structured to minimize jurisdictions can have a significant impact. When sovereign unintended negative side effects, including on secondary debt restructuring becomes necessary, most private sector markets and the future capacity of sovereign borrowers to tap creditors engage in good faith voluntary negotiations. Only international debt markets. Statutory approaches should seek a small minority seek to recover preferential amounts at the to facilitate an effective voluntary debt restructuring agreement expense of other private sector creditors. Statutory measures by incentivizing creditor participation in the Common that disincentivize this refusal to participate in sovereign debt Framework and fair burden-sharing among creditors. restructurings favored by a majority of private creditors will remove some of the leverage that holdout creditors have There are strong policy justifications for national under the current ISDR architecture. legislatures to consider enacting legislation to encourage private creditor participation in the Common Framework. 6. See Rivetti, at: https://documents1.worldbank.org/curated/en/426641645456786855/pdf/Achieving-Comparability-of-Treatment-under-the-G20-s-Common-Framework.pdf EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 6 >>> Potential Statutory Options Key financial centers can explore the following statutory sector’s Principles for Stable Capital Flows and Fair measures: (i) legislation to codify a duty on creditors to Debt Restructuring7. Legislation could be passed in cooperate in the context of sovereign debt restructuring; (ii) key financial centers, such as New York, confirming the legislation to limit the amount that a creditor can seek to recover existence of this implied duty to cooperate in a sovereign in a legal proceeding if an agreement is reached with a majority workout process when certain conditions are met. In the of creditors; (iii) legislation to immunize the sovereign debtor’s context of the Common Framework, the legislation could assets from seizure where said sovereign debtor has already provide that a creditor is under a duty to cooperate in initiated an orderly sovereign debt restructuring process with a Common Framework debt restructuring if the debtor its private creditors in good faith; and (iv) legislation to retrofit country’s debt has been assessed as unsustainable by collective action mechanisms into existing debt and debt the joint IMF and World Bank DSA and the creditor was equivalent instruments. invited to participate on comparable terms. 1. Creditors’ Duty to Cooperate in a Sovereign Debt In contrast to other jurisdictions like New York, Workout Process English law does not impose a general obligation to negotiate or perform contracts in good faith8. Legislate a duty on all sovereign borrower creditors The English law approach is based on the desire to act in good faith and participate in debt workouts to avoid uncertainty and addresses: (i) the validity on comparable terms with other creditors if the and efficacy of commercial contracts, (ii) the need to country’s debt is assessed as unsustainable. Given preserve the freedom of the parties by allowing them to the lack of a sovereign bankruptcy framework, the duty act in accordance with their own commercial and self- on parties to a sovereign debt contract to act in good interests, and (iii) the difficulty in defining precisely what faith can be considered to imply a duty on creditors to “good faith dealing” means. English courts, however, cooperate in a sovereign debt workout process, and have increasingly shown willingness to give effect to to not exploit concessions made by other creditors. specific contractual terms requiring parties to act in good The duty on parties to a contract to act in good faith is faith if the contract expressly provides for that duty, if included in many legal systems. New York commercial it specifies what acting in good faith means, and also law provides that: “Every contract or duty within this Act includes objective criteria. English law’s reticence to imposes an obligation of good faith in its performance recognize a general duty of good faith should not per or enforcement.” (NY UCC§1-203). Good-faith debt se be an impediment to legislate sovereign creditors to restructuring negotiations is also an industry principle participate in Common Framework debt restructurings. and is one of the essential cornerstones of sovereign Following the approach used by English courts to debt crisis management and resolution under the private recognize an express duty in contracts, legislation could 7. Principles for Stable Capital Flows and Fair Debt Restructuring, 2021 Report on Implementation by the Principles Consultative Group. 8. See Calvert, Bond, and Houlihan, Good Faith in English Contract law (March 1, 2022), The National Law Review, Volume XII, Number 146 available at: https://www.nat- lawreview.com/article/good-faith-english-contract-law#:~:text=Under%20English%20law%2C%20there%20is,the%20negotiation%20of%20commercial%20contracts. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 7 establish an express duty on sovereign creditors (and adopted by England under its Debt Relief (Developing sovereign debtors) to act in good faith and cooperate in Countries) Act 2010 (the UK 2020 Act)9, Belgium Common Framework debt restructurings. addressed this more comprehensively in its 2015 law against vulture funds10. The UK 2010 Act sought to limit Potential impact on secondary markets. Two classes the ability of litigating creditors to use the English court of investors participate in the secondary market for system to try to recover in full debt eligible for debt relief the purchase of rights in distressed sovereign debt under the HIPC Initiative (HIPC-eligible debt). It prevents instruments: (i) those who purchase claims in the creditors of HIPC-eligible debt from suing in English passive hope that they will be able to sell their claims courts to enforce payment on terms more favorable than for an amount that will reimburse their acquisition cost, the terms agreed under the HIPC Initiative. The Belgian cover the cost of financing the purchase price for the law is more far-reaching and applies to the debt of any time they hold it, and produce a profit for the purchaser sovereign, it is also focused on curtailing enforcement (distressed debt investors); and (ii) those who purchase by secondary-market purchasers. Furthermore, it claims at a deep discount with the intention of forcing limits a creditor’s ability to seek enforcement of a claim a settlement of the claim at a level higher than that that the judge determines is clearly disproportionate accepted by more passive investors (so called “vulture to the price that the debt was purchased for in the funds”). Distressed debt investors bring important and secondary market. needed liquidity to sovereign debt markets, while vulture creditors buy claims with the express intention of seeking The impact on distressed debt investors of limiting preferential recoveries through legal enforcement of the amounts that creditors can recover in legal the underlying instrument. Incentivizing private creditor proceedings is expected to be limited. Potential participation in the Common Framework by legislating a negative impacts can be mitigated by restricting this duty on creditors of a sovereign borrower to cooperate option to restructurings that have been agreed to by in a debt workout is likely to have only limited impact on a supermajority of creditors. The UK 2010 Act was secondary markets for distressed debt investors. adopted more than a decade ago and despite fears of a negative reaction by the market, it has been accepted 2. Limit creditor recoveries by commercial creditors. There are, however, important differences between the HIPC Initiative and the This would entail legislation to incentivize private Common Framework that may impact how commercial sector creditor participation in Common Framework creditors and distressed debt investors respond. The restructurings by limiting the amounts that creditors HIPC Initiative had been in place for 14 years by 2010, can recover in legal proceedings if an agreement is but the amount of commercial debt subject to HIPC debt reached with a majority of creditors. Legislation in key relief was relatively small, and there were longstanding financial centers could limit the amount that a sovereign concerns that the Initiative’s goal of proportional burden- creditor could obtain in the courts of that particular sharing among creditors was being undermined by jurisdiction if a debt restructuring agreement is reached commercial creditors pursuing litigation and getting with a majority of creditors. Permissible recoveries would paid back on more favorable terms than most bilateral be tied to amounts recovered by other creditors under and multilateral creditors11. The Common Framework is the Common Framework. For this to work the Common currently in the early stages of implementation, and the Framework needs to contemplate a straightforward and amount of commercial debt that may require Common clear methodology for assessing COT between official Framework treatment is large. Under the HIPC Initiative, and commercial creditors. This would facilitate a judge’s official claims made up the majority of HIPC-eligible decision on amounts recoverable by litigating creditors. debt, and the UK 2010 Act sought to enforce a voluntary and consensual decision of the majority of creditors on a There are successful statutory precedents for small minority. limiting creditor recoveries. Limiting the amount that creditors can recover in legal proceedings was partially 9. UK Debt Relief (Developing Countries) Act 2010, available at: https://www.legislation.gov.uk/ukpga/2010/22/contents 10. Loi relative à la lutte contre les activités des fonds vauteurs 2015, available at: http://www.ejustice.just.fgov.be/mopdf/2015/09/11_1.pdf#Page7 11. Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) – Status of Implementation, Development Committee, DC20007-0021, September 28, 2007. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 8 Given the large proportion of commercial debt 3. Immunize Sovereign Assets from Attachment that may require debt relief under the Common Framework, limiting the amounts that creditors can This approach would entail adopting legislation recover in legal proceedings should only apply to that seeks to incentivize private sector creditor situations where restructurings have been agreed participation in CF restructurings by limiting the to by a supermajority of creditors. Otherwise, this ability of creditors to attach or seize sovereign statutory approach could result in an imposition by a debtor assets. The legislation would limit a creditor’s group of official creditors representing a minority of ability to enforce a judgment, instead of limiting the claims on a group of commercial creditors holding a amount of a judgment that a creditor can obtain. Existing majority of those claims. Commercial creditors and sovereign immunity laws already provide significant distressed debt investors may be able to take comfort protection of sovereign debtor assets. The CF-based in the Common Framework’s limited application to legislation would further immunize from attachment any situations where the need for debt treatment, and its assets or revenue streams of a sovereign undergoing restructuring envelope will be based on a joint IMF- (or that has undergone) a Common Framework debt WB Debt Sustainability Analysis and a collective workout if the claim holder declined to participate in CF assessment of the official, participating creditors, which debt restructuring on comparable terms, despite being will be consistent with the parameters of an upper credit eligible. Such legislation could be standalone, or it could tranche (UCT) IMF-supported program. These stringent be an amendment to existing sovereign immunity laws requirements ensure that the Common Framework will or other financial related legislation. France adopted only apply in situations where debtor countries require a law in 2016 that restricts the ability of French courts debt restructurings. An additional element that may call to authorize seizure of foreign State assets to satisfy for a limited negative impact on secondary markets is certain debts of an ODA recipient12. that distressed debt investors do not purchase claims with the intention of seeking preferential recoveries This approach can protect a sovereign debtor’s through legal enforcement of the underlying instrument. assets even if a judgment has been rendered for a 12. LOI n° 2016-1691 du 9 décembre 2016 relative à la transparence, à la lutte contre la corruption et à la modernisation de la vie économique, available at: https://www.legifrance.gouv.fr/jorf/id/JORFTEXT000033558528#JORFARTI000033558576 EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 9 higher amount. As such, it is not affecting the contractual like framework could impose collective decision-making rights of creditors, instead, it restricts some of the on all creditors to a sovereign debtor regardless of the remedies available to creditors to enforce a judgment. law governing the actual underlying debt instruments. This approach would be particularly impactful if adopted Such framework could extend to official and private in jurisdictions where sovereign debtors traditionally sector creditors, and could apply to outstanding and hold assets. The Common Framework methodology new debt. Targeted legislation that focuses exclusively would need to be straightforward and simple to assess on retrofitting a collective action clause (as in Greece COT between official creditors and commercial creditors or Barbados) would only apply to debt instruments under this approach, as in the case of legislation to governed by the laws of the jurisdiction that adopts restrict creditor rights. This would facilitate the judges’ this legislation and would not apply to debt instruments determination of which assets are to be protected governed by the laws of a different jurisdiction. It from seizure. would not apply to bilateral official debt governed by a bilateral lender’s law (for example loans by the French Potential impact on secondary markets: The impact Development Agency (governed by French law)) or to on distressed debt investors of limiting the ability of commercial debt instruments governed by different creditors to attach or seize sovereign debtor assets is laws (an English law retrofitting CACs into English law- expected to be limited because of existing sovereign governed debt instruments would not apply to New immunity laws. As is the case with statutory measures York law-governed debt instruments and vice versa). that could limit creditor recoveries, potentially negative The impacts of a statutory retrofitting of collective impacts are also mitigated for distressed debt investors action mechanisms will extend beyond distress debt because they do not purchase the claims with the investors. Sovereign creditors are likely to view it as a intention of seeking preferential recoveries through legal retroactive impairment of contract rights in ways which enforcement of the underlying instrument. they did not foreseen or expect at the time the contracts were executed. 4. Retrofitting collective action mechanisms There is also the risk that retrofitting a collection This approach would entail adopting legislation to action clause could be found to be unconstitutional. retrofit collective action mechanisms into existing The Contract Clause of the US Constitution prohibits debt contracts. Greece in 2012 and Barbados in State governments from specifically legislating to 2018 amended their domestic law to facilitate debt interfere with private contract rights. As such, any New restructuring by retrofitting collective action mechanisms York law focused on retrofitting collective action clauses into debt instruments governed by their laws. In each would need to avoid being considered unconstitutional case, the legislation provided for a dissenting minority of under this Clause. debt holders to be bound by the vote of a supermajority to accept a sovereign debt restructuring proposal. Collective action mechanisms imposed by law Proposals have been made to build on this domestic on future debt governed by laws of a particular statutory approach by adopting similar legislation in jurisdiction would not face the same legal risks and jurisdictions whose laws govern significant volumes of may be a more feasible option. Such mechanisms sovereign debt. New York lawmakers have introduced would apply to new debt only, not existing debt, and draft legislation to allow unsustainable sovereign would therefore not focus on incentivizing participation in and subnational debt to be restructured through new the Common Framework. Over time such mechanisms procedures that would be added to the existing New would, however, help minimize the risk of holdout York banking law13. creditors when a sovereign debt restructuring becomes necessary. This forward-looking approach has been Legislative retrofitting of collective action clauses adopted for euro area government securities with would only apply to debt instruments governed maturities of more than one year issued on or after by the laws of the jurisdiction that adopts the 1 January 2013 by Article 12(3) of the Treaty of the legislation; its impact will extend beyond distressed European Stability Mechanism and has recently been debt investors. A broad-ranging sovereign bankruptcy- revised to introduce single-limb CACs. There are ongoing 13. NY Senate State Bill 6627, https://www.nysenate.gov/legislation/bills/2021/S6627 EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 10 discussions by sovereign debt market participants other creditors14. Legislation that limits the amount on introducing, on a voluntary basis, majority voting of a judgment that a sovereign creditor can obtain in provisions into commercial loan agreements. the courts of a particular jurisdiction or that limits the ability of creditors to attach or seize sovereign debtor This note has focused on statutory options to assets could be tied to amounts recovered by creditors incentivize private sector creditor participation in that have restructured collectively. Collective action the Common Framework, equivalent options may mechanisms can be imposed by law on all future debt be explored outside the Common Framework. governed by laws of the particular jurisdiction. Further Statutory options can seek to incentivize private sector analysis would be required on statutory options that are creditor participation in debt restructuring favored by a outside the Common Framework. majority of creditors, regardless of whether or not the restructuring is done under the Common Framework Private sector creditors are likely to resist statutory umbrella. This type of approach would address any approaches, arguing that all aspects of a sovereign potential risks inherent in CF-based statutory options; debt restructuring workout should be voluntary. for example, that CF-eligible debt becomes a separate Private sector creditors, however, do not expect a purely asset class that pays a premium over non-CF-eligible voluntary workout process for loans they make to entities debt. Carefully designed statutory approaches that target subject to bankruptcy regimes. In fact, public policy increasing the ability to complete a debt restructuring applicable to restructurings in corporate debt workouts agreed by a supermajority of creditors could improve requires private sector lenders to abide by the decision the sovereign debt restructuring process while avoiding of the supermajority of their fellow lenders. The potential negative impacts on the ability of sovereign debtors options for a statutory mechanism to achieve equivalent to access financing. Legislation could be passed that results in the world of sovereign debt are precisely imposes a duty to act in good faith on all commercial what creditors live with in all corporate loans. Relying creditors that hold debt instruments governed by the on purely voluntary approaches developed by private laws of the particular jurisdiction and to participate in sector creditors does not always deliver the expected a sovereign debt workout on comparable terms with results in a timely manner15. 14. See Buchheit, Lee C. and Gulati, Mitu, The Duty of Creditors to Cooperate in Sovereign Debt Workouts (December 6, 2021), Virginia Public Law and Legal Theory Research Paper No. 2021-51, Virginia Law and Economics Research Paper 2021-26, available at SSRN: https://ssrn.com/abstract=3950529.w 15. In past restructurings, the average difference in NPV reduction (i.e., the haircut) between the official and the private creditors has been greater than 20 percentage points. (Schlegl M., Trebesch C., Wright M., The Seniority Structure of Sovereign Debt (2019). CESifo Working Paper No. 7632, available at SSRN: https://ssrn.com/ abstract=3387668.) At times important private sector-led voluntary initiatives have failed to gain timely traction within the private sector community. Examples include the lack of private creditor participation in the DSSI, despite the IIF’s comprehensive toolkit to facilitate private sector creditor participation and the delay in implementing the IIF’s June 2019 Voluntary Principles for Debt Transparency covering debt financing provided by private sector entities. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE <<< 11