There seems to be some appetite for the recondite stuff here – so let
me draw your attention to a press release with the scintillating title of "Belize
2015 Notes Amended".
The ostensible subject of the press release is that Belize is the first country
in more than 70 years to use a collective action clause (CAC) to modify the
payment terms of a bond. [UPDATE: I meant to add, under New York law.] This is marginally interesting. Reading between the
lines, however, there’s more:
The Government of Belize today announced that holders of the Government of
Belize 9.75% Notes due 2015 have, by the requisite supermajority consent provided
for in the Note documentation, approved modifications of the terms of the
Notes to conform the maturity date and coupon structure of the Notes with
the financial terms of Belize’s new bonds maturing in 2029…
Belize has also announced that it will accept late tenders of the 2015 Notes
into the exchange offer up to February 14, 2007.
You see that final sentence? This is an exchange, where bondholders
are asked to tender their existing 2015 bonds for new 2029 bonds. (Details are
here.) Bondholders
only voted to change the payment terms on the 2015s as they were exiting out
of them anyway – this is known as an exit consent.
The key here is that when the holders of the 2015 bonds voted under the collective
action clause, they were reducing the payment terms on the bond in the certain
knowledge that they would not and could not be affected by that vote –
since they were tendering their bonds to the Government of Belize anyway. The
only people who would be affected were the people who didn’t like the
offer, and wanted to stay out of it. This essentially forces them into the offer
anyway – which it’s why it’s a little bit funny that Belize is accepting
"late tenders" of the 2015s. They end up with the same instrument
either way. (I’m not sure if the new 2029s will be fungible with the old 2015s,
however – they might have different Cusip numbers or tax bases or something
like that, in which case it’s now a no-brainer for any holdouts to enter the
exchange.)
After Ecuador used exit consents in 2000, there was a big backlash, and countries
have been very careful about using them since. What’s more, when CACs were being
pushed by people such as John Taylor at Treasury, those of us who were following
the international financial architecture debate were assured that CACs would
never be used with exit consents: they were an alternative
to exit consents.
It smelled like bullshit then, and it turns out that it was bullshit.
We now know that countries can use exit consents with CACs with impunity. And
although Belize’s exit consents were not particularly coercive, future ones
might well be much, much worse.
(Thanks to Matthew Tubin for the tip.)
Government Press Release about the exchange offer:
http://www.belize.gov.bz/press_release_details.php?pr_id=4223
Felix — two thoughts.
1) I am fairly sure Ukraine used the amendment provisions in its UK law eurobonds to amend the payment terms of those bonds that could be amended in early 00 (or maybe 99 .. tis so long ago). But its biggest bond couldn’t be amended. So I am a bit skeptical of the argument that this is the first use of these clauses in 75 years. Maybe for NY law bonds. But not globally.
2) I am rather surprised that anyone claimed clauses were an alternative to exit consents. That never made sense to me. In a bond exchange world, you would use amendment provisions in conjunction with an exchange, and that means amending the old bonds as you leave. I don’t personally think this is coercive either so long as the old bonds are amended to match the new bonds. It basically replicates a feature of bankruptcy law that allows super-majority voting within a class of creditors. So I would be surprised if the official sector — at least that part of the official sector that employed me at various points in time — ever wrote that CACs would end exit consents, at least in the sense of amending bonds as you were leaving them :).
THat said, the whole debate was often very confused. Exit consents were often used a synonym for amending the non-financial terms of a bond — something that was allowed under NY law (i.e. what ecuador did). And that was contrasted with amending the payment terms. But exit consents, as you rightly note, are really just a technique that makes use of whatever amendment provisions that you have. Ecuador amended the non-financial terms b/c it couldn’t amend the financial terms .. but I honestly don’t see why you would use amendment provisions in any other way. Especially in the context of a complex (multi-instrument) exchange, the exchange offer is central to coordination — calling a meeting of each bond and then voting doesn’t make much sense. everyone bond wants to know the terms similar bonds are being offered. so in that context, it makes total sense to use the amendment provisions in conjuction with an exchange.
and so long as the old bonds are amended to be the new bonds, I don’t see any basis for objecting on unfair coercion grounds. the right to amend with X% is in the four corners of the contract.
Felix —
First, I agree with Setser that the discussion is a bit confused since Buchheit typically framed them as an option for use when majority amendment clauses weren’t available.
I presumed because of this framing that “exit consents” referred to altering the non-financial terms of a contract under NY law – ie the Ecuador (2000) example:
Ecuador and the lawyers engineered the exchange offer’s “exit consent” — by getting rid of the cross-default and negative pledge clauses which enabled Ecuador to hold on to the Brady’s making acceleration a non-issue, and further the bonds were delisted.
So if a Majority Action Amendment is utilized to alter the financial terms of a bond, the same basic effect is being sought whether or not its an “exit consent” under the Buccheit definition – the main differences I would presume would be the voting threshold necessary to design the exit, and the direct ability to kill the value of the old bond by altering the financial terms directly which should be extremely effective in reducing any residual incentive to hold out.
Secondly, you are referring to explicit argument that official sector folks made that CACs and ECs would not be utilized together. I am not even sure I understand why in a world of exchange offers anyone would bind their hands like that, but I presume it was a rhetorical response to fear of exit consents and disapproval voiced by groups like EMCA.
Brad:
1) You’re quite right. My bad.
2) Are you really “rather surprised that anyone claimed clauses were an alternative to exit consents”? Because they did so repeatedly to me, even after I gave them many opportunities to admit that in fact exchange offers would still be the way everything worked, and that therefore exit consents were a sensible thing to use.
As for grounds for objection, yes you’re right that the right to do this is in the four corners of the contract. But it’s a bit like kicking the ladder away once you’ve climbed it: the bond you’re amending is one you’re exiting from and therefore you have no interest in the rights of holders of that bond.
Felix —
Local press accounts of the exchange, like mention that beyond the majority of creditors that have accepted the offer — there are is a creditor who is still in the midst of negotiations:
“Dr. Barnett [Financial Secretary] added that, “…the only remaining commercial creditor of any significant size (the holder of the insured loans) is currently in discussions with the other parties involved in those transactions. We expect that those arrangements will be completed in time to permit the insured loans to participate in the exchange offer.”
Any leads?
Funny thing about sovereign debt: with few exceptions, bond holders have no recourse.
I think there was one Belize loan with some kind of monoline wrap — which means that Belize has to negotiate separately with the insurer. But I’m not sure.