In an attempt to increase certainty for investors in emerging market debt, trade bodies have endorsed a standard form of collective action clauses (CACs) governed by English law.
The International Primary Market Association (IPMA) announced the standard form at the end of October. The clauses will be used in emerging market sovereign bond issues that have a fiscal structure and are governed by English law.
The clauses allow a majority of bondholders to amend the terms of a bond issue, making sovereign debt restructurings easier and preventing rogue bondholders from holding out for more money by blocking proposed compromises.
Previously, most emerging market sovereign debt restructurings have been accomplished by way of an exchange offer. Issuers that use the IPMA clauses are not precluded from proposing an exchange if they believe that is preferable to seeking consents.
IPMA also adopted a new recommendation that requires lead managers of debt issues of sovereign issuers to inform co-managers when they are invited into a bond issue whether the issue will include the IPMA standard collective action clauses and financial or other information covenant.
"IPMA's standard form collective action clauses make an important contribution to a voluntary market approach to sovereign debt restructuring. They reflect developments in best market practice since the Mexican government's groundbreaking adoption of CACs in its global bond launched in February 2003," said Robert Gray, chairman of IPMA.
Almost all emerging market sovereigns now include CACs in their bond issues but the exact format of the clauses has varied. IPMA hopes its standard form will establish a definitive market practice.
Trade associations The Bond Market Association, Emerging Markets Creditors Association, Emerging Markets Traders Association, Institute of International Finance, International Securities Market Association and Securities Industry Association have all endorsed IPMA's standard form.