This article explores the process of sovereign debt restructuring and considers how recent developments, including stronger Collective Action Clauses (CACs) and new legislative measures and protocols, might impact future restructurings.
The period of relatively stable sovereign debt markets is over.
Growing numbers of sovereigns are either close to defaulting on bond payments or have already done so. 135 countries are "critically indebted" according to the Global Sovereign Debt Monitor 2022, and the twin crises of COVID-19 and the war in Ukraine have increased instability. There is also increased financial pressure on economies which are dependent on tourism and struggling to afford energy imports.
Unlike corporate debtors, there is no insolvency regime applicable to countries; however, there are a number of features that are common to sovereign debt restructurings, which we have set out below.
PARTICIPANTS IN THE SOVEREIGN DEBT MARKET
THE PROCESS
HOLDOUT CREDITORS
Holdout creditors are often distressed debt investment funds that purchase defaulted sovereign debt on the secondary market at a fraction of the face value with the specific purpose of not participating in any restructuring and seeking to recover the full face value of the debt.
Preventing the sovereign debt restructuring is generally not in the interests of the holdout creditor; indeed, once a restructuring has been completed, the sovereign is in a better financial position to meet their demands. Rather, their aim is to receive a better return or be paid to sell out of their bond position. Holdout creditors will use litigation to obtain judgments and seize the sovereign's assets abroad where they can, in an attempt to pressure sovereigns to pay up.
PREVENTING HOLDOUTS
Due to the impact holdout action can have on the restructuring process, the economic and social stability of the sovereign, protracted litigation, and delayed debt relief, a number of approaches have been developed to counteract these creditor actions:
RECENT RESTRUCTURINGS
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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