- within International Law topic(s)
In October 2025 the IMF released the 2025 Debt Stocktaking Policy Paper. This represents the first comprehensive review of documentation relating to international sovereign restructurings since 2020. The paper provides a technical assessment of the strengths and weaknesses in the current system governing sovereign debt resolution with private creditors and highlights areas where the restructuring architecture continues to lag behind the realities of today's creditor base, instruments and legal dynamics. The paper provides useful observations on the documentation of sovereign bond restructurings and emerging contractual features, and signals implications for sovereign' future documentation practices and debt-management frameworks.
Below is a digestible review of the key takeaways of the policy paper aimed at sovereign issuers, financial advisors and banks involved in underwriting, structuring and negotiating sovereign debt transactions, together, where applicable, with practical observations on how market participants should address, and prepare in advance for, the complexities that make large sovereign restructurings costly and time-consuming. We also add at the end a brief description of a recent market development: the London Coalition.
1. Non-bonded commercial debt is a source of fragmentation and delay
Enhancements to collective action clauses in international sovereign bonds have improved the efficiency and predictability of bond restructurings. Yet restructurings increasingly hinge on instruments outside the sovereign bond perimeter, and it is these instruments (such as syndicated loans, trade credits, short-term commercial facilities and collateral-linked arrangements) that now create the bulk of delays and uncertainty, in essence because they typically lack aggregation mechanisms, can be governed by diverse legal frameworks, are often subject to confidentiality provisions, and contain bespoke bilateral terms. In recent debt restructurings, delayed clarity on the scale and composition of non-bonded commercial claims required repeated recalibration of official- and private-sector comparability assessments and prolonged the time needed to define the restructuring plan.
Sovereigns should maintain an up-to-date inventory of all commercial claims and prioritize early engagement with these creditors. Sovereigns should also promote greater consistency in contractual terms across borrowing instruments, including covenant architecture.
2. Comparability of Treatment and Most-Favored Creditor remain pressure points in multi-creditor restructurings
Creditors' emerging push for comparability-of-treatment ("CoT") (the principle that different creditor groups should receive broadly similar levels of debt relief in a restructuring) and most-favored-creditor ("MFC") (contractual or de-facto assurances that no other creditor will subsequently receive more advantageous terms) protections reflects creditor demand for reassurance that concessions they make are not later undermined by a more favorable deal granted to another creditor class.
CoT remains one of the most difficult elements in multi-creditor restructurings, particularly where a sovereign's creditor base spans bilateral official creditors, private bondholders, commercial lenders and providers of secured credit. CoT assessments are difficult to standardize given the diversity of instruments, governing laws and security packages; and debates over valuation methodologies and treatment of collateralized or revenue-linked obligations in the context of setting the rules and bounds for CoT often require repeated recalibration of debt relief parameters across creditor classes, which often becomes a time-consuming and costly undertaking. The issue is exacerbated by MFC protections which further constrain a sovereign's negotiating flexibility by pressuring it to extend the same or better terms across creditor groups.
3. Collateralized sovereign obligations create hidden seniority and distort restructuring outcomes
The growing use of collateral (and collateral-like arrangements) and assigned revenue streams has introduced de-facto seniority that complicate restructuring efforts. Secured or collateral-linked claims can slow progress and limit the range of viable restructuring options, as illustrated by cases such as Malawi, where collateral arrangements with an African export-import bank hindered early agreement among creditors.
Sovereigns should comprehensively map and document all secured exposures and disclose these early in the restructuring process. Clear and complete disclosure strengthens trust, improves comparability assessments and reduces the risk of last-minute surprises that can derail negotiations.
4. Transparency gaps remain a systemic obstacle
While transparency initiatives have improved, meaningful information gaps persist at the outset of negotiations. There are often frequent omissions of key data at the outset of negotiations, including contingent liabilities, quasi-sovereign and SOE exposures, guarantees, domestic debt terms and short-term commercial borrowings. Data on secured or collateral-linked claims is often incomplete, and sovereigns frequently lack a consolidated and up-to-date view of all claims that fall within the restructuring perimeter.
These gaps disrupt the sequencing of negotiations. In several recent restructurings reviewed in the paper, incomplete debt stock information required repeated adjustments to baseline assumptions, slowing progress and undermining creditor confidence.
A key takeaway for sovereigns is that proactive transparency materially improves restructuring outcomes. Sovereigns that enter negotiations with full debt inventory (including contingent liabilities, collateralized exposures, guarantees and short-dated commercial debt) achieve faster and more credible restructuring outcomes. Recent experience has highlighted that early clarity around domestic debt terms and collateral arrangements improved creditor alignment only after initial rounds of confusion and requests for supplemental information.
5. Legal uncertainty persists due to jurisdictional diversity and the rise of non-standard governing law
Sovereign debt portfolios now increasingly include instruments governed by a range of legal regimes beyond English and New York law. This growing jurisdictional diversity fragments the legal architecture of sovereign debt and introduces uncertainty regarding enforcement, creditor coordination and dispute-resolution pathways. The paper notes that the use of non-standard governing laws can increase the risk that creditors pursue different legal strategies and complicate the task of aligning expectations across creditor groups in a restructuring.
Sovereigns are advised to maintain as much consistency as possible in governing law. While issuing under multiple legal regimes may offer short-term flexibility, it increases vulnerability in distress scenarios by expanding the range of enforcement rights and procedural approaches that creditors may invoke. Greater standardization of governing law across future issuances reduces friction and improves clarity during restructuring negotiations.
6. State-Contingent Debt Instruments and Loss-Reinstatement Clauses Add Complexity to Valuation and Comparability Assessments
State-contingent debt instruments ("SCDIs") are bonds or loans whose payment terms vary depending on observable economic conditions such as GDP growth, export performance or commodity prices. These instruments are becoming more prominent within the evolving contractual framework for sovereign debt. Their appeal lies in providing the sovereign with payment flexibility in periods of stress and aligning debt service with macroeconomic conditions. However, because the payment profile of SCDIs evolves with future economic outcomes, they introduce valuation uncertainty and complicate comparisons across instruments during a restructuring. This uncertainty complicates debt-sustainability modeling and raises questions in the context of COT, where creditors expect to benchmark their recoveries against those of others using consistent assumptions.
Loss-reinstatement clauses ("LRCs") are provisions that automatically reinstate principal reductions or adjust bond terms if certain negative events occur in the future, such as another restructuring or a default. These have also emerged in recent sovereign debt restructurings. While LRCs are designed to protect creditors against subsequent deterioration in credit conditions, their conditional re-adjustment of outstanding debt adds a layer of legal and financial contingency that complicates cross-instrument comparisons with different potential future paths. In restructurings involving MFC-style protections, the potential reactivation of LRCs can create uncertainty about whether later settlements with other creditors might trigger adjustments, and how such triggers should be evaluated when determining if one creditor group is being treated more favorably than another.
Recent Development: The London Coalition
The London Coalition for Sustainable Sovereign Debt (the "Coalition") was launched in June 2025 by the UK Treasury and senior private-sector leaders. It has emerged as a new policy platform aimed at advancing market-based reforms in sovereign financing and restructuring. The Coalition brings together officials, investors, financial institutions and restructuring practitioners to develop clearer, more resilient contractual frameworks and to improve coordination among both bonded and non-bonded commercial creditors.
The Coalition is currently organized around two technical workstreams: one focused on innovations in sovereign bond contracts and liquidity-relief mechanisms for vulnerable economies, and another focused on loan-contract features and coordination challenges involving non-bonded commercial creditors. Among its early areas of emphasis is the development of "debt-pause clauses"—contractual standstill mechanisms that would temporarily suspend payments following exogenous shocks. If standardized and incorporated into new sovereign issuances, these clauses could provide more predictable liquidity space during crises. Their effectiveness, however, will depend on clear trigger definitions, majority-voting thresholds and transparent communication across creditor groups.
The Coalition is expected to publish model language and technical outputs in 2026, with the aim of informing broader international processes involving the IMF, World Bank and G20.
Footnote
1. Evan Koster and Juan D. Moreno are, respectively, Partner and Special Counsel at Baker Botts L.L.P. (New York), with extensive experience advising emerging market sovereigns and quasi-sovereigns. The authors have advised governments and dealer managers in some of the most high-profile sovereign debt restructurings of this decade, including in Ghana, Sri Lanka and Ecuador.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
