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Insights from recent EM sovereign debt restructurings

Market Commentary

11 August 2020



Ecuador recently undertook a successful sovereign debt restructuring in record speed, followed by Argentina after a somewhat more long-winded and volatile process. These are the first two major EM sovereign debt restructurings, since the breakout of the COVID-19 pandemic. Why were they successful? What insights do these two restructurings provide? The first part of this report identifies the five key factors that contributed to successful restructurings in Ecuador and Argentina. The second part of the report discusses two refinements in the framework of Collective Action Clauses (‘CACs’) embedded in the indentures of the new bonds from the Ecuadorian and potentially also the Argentinean exchanges. The refinements eliminate important loopholes that made previous versions of CACs vulnerable to potential abuse by issuers. As such, the new CACs should ensure that sovereign issuers have the freedom they need to propose when they have the required majority, while forcing them to continue to negotiate with bond holders if they do not have the required majority. We expect the innovations to the CACs to become part of the new legal standard for EM sovereigns going forward, to the benefit of issuers and bond holders alike.

 

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