IIF Authors

Status: Will be live at 11/30/2015 00:00

Statement in support of full adoption of ICMA recommendations for enhanced CACs in sovereign bond contracts

Monday, November 30, 2015

The Institute of International Finance in its capacity as Secretariat of the Group of Trustees-- the governing and monitoring body of the Principles for Stable Capital Flows and Fair Debt Restructuring-released the following statement today.

1. We welcome the growing acceptance by sovereign issuers and investors of the recommendations put forward a year ago by the International Capital Market Association (ICMA). The proposals include model aggregated collective action clauses; a model pari passu clause; and a suggested creditor engagement clause for the formation of creditor committees and the engagement by sovereign debtors with these committees.

2. We believe the three elements of the ICMA proposal represent a balanced enhancement of CACs to strengthen the framework for sovereign debt restructuring while providing adequate safeguards for investor rights. A stronger debt restructuring framework will support debt sustainability, restoration of market access, and-critically-economic growth for the country undergoing debt restructuring.

3. In this context, we strongly encourage sovereign issuers and investors to include a creditor engagement clause in bond contracts to help guide market expectations in case a debt restructuring becomes unavoidable. This promotes a timely and orderly resolution of sovereign debt crises, supporting the debtor country to recover and preserve values for all stakeholders.

4. We reiterate the value of implementing the voluntary recommendations of the Principles for Stable Capital Flows and Fair Debt Restructuring. We believe that adherence to the Principles by sovereign debtors and creditors has helped strengthen the framework for sovereign debt restructuring. We note that the ICMA recommendations are fully consistent with these Principles.

5. Inclusion of the ICMA recommendations regarding creditor engagement clauses will send a strong signal of sovereign borrowers' commitment and willingness to partner with the global investor community. Incorporating all three ICMA recommendations would provide a clear indication of support for the reforms to the contractual approach that arose from discussions between key officials, the multilateral institutions, the Paris Club and private sector stakeholders that culminated in the publication of the ICMA recommendations in October 2014.

6. Sovereign debt issuers in both mature and emerging market countries should incorporate CACs (with appropriate aggregation clauses and documentation) in new bond issues denominated in a foreign currency. Inclusion of CACs should be well documented, as exemplified by either the identical CACs used mandatorily by euro area Member States or via investor relations websites maintained by national finance ministries and/or central banks.

7. Effective sovereign debt crisis prevention and efficient crisis resolution is a shared responsibility that requires open dialogue between sovereign debtors and creditors-a key element of the Principles. Such dialogue can help creditors with the due diligence needed for accurate risk assessment.

8. We underscore our strong commitment to promoting adherence to the Principles, which support cooperation between sovereign issuers and private-sector investors in developing a robust and effective framework for sovereign debt restructuring.

9. We will continue to monitor implementation of the Principles for Stable Capital Flows and Fair Debt Restructuring, including via our annual assessment of investor relations practices and data transparency by the most active EM countries in international sovereign debt markets. In this context, the IIF Secretariat will continue to review implementation of the ICMA contract reforms in EM bond issues, and will report to the Group of Trustees via the annual report on implementation of the Principles.

10. We welcome the widespread support for the ICMA contractual reforms, including but not limited to their endorsement by the Executive Boards of the IMF, ICMA and the IIF. We also welcome encouragement at the G20 and IMFC level to promote the use of the enhanced collective action clauses and report on their inclusion.

11. We note that investors and underwriters have a pivotal role in broadening awareness of the benefits of strengthened bond documentation. We will continue to actively support industry efforts including by the IIF, ICMA and EMTA to advocate the benefits of adopting the ICMA contractual reforms. We understand that it will take some time for the full benefits of enhanced CACs to materialize, as a significant proportion of relevant outstanding bonds without enhanced CACs will not mature for some time.