Transparency and professionalism minimise the pain of the citizens – Prof. Buchheit

World-renowned expert Prof. Lee Buchheit advised the Sri Lankan Government to stay the course on the external debt restructuring even though the exercise is most challenging and called for transparency and professionalism to be successful and minimise the pain on the citizens.

Prof. Buchheit said: “All sovereign debt restructurings are always and everywhere painful. It is not a pleasant undertaking but it can be gotten through and the country can return to a position of normalcy.”

“I would tell the Government not to give up hope. It is a difficult and disagreeable process but there is light on the other side,” said Prof. Buchheit, widely considered as a veteran having worked on over two dozen sovereign debt restructurings during his 43-year legal career.

He led the legal teams advising Greece in the 2012 restructuring of Government bonds totalling over 206 billion euros (the largest sovereign-debt workout in history). He also advised the Republic of Iraq in the 2004-08 restructuring of $ 140 billion of debt accumulated by the Saddam regime.

The go-to expert for debt-ridden nations Prof. Lee Buchheit highlightrd some of the thorny issues involved that can prolong the process in Sri Lanka’s debt restructuring.

The two important non-financial clauses in sovereign bond documentation: the ‘collective action clause’ and the ‘pari passu clause’.

The pari passu clause requires the issuer of a bond to maintain the equal ranking of the instrument with its other “senior” indebtedness. It is not a promise by each bondholder to accept equal treatment with its fellow bondholders.

The Collective action clauses (CAC) are undoubtedly helpful to reduce holdout creditor behaviour in a sovereign bond restructuring.  But they are not a complete solution.   It is sometimes fairly easy for a holdout to acquire — on its own or in collaboration with other similarly-minded investors — a blocking position in a particular bond (typically 25 percent of the principal).

For example, in Greece in 2012, the Hellenic Republic had 35 series of English-law governed bonds, each with its own CAC. Only 17 of those series joined the restructuring. Holdout creditors had acquired blocking positions in the other series.

The holdout creditor problem in sovereign debt workouts is a nightmare. Argentina’s $ 68.8 billion in foreign-bonds and Lebanon’s default on $ 1.2 billion debt.

Both remain exposed to the potential cheap tactics of holdout creditors: where funds seek full repayment of their original bonds through litigation, as opposed to participating in debt negotiations.

Interestingly, such an inter-creditor promise is to be found in syndicated bank loans. It is called a “sharing clause” and requires any bank that receives a disproportionate payment to share it with the other members of the syndicate. But sharing clauses have never been used in bond issues.

The use of trust structures in sovereign bonds can discourage holdout creditor interest, at least for bonds that have not matured according to their original terms.  Fortunately, SL ISBs use a trust indenture.


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