Sovereign Bonds Changed by ICMA to Head Off Repeat of Argentina

Sovereign bond contracts are being changed by the International Capital Market Association to prevent a repeat of the wrangling that has marred the restructuring of Argentina’s debt.

The new terms, known as collective action clauses, allow a majority of bondholders to agree changes to bonds that are binding on all investors, ICMA said in a statement. In future, a minority of investors won’t be allowed to undermine a restructuring agreed by 75 percent or more of bondholders.

The proposals are the response to controversies dogging the restructuring of Argentina’s debt, which in July pushed the nation into its second default in 13 years. Zurich-based ICMA represents about 400 of the world’s biggest investment banks, asset managers and debt issuers and sets capital market conventions and standards.

“The potential adverse fallout globally from the default and restructuring of Argentina’s debt demonstrates the importance of having clear, unambiguous contract terms for sovereign bonds,” Leland Goss, ICMA’s general counsel, said in the statement. The new clauses “will make more orderly and efficient sovereign debt restructurings achievable in the future,” he said.

Argentina’s creditors led by billionaire Paul Singer refused to accept terms agreed by the majority of the nation’s bondholders after its 2002 default, which paid investors about a third of the money they had lent. They pursued it through the courts for a decade until the nation was prevented from meeting a July 30 deadline on payments to its restructured bonds.

The new terms would also prevent holdouts using clauses insisting on equal treatment of bondholders being used to obstruct payments that have been agreed during restructurings.

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