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Restructuring Sovereign Bonds: Holdouts, Haircuts and the Effectiveness of CACs

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Sovereign debt crises are difficult to solve. This paper studies the “holdout problem,” meaning the risk that creditors refuse to participate in a debt restructuring. We document a large variation in holdout rates, based on a comprehensive new dataset of 23 bond restructurings with external creditors since 1994. We then study the determinants of holdouts and find that the size of creditor losses (haircuts) is among the best predictors at the bond level. In a restructuring, bonds with higher haircuts see higher holdout rates, and the same is true for small bonds and those issued under foreign law. Collective action clauses (CACs) are effective in reducing holdout risks. However, classic CACs, with bond-by-bond voting, are not sufficient to assure high participation rates. Only the strongest form of CACs, with single-limb aggregate voting, minimizes the holdout problem according to our simulations. The results help to inform theory as well as current policy initiatives on reforming sovereign bond markets.

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  1. The policy debate is summarized in Krueger (2002), United Nations (2012, 2016), International Monetary Fund (2013, 2014, 2016), Buchheit et al. (2013a, b), Relatedly, Schumacher et al. (2015), and Schumacher et al. (2018) show that more than half of recent sovereign debt restructurings involved creditor litigation.

  2. See, for example, Becker et al. (2003), Eichengreen and Mody (2004), Bardozzetti and Dottori (2014), Bradley and Mitu (2013), Carletti et al. (2017), Picarelli and Aitor (2018), and Chung and Papaioannou (2020).

  3. Schumacher et al. (2015) examine the determinants of sovereign debt litigation, but do not explore the role of CACs or the size of holdouts due to a lack of data on these.

  4. These majority thresholds apply if the issuer seeks consent by creditors by means of a “written resolution.” Alternatively, a physical bondholder meeting can be called, at which the majority thresholds are higher (75% on aggregate and 66 2/3% at the bond level), and attendance at the meeting needs to reach a quorum of 66 2/3%.

  5. Perhaps surprisingly, there is also little evidence on the use of CACs in the corporate context. To some extent, this might be driven by the fact that CACs cannot be included in most corporate bonds issued under US law following the enactment of the statutory bankruptcy regime under Chapter 11 in the US and the 1939 Trust Indenture Act (Buchheit and Gulati 2004, 2020; Weidemaier and Mitu Gulati 2014). English-law corporate bonds usually contain CACs. Yet, to our knowledge there is no research analyzing the effectiveness of CACs on creditor participation in English-law corporate debt workouts.

  6. We exclude restructurings of bonds that went into default in the interwar years (some bond defaults of Communist countries were settled only decades afterwards). See Meyer et al. (2019) for an overview of historical sovereign debt restructurings.

  7. US Treasury Secretary Nicholas Brady advocated the exchange of non-performing bank loans into bonds to resolve the Latin American debt crisis of the 1980s. These bonds were typically collateralized by US Treasury bonds. See, for example, Cruces and Trebesch (2013) or Federal Reserve System (1998) for more details on the Brady deals.

  8. Panama’s 1994 bond exchange restructured only USD 452 million compared to the USD 3,936 million in sovereign bank loans that were restructured in the 1996 Brady agreement.

  9. Argentina in 2005 allowed some strip bonds to be tendered just like stand-alone bonds, but others had to be tendered together with the remaining parts of the original bonds. Belize in 2006 allowed all strip bonds to be tendered separately, but only reported participation outcome on the original bond level.

  10. This was because the last fixing of the yield to maturity on the benchmark bonds to which the coupon rate was indexed spiked after the default. For more information on these FRANs, see Levine (2016).

  11. For Uruguay 2003, International Monetary Fund (2003) has a detailed anatomy on bond-level participation and Sturzenegger and Zettelmeyer (2006) and Sturzenegger and Zettelmeyer (2008) offer additional details on the domestic bonds. For Argentina 2005, we derived bond-level holdout rates from the difference in eligible amounts between the 2005 exchange offer and the 2010 exchange offer (Schumacher 2014) and cross-checked our haircut and other calculations with Sturzenegger and Zettelmeyer (2006), Sturzenegger and Zettelmeyer (2008) and Cruces and Samples (2016). For Greece, we use the holdout information from Zettelmeyer et al. (2013) and cross-checked our haircut and other calculations with it.

  12. Recently, Asonuma et al. (2020) have proposed the concept of the sovereign “exchange recovery rate”, captured by the ratio of the price of the new instrument immediately after the exchange to the price of the old instrument prior to the exchange. This approach is in the spirit of Moody’s and S&P who measure corporate bond recovery values using market prices (see Meyer et al. 2019 for a discussion).

  13. Cash payments can be generalized as zero-coupon bonds without a maturity date.

  14. We focus on a window of seven days from the settlement day and take the earliest available price and yield for the new bond(s) using either Bloomberg or JP Morgan database of bonds underlying the EMBI. When there are multiple new bond series, we use the same pricing source for all of the new bonds in each restructuring. The only exception is Argentina 2005, where no single source covers all new bonds and we use a combination of Bloomberg and EMBI as well as prices and yields in Sturzenegger and Zettelmeyer (2006) and Sturzenegger and Zettelmeyer (2008). These three sources are consistent with each other for the bonds in overlap.

  15. For example, Argentina 2005 had nine series of new bonds, each with a different exit yield, ranging from 9.353% to 10.602%. Moreover, following Sturzenegger and Zettelmeyer (2006), Sturzenegger and Zettelmeyer (2008), we look at exit yields on not only the new bonds but also the existing bonds that are serviced throughout and excluded from the restructuring.

  16. For restructurings where only one exit yield is observed, we follow Sturzenegger and Zettelmeyer (2006) and Sturzenegger and Zettelmeyer (2008) and adjust the discount rate by maturity using the US Treasury yield curve.

  17. In the regression analysis, we treat the Greek restructuring in 2012 as a single case comprising both the foreign and domestic-law bonds.

  18. The fact that offers are more-or-less uniform also follows the bankruptcy logic – all debt is reduced to “claims” after the bankruptcy filing, without regard to pre-bankruptcy financial terms. Bankruptcy classification of creditors tends to follow legal and functional classifications (e.g., seniority of the claim), not financial features of the claims. Similarly-situated creditors are put in the same class and receive the same treatment.

  19. As illustrated in Appendix, the size of losses is driven by face value reduction, coupon reduction, maturity extension, or other ways of reducing the present value of the exchanged bonds.

  20. To check this point more explicitly, we estimated a regression using haircuts as dependent variable and a binary indicator of CACs as the explanatory variable, controlling for deal fixed effects. We find that the coefficient is small and insignificant, further alleviating concerns that CACs drive haircut size within the same deal.

  21. We also used alternative cut-off values in the probit regressions, ranging from 5% to 25%. The results on the haircut and CACs variables are robust to these alternative definitions of the outcome variable.

  22. Because our baseline regression contains deal fixed effects, any unobserved country-specific effects should be accounted for in the regression analysis in the previous section.

  23. We could not find information on whether CACs were triggered in Dominica 2004 or Grenada 2005.

  24. We report the results for the Greece’s foreign-law bonds separately from the domestic-law bonds for illustrative purposes only. In the regression analysis, we treat the Greek 2012 restructuring as a single case.

  25. In Pakistan 1999, despite the legal advisors’ suggestion to use CACs, the government was concerned that a bondholder meeting would vocalize opposition and decided to keep the exchange voluntary. See International Monetary Fund (2001, p.30-31). While also Grenada 2005 appears to be a case in which CACs were not used despite reaching the required participation threshold, we could not determine a reliable source to confirm this assumption.

  26. The same thresholds are applied in written resolutions in the euro area version, even though higher thresholds apply in the case of physical bondholder meetings, see footnote 6.

  27. The aggregate participation rate at 80.3% in our sample is slightly higher than what is reported in other sources such as Sturzenegger and Zettelmeyer (2006, 2008), and Moody’s (2013a, b). The reason is that, as mentioned in Sect. 2, we exclude coupon and principal strips for which crucial contractual information (such as governing law) is missing. We cover 145 of the 315 eligible securities listed in the exchange offer, and the coverage is comparable to Schumacher (2014) and Cruces and Samples (2016) and twice as large as Sturzenegger and Zettelmeyer (2006, 2008).

  28. We treat domestic-law and foreign-law bonds separately in this simulation exercise for illustrative purposes. We treat Greece 2012 as a single deal in the regression exercise.


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Correspondence to Chuck Fang.

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This paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB. We thank Tamon Asonuma and Michael Papaioannou for sharing data. We also thank the editors Emine Boz and Linda Tesar, our discussants Marcos Chamon and Philippa Sigl-Gloeckner, conference participants at the IMF’s Twentieth Jacques Polak Annual Research Conference, the Fiscal Policy Seminar of the German Ministry of Finance, and at DebtCon3 at Georgetown University, as well as Elliott Ash, Charles Blitzer, Lee Buchheit, Henrik Enderlein, Aitor Erce, Diego Ferro, Hans Humes, Mitu Gulati, Clemens Graf von Luckner, Theresa Pfeifle, Katia Porcezanski, Felix Salmon, Robert Scott and Jeromin Zettelmeyer for helpful comments on various stages of this project. Nicolas Wuthenow provided very helpful research assistance.

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Fang, C., Schumacher, J. & Trebesch, C. Restructuring Sovereign Bonds: Holdouts, Haircuts and the Effectiveness of CACs. IMF Econ Rev 69, 155–196 (2021).

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