Moody's: Holdout creditors have not been an obstacle to sovereign debt restructurings

Global Credit Research - 10 Apr 2013

New York, April 10, 2013 -- Sovereign bond restructurings over the last 15 years have generally been resolved quickly and almost always without ligation from holdout creditors, says Moody's Investors Service in a new report in its Sovereign Defaults Series. Reviewing 34 sovereign bond exchanges since 1997, Moody's finds that only two had a significant percentage of holdout creditors.

Specifically, in only two cases did holdout creditors represent more than 10% of the value of the outstanding bonds. In only one case -- that of Argentina -- have holdouts led to persistent litigation.

"Our analysis shows that concerns over coordination problems among creditors are exaggerated," says Elena Duggar, Moody's Group Credit Officer for Sovereign Risk and author of the report "The Role of Holdout Creditors and CACs in Sovereign Debt Restructurings."

"In most cases, a bondholder committee was formed within a reasonably short timeframe and negotiations over the restructuring were concluded relatively quickly," says Duggar. "The case of Argentina was and remains unique in its unilateral and coercive approach to the debt restructuring."

On average, sovereign bond restructurings have closed 10 months after a government has announced its intention to restructure and seven months after the start of negotiations with creditors, says Moody's.

Creditors have typically participated in sovereign bond restructuring offers: in the 34 restructurings, creditor participation averaged 95%. The only exchanges with lower participation rates were those of Argentina, with a realized participation rate of 76%, and Dominica, with a rate of 72%. Later on, however, participation rates increased to 93% in Argentina and close to 100% in Dominica.

Moody's notes that about 35% of sovereign debt exchanges relied on the use of Collective Action Clauses (or CACs) or exit consents in the bond contracts to bind a larger share of creditors in the restructuring.

CACs allow a supermajority of creditors to amend the instrument's payment terms and other provisions, thus allowing the supermajority to agree to a debt restructuring legally binding to all shareholders, including those who vote against the restructuring.

The European Stability Mechanism (ESM) Treaty has mandated that CACs be introduced into euro area sovereign bond contracts.

Ongoing creditor litigation over Argentina's 2005 debt exchange has been drawing attention to the role of holdout creditors and the problem of free rider incentives, leading to a large body of theoretical work on the topic. The Moody's report reviews empirical evidence from 34 exchanges involving 20 sovereigns and both Moody's-rated and unrated debt instruments. Nine sovereigns performed several debt exchanges in a row.

For more information, Moody's research subscribers can access this report at http://www.moodys.com/research/Sovereign-Defaults-Series-The-Role-of-Holdout-Creditors-and-CACs--PBC_150162.

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http://www.moodys.com/research/Moodys-Holdout-creditors-have-not-been-an-obstacle-to-sovereign--PR_270542