A law to be passed in New York state would force commercial creditors, including bondholders, to grant the same relief as lender governments when restructuring sovereign debt in developing countries.
Its backers say it would simplify debt resolution — agreements between lenders and borrowers to renegotiate terms after default — that have dragged on for months or years in countries such as Zambia and Sri Lanka.
It would also prevent “recalcitrant” or “vulture” creditors from filing protracted lawsuits to get a better deal than other lenders.
But its opponents say the bill, which proponents hope will pass it into law before the end of the state legislature on June 8, is misguided and counterproductive.
That would make it more expensive for developing countries to raise money in international capital markets and open the door to a host of legal challenges, they said.
Its progress will be closely watched in the UK, where parliamentary committee Calls for legislation to compel private creditors to participate in debt resolution. Almost all sovereign bonds in developing countries are issued under New York or British law.
“This bill is desperately needed. What we’ve seen when private creditors persist and refuse to come to the table during the pandemic,” said Eric Le Eric LeCompte said.
Speaking outside the statehouse in Albany, New York, LeCompte said “hundreds” of supporters were there pushing to pass the bill before the recess, against “vulture funds that poured millions of dollars into trying to kill it.”
Critics of the bill say its attempt to force commercial lenders to restructure will backfire, even though the law has good reason to prevent rejecting creditors from disrupting a restructuring that could prevent defaulting countries from regaining market access for years.
They say it has two serious flaws.
First, it will make investors (often pension funds and other large institutions) less willing to buy developing country sovereign bonds in the primary and secondary markets, making it harder and more expensive for them to finance development.
Second, its ill-defined terms and scope will invite lawsuits from the issuing state and its creditors.
Leland Goss, general counsel at the International Capital Markets Association, said that while the bill was well-intentioned, it would “hurt the very governments these proposals are designed to help.”
Deborah Zandstra of law firm Clifford Chance said the drafters of the bill should reconsider. “If I were them, I’d push it to the next session and do some market consulting.”
She said the bill, or a similar one, could serve a useful purpose if it made it harder for dissenting investors to gain an advantage over traditional bondholders.
A lawsuit brought by opponents against Argentina after it defaulted on an $80 billion debt in 2001 was not resolved until 2016.
Some distressed debt investors are trading at multiples of the discount they paid for the country’s bonds after more than 90% of creditors accepted 30% of the bond’s face value.
But Zandstra argues that the problem is largely addressed through collective action clauses, which have been widely used in sovereign bond contracts since 2014, making it difficult for a minority of creditors to block deals accepted by the majority.
An IMF working paper found that only 4% of the $1.3 trillion in foreign law sovereign bonds issued in March 2020 had no collective action clauses.
If the purpose of the bill was to force traditional bondholders to engage with debt-distressed developing countries, “then the problem doesn’t exist. If that’s what drives it, it’s misguided,” Zandstra said.
Debt activists and many others, including David Malpass, who stepped down as World Bank president this month, have blasted bondholders and other commercial creditors for not participating in the G20 debt servicing suspension initiative launched early in the pandemic.
That has allowed 48 of the 73 eligible low-income countries to defer $12.9 billion in repayments to foreign governments due between May 2020 and December 2021.
Notably, none of the 48 private creditors asked private creditors to defer repayments under the scheme for fear of harming their credit ratings and raising their borrowing costs or losing market access altogether.
The G20’s follow-on initiative, the so-called Common Framework, requires participating countries to seek relief from private lenders comparable to what they initially received from bilateral creditors.
But the initiative has received little attention, with only four countries signing the deal – Zambia, Ethiopia, Chad and Ghana.
Kevin Daly, investment director at asset manager Abrdn and a member of the committee of investors holding defaulted bonds issued by Ghana, said bondholders were quick to get involved.
But they can only do so after bilateral lenders, led in many cases by China, agree on an outline deal.
“We’re willing to sit down, we’re willing to get a haircut, and it’s totally hypocritical to say we’re not,” he said.