Count the Limbs : Designing Robust Aggregation Clauses in Sovereign Bonds

On August 29, 2014, the International Capital Market Association (ICMA) published new recommended terms for sovereign bond contracts governed by English law. One of the new terms would allow a super majority of creditors to approve a debtor's restructuring proposal in one vote across multiple bond series. The vote could bind all bond holders, even if a series voted unanimously against restructuring, so long as enough holders in the other series voted for it. An apparently technical change, awkwardly named “single-limb aggregated collective action clauses (CACs)” promised to eliminate free-riders for the first time in the history of sovereign bond restructuring. It could also open up new possibilities for abuse. The markets might have rebelled. Instead, they yawned … and proceeded to adopt the new terms. We consider why such consequential contract change met with less resistance than its relatively modest predecessors, series-by-series and two-limb aggregated CACs. We focus on contract design, and the process by which it came about. Most of the essay is devoted to analyzing the key features of single-limb aggregated CACs and the considerations that shaped decisions about these features. We conclude with observations on contract reform in sovereign debt restructuring and the challenges ahead