Clauses & Controversies

Fear of Fund” and the Bridgetown Initiative Sovereign debt has been very much in the news in early 2023 thanks to a combination of factors that have exacerbated debt crises in various parts of the world. Massive COVID expenditures, increasingly extreme climate events, the emergence of China as a major lender to weaker sovereigns and the rise in global interest rates are among them. Unsurprisingly, there are lots of ideas being offered to help deal with the new problems being thrown up by the combination of these features. One of those ideas that has gotten the most traction is the Bridgetown initiative, the brain child of Avinash Persaud. In today’s episode, we ask Avi about Bridgetown and related matters having to do with dealing with the impact of extreme climate events on the debt of poor and climate vulnerable countries. Producer: Leanna Doty

Bondholders Rights as a Function of Nationality Rather than Contract Recent debt restructurings have raised the question whether some investors in sovereign debt might have additional rights (or obligations) as a result of bilateral investment treaties between their home states and the debtor state. It seems strange to think that investors from, say, Ruritania might have different rights than investors from Transylvania, even though they hold the exact same instrument, simply as a function of their nationality. Is this really the type of system that investors want? That sovereigns want? Livia Hinz of the European University Institute has done super interesting work on this topic, including on how treaty drafters are responding to the potential impact of investment arbitration on sovereign debt. She joins us to discuss whether investment arbitration really offers much of value to investors, its potential implications for sovereign debt restructurings, and how bilateral investment treaties are addressing these topics. Producer: Leanna Doty

The Bond King The name PIMCO is ubiquitous in the world of bond finance. But aside from its enormous size, why is PIMCO so important? Our guest this episode is Mary Childs, co-host of NPR's Planet Money podcast. Her book, The Bond King, tells the story of PIMCO's origins and of how Bill Gross transformed the bond markets, built PIMCO into a behemoth, and then lost power. She joins us to talk about the book and to explain PIMCO's significance to the bond markets. Producer: Leanna Doty

Lessons from the U.S. Municipal Bond Cases? In a sovereign debt crisis, a government will sometimes argue that the country does not have to pay some of its debt, because it borrowed the money in violation of its own law, typically while a different government was in power. And in fact, domestic law typically does constrain the borrowing of countries and sub-sovereigns: debt ceilings, legislative approval requirements, etc. Many foundational -- though now, largely forgotten -- legal cases involving such disputes arose in the context of U.S. municipal debt. In the mid to late 1800s, the U.S. Supreme Court decided literally hundreds of the cases, often ruling in favor of the municipality. Vincent Buccola and his co-author Allison Buccola wrote a wonderful article, The Municipal Bond Cases Revisited, reconstructing these cases. Vincent join us to talk about their findings and the implications for modern disputes (e.g., Puerto Rico). Producer: Leanna Doty

Ghana’s 2030 FUD Bond We learned a new term a few days ago: FUD. Apparently common in the crypto world, it refers to when panic about something spreads “fear, uncertainty and doubt.” An investor friend used the term to describe aspects of the Ghana 2030 bond. We had previously thought this bond was safe, since it benefits from a World Bank guarantee. But reading the contract terms more closely, the FUD has rubbed off on us. It isn't clear to us that the bond will escape the restructuring. Of course, it could be left out of the restructuring and be paid in full. But why would Ghana and holders of non-guaranteed bonds want this? If it is included in the restructuring, it could end up with the same treatment as everyone else, without getting better treatment on account of the guarantee. Time will tell. Producer: Leanna Doty

A Truly Gnarly Year Times are pretty bad for emerging markets, what with a surging dollar, interest rate increases, etc. But somehow, despite having a president with, ahem, eccentric economic views, Turkey's recent $1.5 billion bond issuance was reportedly way oversubscribed. So things are a bit weird. We've long admired and learned from the work of this week's guest, Sydney Maki of Bloomberg. Sydney joins us to talk about the state of the sovereign debt world in general and, in particular, about a couple of deals (and debt crises) that have perplexed us. What are the prospects for a restructuring of Suriname's debt, and how does the discovery of offshore oil complicated things? And what should we make of the recent blue bond transaction involving Barbados and the Nature Conservancy? We are skeptical of debt buybacks in general, especially when the country buys back only a fraction of debt at seemingly high prices. But maybe we are being too cynical about the blue bond deal? Sydney helps us make sense of what's going on. Producer: Leanna Doty

Please Sir, May I Read the Contract? Sovereign bonds are sold after distribution of a sales document -- a prospectus or offering circular -- that describes key risk factors and that summarizes or reprints the terms and conditions of the bonds. The sales document isn't the contract, or at least not the whole thing, because it typically makes clear investors will be bound by terms found elsewhere, such as a fiscal agency agreement. But these other documents often aren't given to prospective investors. Even after buying, the investor may have to jump through hoops to get a peek at the fiscal agency agreement -- e.g., physically going to Luxembourg to read (but not copy) the document. And, if the investor doesn't like what they see, they have no right to return the bond. We've always been puzzled and a bit irritated at these practices but have assumed that investors are bound by the terms in the fiscal agency agreement. But... is that really so clear? If terms aren't disclosed in advance, and there is no right to return once the terms are disclosed, then it doesn't seem clear at all. Producer: Leanna Doty

Pakistan’s Bizarro 2024 Bond Pakistan is in crisis and its bonds are in the toilet. One of its bond series though, the 2024, is not like the others. It has one of the highest CAC vote thresholds we’ve seen anywhere in the modern era. But that’s not it; best we can tell, the process by which votes are counted appears to be some weird historical holdover. How? Why? What? In this episode, we try to suss out the implications of the weirdness in the bond. Our guess: This is going to be a nightmare to restructure. Producer: Leanna Doty

Contracting for Home Field Advantage Virtually all international sovereign bonds include provisions designed to make it easier for investors to sue the sovereign after default. Choice of forum clauses, waivers of sovereign immunity, provisions addressing service of process, etc. Russia is a prominent exception where these clauses are absent, and this is one of many factors making it hard for investors to decide how to respond to the country's default. John Coyle (UNC) is one of the foremost experts in how courts interpret choice of forum (and choice of law) clauses. He joins us to talk about investors' rights against Russia and about risks that badly drafted choice of forum clauses can pose for investors. For instance, if the sovereign asks its own courts to declare a loan invalid, can this decision bind investors? Producer: Leanna Doty

Ukraine’s Dodgy Designations In its recent debt reprofiling, Ukraine asserted that it had the unilateral right to “re-designate.” The context here is the operation of the aggregated collective action clause (CAC), which allows the debtor to conduct an aggregated vote across multiple series of bonds to see if a restructuring proposal gains the support of the entire group. Ukraine claimed that it had the contractual right, in its sole discretion, and after the votes were in, to decide which series of bonds to include in the restructuring. To be fair, its bond contracts did seem to allow this. More or less. But the contracts didn't explicitly confer this power, and it is a strange way to conduct a vote. Why allow an idea's proponent to count the votes before deciding which votes should count? In Ukraine's case, the reprofiling had wide creditor support, so perhaps it didn't matter all that much. But we wonder whether investors will come to regret allowing this assertion of a unilateral redesignation power to pass without objection. There will be other restructurings, where investors will be asked to make much bigger sacrifices, and where governments may just use the redesignation power as leverage. When that happens, we won't be surprised when the Ukraine example is trotted out as an informal precedent to justify this practice. Producer: Leanna Doty