Clauses & Controversies

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

Why Did the Dog Not Bark? (or Why Did the Creditors Consent So Readily?) Ukraine’s gave creditors in its 2016 restructuring GDP warrants that were bizarrely uncapped.  Now, with expectations of post-war GDP shooting up, thanks to likely reconstruction support from the US and the EU, these warrants are potentially gold mines. Yet, just a couple of weeks ago, Ukraine was able to not only defer payments on them, but get agreement on in effect capping them. Why did Heartless Hedgies leave giant gobs of money on the table?  What are we missing here? Producer: Leanna Doty

Making (Non?)Sense of the Russian CDS Auction CDS auctions intimidate us because there is so much that we don’t understand about how they are supposed to work. But there are others who, thankfully, understand a lot more not only about CDS auctions but also how they work in contexts such as those of Russian sovereign bonds. One of those gurus is Chris Spink of the International Financing Review (and Refinitiv/Reuters Financial). The Russian auction was especially complicated because Russia had different types of dollar and euro bonds out there, some that gave Russia a conditional right to make payments in rubles and some that didn’t. And then there is the fact that while Russia seems to have formally defaulted on many of its foreign currency obligations—therefore probably triggering cross default/acceleration provisions—it is still offering to pay everyone in rubles (regardless of whether they have the special ruble payment clause or not). Producer: Leanna Doty

Diaspora Bonds Remittances are an important source of capital for many countries. Though remittances often flow directly to family and close relations, many countries would like to tap this pool of capital directly. Diaspora bonds offer a potential solution, allowing countries to issue bonds to nationals living abroad or to others who, for philosophical reasons, want to lend. Recently, the issue has come up for Ukraine in its attempt to defend against Russia’s invasion. Many other countries, faced with war, hurricanes, pandemics, and other crises, have tried to tap their diasporas. But engineering diaspora financing has proven difficult. We talk to sovereign debt guru Steven Tepper (formerly of Arnold & Porter), who, over a thirty-year period, helped advise one of the most successful diaspora finance programs – that of Israel Bonds. Producer: Leanna Doty

It’s a Mad, Mad World Pakistan’s debt repayment prospects were dicey even before the catastrophic floods. Now, a debt restructuring seems almost inevitable (to us, anyway). Nikou Asgari is one of the Financial Times’ brilliant capital markets reporters, who covers European debt and has also covered Pakistan’s debt crisis. We had originally intended to talk mostly about Pakistan. As it happened, we recorded this episode on September 23, the day of Kwasi Kwarteng’s mini-budget announcement in the U.K. and two days before the Italian election that set Giorgia Meloni on course to becoming Prime Minister. So … let’s just say there was a lot to discuss. Nikou guides us through the economic and political context in Pakistan, the turmoil in the gilts market, and the political risk in Italy. Producer: Leanna Doty

Is the Bottom Falling Out of the EM Sovereign Debt Market? The dollar is rising in value; interest rates are rising, borrowing costs for EM sovereigns are rising, and energy prices are rising. And then there is the continuing horrific war in Ukraine. Does this all, put together, spell disaster for the EM sovereign debt market? Alexandra Scaggs of FT Alphaville, one of our favorite financial reporters and someone who has always been able to see the big picture better than we have, joins us to talk about the state of things. Producer: Leanna Doty

The New, New Syndicated Lending In the 1970s and 1980s, most sovereign lending took the form of syndicated bank loans. This changed after the 1980s debt crisis and the Brady plan, so that in from the 1990s on, sovereign bond markets have supplied most emerging market borrowing needs. For the last 10-15 years, even very poor countries have tapped the bond markets. Syndicated loans still exist, of course, but are rarely used for general budgetary purposes. Although over-simplified, that’s a fairly standard way to view modern sovereign borrowing. Only it turns out that it may be no longer true. Tightening global financial conditions have caused lots of countries to turn to syndicated loans. We had a general understanding that this was true, but had no idea of the scope until a recent article by our guest, Chelsey Dulaney of the Wall Street Journal. She joins us to talk about how low-income countries are increasingly relying on syndicated bank loans and about the potential risks. Producer: Leanna Doty