Governments, like companies, sometimes have difficulties repaying their debts. In general, restructuring these debts (rather than accelerating them and taking enforcement action) is a way for creditors to maximise the total recovery.
However, one key feature of the syndicated loan market can make restructuring of sovereign loans more difficult than restructuring of sovereign bonds. The feature in question is the standard position that any extension of repayment dates in a syndicated loan requires the consent of all Lenders. By contrast, in the bond market, the relevant consent level in collective action clauses is generally 75%.
This feature of the syndicated loan market can present significant difficulties in the context of sovereign debt restructuings. Any single "hold out" lender, even with a tiny share of the loan, can delay or block the entire restructuring process.
To fix this structural issue, a number of industry and governmental bodies (including HM Treasury, the LMA, APLMA, ICMA and the Institute of International Finance, along with input from other private sector entities) have produced new majority voting provisions (“MVPs”) for use in commercial loans to sovereign borrowers. The idea of the MVPs is to allow a 75% majority of lenders to agree to debt restructurings in a way which would bind any dissenting minority lenders.
My thoughts
- The MVP drafting is a helpful step forward to hopefully make sovereign debt restructuring less time consuming and disruptive.
- Whilst there is undeniably a collective benefit in the MVP provisions for the stability of the market as a whole, the MVPs are purely voluntary (and were only published yesterday) so it is too early to judge the extent to which lenders will want to include the MVPs in new sovereign loans.
- There is a comfort for lenders in the status quo - in that, based on current standard drafting in sovereign loans, they cannot be forced to extend repayment terms if they do not want to. However, this can also work against them if they are in favour of a debt restructuring proposal but other lender(s) are holding out. So there is a balance to the issue of incorporating the MVPs.
- Syndicated loans have a lot of provisions which call for majority rule, so it's not new that the wishes of the majority can be imposed upon a dissenting minority. What is different here is that the 75% threshold applies to what has, until now, been a sacred exception to the "majority rules" concept. It will be interesting to see how market practices develop.
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