LONDON/NEW YORK, Sept 26 (F.M.I.E) – Investors in emerging market sovereign bonds, concerned about restrictions on debt restructuring, are incorporating clauses into bond agreements that permit jurisdiction changes to circumvent these limitations.
Recent debt deals, including one in Sri Lanka and another finalized last year in Suriname, feature provisions that allow investors to alter the location for settling disputes. These measures highlight investors’ efforts to safeguard against proposed legal changes intended to aid poorer countries in obtaining debt relief. However, financial firms argue that such changes could render emerging nations’ bonds riskier for investors or more costly for borrowers.
Andrew Wilkinson, a senior restructuring partner at law firm Weil Gotshal, stated, “The ideas… are not going to go away. They will keep coming up because there is a problem.” Proposed changes to New York state laws—home to about half of international bond agreements—could cap commercial creditors’ recoveries at the level of bilateral official lenders. They might also impose a predetermined formula for determining creditor recoveries during restructurings.
Proponents of these changes argue that they would streamline the default process and alleviate the burdensome negotiations faced by indebted nations. However, investors contend that they could be compelled to accept losses that might be manageable for governmental creditors but devastating for private ones. Rodrigo Olivares-Caminal, chair of banking and finance law at Queen Mary University of London, remarked, “You are lending millions, and you have a fiduciary duty towards your investors.”
Creditors caution that proposals like those in New York could backfire, potentially leading to reduced lending to poorer nations or necessitating higher returns to offset the increased risk. Although the New York bills did not pass in the past two years, support for legal reforms is gaining momentum amid what the World Bank describes as a silent debt crisis, with emerging nations facing estimated external debt servicing costs of $400 billion this year.
Recent defaults in countries like Zambia and Ethiopia have intensified discussions about debt equity, especially given Zambia’s lengthy three-year restructuring process. Debt justice advocates, including Ben Grossman-Cohen of Oxfam America, have endorsed the New York bills but characterized the Sri Lanka contract clause as a mere publicity stunt. In contrast, Olivares-Caminal views the Sri Lanka provisions as a significant turning point, noting, “In Suriname, it was a technicality and went unnoticed. But Sri Lanka, I think, will send a strong message.”
These clauses are seen as a direct response to ongoing tensions in major jurisdictions—New York and England—where similar proposals have gained traction following the Labour party’s rise to power. In Suriname, a clause allows 50% of bondholders to vote on changing the bond’s jurisdiction, although the country can veto this request. In Sri Lanka, just 20% of bondholders can initiate a vote to shift jurisdiction from New York to England or Delaware, without a government veto.
CAUTION REQUIRED
Even proponents of reforms aimed at achieving fairer debt restructurings caution lawmakers to proceed carefully. Rebeca Grynspan, Secretary-General of the UN Trade and Development Agency (UNCTAD), highlighted that various safeguards implemented over the past decade already protect against rogue creditors delaying debt agreements for better terms. She also noted that provisions like natural disaster clauses are aiding debtor countries.
“Legal instruments are important, but if we overdo it, the private sector will go elsewhere to issue debt,” she warned. Experts suggest that shifting from New York to English law could be relatively seamless, given that both jurisdictions have developed legal systems adept at managing sovereign debt defaults. However, creating a new restructuring regime from scratch would pose challenges. Wilkinson emphasized, “You need established law and judges experienced in applying them.”