In case it hits financial trouble

Thursday, November 13, 2014

Mexico issues ‘anti-vulture’ debt

“Anti-vulture” provisions will be included in Mexico’s latest bond issuance in New York to keep speculators similar to the ones who plagued Argentina after its 2001 default from targeting the country in the event it hits financial trouble in the future.

The two salient points are the introduction of stronger Collective Action Clauses (CACs) and a re-written version of the infamous pari-passu clause that was interpreted by New York District Judge Thomas Griesa as meaning that restructured bondholders can be blocked from getting paid at the agreed discount rate until unrestructured creditors are paid in full, even if no agreement is reached with the defaulting country to do so.

Mexico was an early adopter of CACs in 2003 and was followed by many other countries. But according to Georgetown University sovereign law expert Anna Gelpern these aren’t strong enough by themselves to protect countries from the actions of holdout speculators, as the latter could still “buy a blocking position in a tiny bond issue trading at a deep discount, block the restructuring of that issue, and pari passu right ahead,” given the legal precedent set by Judge Griesa.

With this in mind, Mexico combined these stricter CACs with a revised pari passu clause, excluding the “ratable payment” interpretation established by Griesa to force Argentina into repaying holdouts full debt plus penalties proportional to the discounted repayments that restructured bondholders receive.

The bond issuance is seen by experts as capable of transforming standards for sovereign debt contracts, with other countries expected to follow Mexico as they did in 2003, when its new CAC standards became ubiquitous.

Herald staff