wer kennt? Proposed design features of a sovereign coco

Table B

Proposed design features of a sovereign coco

(1) CACs are clauses in sovereign bond contracts that bind minority ‘hold-out’ creditors
into a debt restructuring deal agreed between the debtor and a qualified majority of
consenting creditors.

Feature Design

Trigger for maturity
extension

The maturity extension clause would be activated when
the sovereign receives emergency liquidity from the
official sector. In practice, this will be when the sovereign
draws upon credit from the IMF or another
bilateral/regional facility (such as the European Stability
Mechanism and other similar arrangements).

Length of maturity 
extension

The maturity extension needs to be long enough to
overcome the sovereign’s liquidity problems (providing
breathing space to put in place required adjustment
policies). But not so long that it unduly penalises
creditors. This suggests that the length of the maturity
extension should match that of typical official sector
support programmes. The typical length of an IMF
programme is around three years.

Bonds covered 

All sovereign and sovereign-guaranteed debt (bonds and
loans) would include this clause. However, Treasury bills
with an original maturity of one year or less would be
excluded since they are typically excluded from debt
restructurings.

Coupon payments

 If a maturity extension is triggered, coupon payments for
each bond will continue at their original level and
frequency. ‘Amortising bonds’ — and other debt
instruments that repay the face value in instalments —
would have the principal (but not coupon) payments
postponed for the length of the maturity extension.

Number of maturity
extensions

The maturity extension clause can only be activated once.
Therefore, a country which takes several consecutive
support programmes would not benefit from multiple
maturity extensions. However, any sovereign cocos issued
after the trigger event would be unaffected — these could
be triggered in the normal way.

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