January 8, 2013 6:21 pm

Netherlands in €3.2bn CAC bonds debut

The first batch of eurozone government bonds that incorporate clauses that make sovereign debt restructurings easier was sold on Tuesday by the Netherlands, which raised €3.2bn at an auction of three-year securities.

Eurozone policy makers have mandated that all new government bonds sold in the common currency area should, from this year on, include so-called collective action clauses.

These allow a large majority of bondholders that agree to a restructuring to force minority holdouts to sign up to the deal and therefore make it harder for recalcitrant creditors from scuppering an agreement struck between a majority of lenders and a country.

The clauses were retroactively fitted into Greek government bonds to ease its debt restructuring last year but all eurozone governments will now have to automatically include them in new bonds.

Other European governments have so far this year increased the size of existing bonds through “taps” but the Dutch debt agency is the first to sell new bonds with the euro-CACs.

The percentage of taps allowed falls gradually over the next decade.

Despite the fact that the clauses theoretically make it easier for governments to default, the inclusion had little impact on the pricing of the Dutch bonds.

The Netherlands raised €3.2bn of zero-coupon bonds maturing in April 2016 at a yield of 0.318 per cent, “just a touch below the pre-action grey market valuations”, Newedge, a brokerage noted.

Fund managers and analysts do not expect the gradual introduction of CACs to the European bond market to have a discernible impact on prices and yields.

Most government bonds are issued under local law and can therefore be retroactively fitted with CACs through legislation – as Greece did in early 2012.

“Private sector holders of Greek bonds got smashed and there were initially no CACs,” a senior fund manager pointed out.

CACs have become relatively common in emerging markets, particularly after a spate of sovereign debt restructurings in the 1990s.

However, the euro-CACs differ from the typical provisions in several important ways.

Most CACs have a voting threshold of 75 per cent and only apply to the specific bond in question.

But the eurozone clauses will have a lower voting threshold of two-thirds and extend over a country’s entire stock of bonds, a so-called “aggregation”.

This makes the euro-CACs a much more powerful potential instrument for governments than the normal clauses.

Nonetheless, there is a bond-by-bond threshold of 50 per cent so, if a majority of bondholders vote against a restructuring, they can shield that specific bond.

Separately, the European Stability Mechanism sold its first ever debt on Tuesday, raising €1.9bn through the issuance of three-month bills at a negative yield.

The ESM will gradually pick up the baton from the European Financial Stability Facility as the continent’s permanent bailout fund.

Japan’s finance minister Taro Aso said on Tuesday that his country was keen to buy ESM debt, partly to weaken its yen currency.

But economists pointed out that the purchases would be made with existing foreign currency reserves and would therefore not affect the yen – and any purchases of ESM debt is likely to simply replace buying of EFSF bonds.

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