The first test of new rules created in response to Argentina’s default at the hands of US bond investors is expected to begin this week – from an unlikely source.
On Monday, the oil-rich nation of Kazakhstan is slated to become the first country to sell sovereign bonds that contain new terms binding all investors to decisions made by the majority in a single vote.
The International Capital Market Association, a group representing some of the world’s largest financial institutions, created a new framework for sovereign debt contracts this summer in response to the Argentine crisis.
But sovereign debt experts have expressed surprise that Kazakhstan, a former Soviet state and an infrequent borrower on international debt markets, has been the first country to introduce the changes.
“It is extraordinary that it is Kazakhstan,” said Mitu Gulati, a law professor at Duke University and expert on sovereign debt restructuring. “But I think it’s a little early to do victory laps [in terms of reform]. The question is still when will a large issuer like Mexico make the changes and what will happen then?”
The ICMA alterations are intended to make it more difficult for investors to stage a repeat of the battle between Argentina and so-called “holdout” investors, who have pursued the country for full payment on debt on which it defaulted more than a decade ago.
Inclusion of the new clauses is voluntary, and there was concern that governments might prove resistant to using them.
Kazakhstan’s decision to make the changes in its first return to the international bond market since 2000 is regarded as particularly interesting because the country has adopted all of the recommended alterations, including the option of binding investors to a single vote across all bonds, and a narrower definition of the controversial pari passu clause used by holdout investors to claim full repayment.
“Sovereign bond contracts are full of clauses written in the 18th century and left unchanged since then,” said Anna Gelpern, a fellow at the Peterson Institute for International Economics and formerly of the US Treasury.
“The last time that the official sector and others promoted contract reform, it was contentious and took a long time.”
However one banking analyst said he doubted there would be a perceptible price difference when Kazakhstan’s debt was sold, pointing out that investor appetite for emerging market debt remained extremely high.
Behind the ICMA revisions are fears that the success of hedge funds led by Elliott Management against Argentina could encourage litigious holdout investors to undermine future attempts of sovereign debt restructuring and destabilise wider debt markets.
This summer Argentina defaulted for the second time in just over a decade after US courts ruled that it could not make interest payments on any debt unless holdout investors were also paid in full.
“Argentina’s battle has affected every link in the financial chain from the investors to the bond issuer to the banks,” said Prof Gulati. “So this is something that everyone has an interest in reconciling.”
The fact that Argentina’s fight with holdout investors continues to rumble on has provided an incentive to governments and financial institutions to make the changes as quickly as possible, he added.