Mexico and other Latin American sovereigns have been omitting four key words from the collective action clauses in new bond issues - and that is ruffling the feathers of major bond investors. Standard language in collective action clauses recommended by industry groups - and intended to ensure an equal payout to all - has been tweaked in several recent bond issues.
The omission of the words "on the same terms" in the CACs seems to have been only belatedly noticed by some investors, and has now caused a stir among more than a few buy-side players. "The removal of that language is extremely concerning," Aaron Kim, a senior vice-president at bond fund giant Pimco, told an industry conference this week.
The CACs themselves were designed by the International Capital Markets Association and given the stamp of approval by both the IMF and the G20. Essentially, they are intended to avoid a repeat of the legal quagmire enveloping Argentina, whose bonds have been the subject of a years-long court battle waged by disgruntled creditors in which so-called holdout creditors are demanding more of a payout than was agreed to by those that accepted the restructuring of the bonds
The CACs aim to prevent a minority group of bondholders from holding up payments to others, and spell out that any restructuring can go ahead with 75% approval from investors, binding in any dissenting creditors in the process. As promoted by ICMA, the CACs say that all bondholders must be repaid "on the same terms" - the four words whose omission in some new bond issues has raised eyebrows in the market. Pimco's Kim, one of the first to notice their absence in the new Mexico 2025 bond issues that were priced in November, told the conference: "A lot of people have missed this."
Alejandro Diaz de Leon Carrillo, Mexico's deputy undersecretary for public credit, did not explain why the words were left out - but shrugged off the importance of the omission. "I don't think those words are the silver bullet of this provision," Diaz told IFR. "This shouldn't raise doubts about what the provision actually means," he said. "We wanted to be as transparent and respectful of bondholders' rights as possible."
Neither Cleary Gottlieb Steen & Hamilton, which advised Mexico on the bond issue, nor Sullivan & Cromwell, which advised the issue's underwriters, replied to requests for comment. But the omission of the four words has since been copied in other bond issues by Colombia and the Dominican Republic - and included in the documentation of a pending deal from Panama.
Legal experts say the omission could give sovereigns more leeway in dictating the terms of any eventual restructuring. "It is very interesting that those words are not in the terms of the bonds," said Francis Fitzherbert-Brockholes of White & Case, which advised on a recent bond issue from Kazakhstan - the first to incorporate the recommended CAC language in full. "Not having them allows the issuer much more flexibility in a restructuring," he said.
Whatever the perceived intention of the change in language, however, Mexico looks to receive the benefit of the doubt from many, due to its reputation as one of the most sophisticated sovereign borrowers in Latin America. With rock-solid A3/BBB+/BBB+ credit ratings, the country is unlikely to be seen in the same light as Argentina, which last year underwent its second default in little more than a decade. "I am quite certain that Mexico's omission does not reflect a substantive difference of views," said Anna Gelpern, a Georgetown University professor who helped ICMA draft the CACs.
"There has never been any disagreement that uniformly applicable modification would be 'on the same terms'." And the ultimate arbiter of course is the market itself - which lapped up the bonds from both Mexico and Colombia with no obvious sign of concern. The latter saw nearly US $3.5bn in orders for its new US $1.5bn bond issue that was priced in January. "Our last transaction in international markets got a historical record in terms of demand," said Michel Janna Gandur, Colombia's general director of public credit and national treasury. "If there are some doubts, they are not shared by the broader market."
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