Sovereign Debt Restructurings – Key IMF Policies and Challenges

Sovereign Debt Restructurings –

Key IMF Policies and Challenges

Sixth Annual Sovereign Debt Restructuring Conference, February 23, 2023

Yan Liu

Deputy General Counsel

International Monetary Fund

The views expressed herein are those of the presenter and should not be attributed to the IMF, its Executive Board, or its management

Outline ▪ Key IMF Policies in Sovereign Debt Restructuring ▪ Contractual Approach and IMF Policies

The views expressed herein are those of the presenter and should not be attributed to the IMF, its Executive Board, or its management

Key IMF Policies in Sovereign Debt Restructurings

The views expressed herein are those of the presenter and should not be attributed to the IMF, its Executive Board, or its management

The Fund’s Framework for Sovereign Debt Restructuring

The purpose of Fund financing: provide financing to assist members in ‘resolving their balance of payment problems’, and help member return to ‘medium term external viability’ through a Fund supported adjustment program under ‘adequate safeguards’ to Fund resources.

▪ In most Fund-supported programs, a combination of policy adjustment and IMF financing catalyzes external financing from public and private sources.

▪ However, in some case, where members with significant indebtedness have lost –or are losing – market access, the catalytic role of Fund financing may not be enough.

▪ In cases where a member’s debt is assessed as unsustainable, the Fund is precluded from lending, unless the member takes steps to restore debt sustainability.

The views expressed herein are those of the presenter and should not be attributed to the IMF, its Executive Board, or its

Financing Assurances

Market Access

Exceptional Access Arrears

The Key IMF Policies in Sovereign Debt Restructuring

▪ The DSA is for IMF lending.

▪ When debt is assessed as unsustainable, the IMF is precluded from lending unless it has assurances that debt sustainability will be restored. This is a case-bycase analysis.

Debt Sustainability

▪ For official bilateral creditors in pre-default context, credible and specific assurances to restructure in line with program parameters are needed.

Debt sustainability is a requirement for all IMF lending.

▪ For private creditors in pre-default context, assurances derived from a judgment that a credible process for debt restructuring is underway and such restructuring will likely deliver an outcome in line with program parameters.

The views expressed herein are those of the presenter and should not be attributed to the IMF, its Executive Board, or its management

The Key IMF Policies in Sovereign Debt Restructuring

▪ Concept of market access is closely related to debt sustainability.

▪ A protracted loss of market access could may create the presumption that debt may be unsustainable.

▪ A member needs to restore investor confidence and regain market access to ensure capacity to repay the Fund.

The views expressed herein are those of the presenter and should not be attributed to the IMF, its Executive Board, or its management

Market Access Policy

Closely Related to Debt Sustainability

The Key IMF Policies in Sovereign Debt Restructuring

• The IMF may lend beyond the normal access limits under four substantive criteria and subject to procedural safeguards (i.e., early Board involvement).

• 2nd criterion - a high probability that the member’s public debt is sustainable in the medium term

Exceptional Access

• Green zone – debt sustainable with high probability

• Grey zone - debt sustainable but not with high probability

• Red zone – debt is not sustainable

Higher scrutiny when lending above normal access

• 3rd criterion - prospects of gaining or regaining access to private capital markets within a timeframe and on a scale that would enable the member to meet its obligations falling due to the Fund.

The views expressed herein are those of the presenter and should not be attributed to the IMF, its Executive Board, or its management

The Key IMF Policies in Sovereign Debt Restructuring

▪ Financing assurances policy aims at ensuring the adequacy of program financing to fill financing gaps during the program period and the member’s capacity to repay the Fund post program.

Financing Assurances

▪ Financing gap can be met through new money, restructuring or arrears (to be discussed).

▪ The policy does not prescribe the allocation of financing to be provided between official and private creditors.

The views expressed herein are those of the presenter and should not be attributed to the IMF, its Executive Board, or its management

The Key IMF Policies in Sovereign Debt Restructuring

▪ In post-default cases the IMF’s arrears policies apply.

▪ Arrears policies differ depending on whether claim is held by a private creditor, an official bilateral creditor or an international financial institution, and defines conditions under which the IMF can lend despite arrears.

Arrears Policies

► Lend into Arrears to private creditors (LIA policy) – good faith efforts

► Lending into arrears to official bilateral creditors (LIOA policy) – representative Paris Club agreement, creditor consent or applying three criteria (need, good faith, no undue effect on ability to mobilize official financing in future)

► Non-toleration of Arrears (NTP) – arrears to all IFIs in non-OSI cases, and in OSI cases, judgement based on factors

▪ When arrears policies apply, a financing assurances review is necessary at each program review.

The views expressed herein are those of the presenter and should not be attributed to the IMF, its Executive Board, or its management

Contractual Approach and IMF Policies

The views expressed herein are those of the presenter and should not be attributed to the IMF, its Executive Board, or its management

Selected issues under Contractual Approach

• Private creditor participation

• enhanced CACs

• MVPs for syndicated loans

• increasing use of collateral

• Most favored creditor clauses to address intercreditor equity

• Debt transparency – authorization and disclosure

• Statutory solutions The views expressed herein are those of the presenter and should not be attributed to the IMF, its Executive Board, or

Enhanced CACs are the market standard and are working well

▪ Endorsed by the IMF in 2014

► “Single-limb” feature allows a qualified majority of creditors across all series to bind all bonds.

► Only “double-limb” feature has been used in recent debt restructurings (e.g., rgentina, cuador, Ukraine (2022)). Has generally worked well.

▪ Inclusion has become the market standard:

► As of end-December 2022, there have been around 1,000 issuances of international sovereign bonds for a total of approximately USD 1.3 trillion since IMF endorsement in 2014.

► 92 percent (nominal principal amount) of issuances since end-June 2020 have included enhanced CACs.

► Revised pari passu clauses are generally included as a package with the enhanced CACs.

▪ Over 70 percent of outstanding stock now includes enhanced CACs (with the redemption profile heavily tilted towards bonds with the old style “series-by-series” CACs)

Model

• Less than ¼ of EMDE external debt held by the private sector is in non-bonded form, but that share rises to about ¾ for LICs

• In 2022, the UK-Treasury led private sector working group (with support of IMF staff) developed a set of “specimen” majority voting provisions (“MVPs”) and a Guidance Note for syndicated loans

• Published by industry bodies (e.g., IIF, LMA, ICMA) in November 2022

• The specimen clauses have the following features:

► Allow a qualified majority of lenders in a syndicate holding a particular loan to bind a minority of lenders to changes in payment terms

► Creditor Protections: Voting threshold (75 percent), Disenfranchisement, Information Disclosure

► Ancillary features: e.g., unitised voting, changes to events of default, “snooze you lose” and “yank the bank”

• Roundtable with debtor countries held post-Annual Meetings, ongoing outreach, no signs of a first-mover

“CAC-like” features for syndicated loans were developed recently, but no country has included them

Collateral and collateral-like Instruments

continue to pose challenges

• Collateralized instruments have posed challenges in recent restructurings

➢ Examples: Chad, Argentina provinces, DRC and Malawi

• Negative Pledge Clauses (“NPC”) play a limited role:

➢ NPCs can play a role in limiting countries’ use of collateral arrangements by requiring debtors to preserve the seniority of existing creditors

➢ Scope of NPCs varies and debt transparency issues may limit their value

➢ Measures include promoting greater disclosure about collateral use, enhanced authorization processes for borrowers, increasing awareness and more rigorous enforcement of NPCs

Other contractual features could also support timely and efficient restructurings

• Trust Structures

➢ Trust structures reduce the leverage of minority creditors in a default situation by allowing litigation only postacceleration and requiring sharing of litigation gains.

➢ Use in NY-law governed bonds has increased in recent years but English-law governed bonds do not generally use this structure.

• “Most Favored Creditor” Clauses

➢ Have been used in past restructurings (Argentina, Ukraine) to ensure that among private bondholders, private sector holdouts are not paid more favorable terms

➢ Legal scholars have suggested using the clauses to ensure comparability of treatment both within and across creditors classes (e.g., private and official sector); this would be novel and is untested

➢ Issues include enforceability, monitorability, impact on IMF policy

Work to improve debt transparency is ongoing, with more work to come later this year

• Challenges to public information on debt – complex public debt landscape, increasing share of debt held by commercial creditors and non-Paris Club creditors, SOE borrowing/PPPs, use of confidentiality clauses.

• IMF Staff is conducting analytical work of domestic legal frameworks – a forthcoming paper

➢ Study of more 65 jurisdictions (mainly LIDCs and EMs) shows that legal requirements for public debt disclosure are uncommon.

➢ Shortcomings include ambiguous authorization frameworks, unclear or narrow debt coverage, deficient reporting, monitoring and accountability frameworks

• IMF continues to provide technical assistance on debt management and debt transparency

• Market-based initiatives:

➢ OECD debt transparency initiative

➢ MVPs have information disclosure requirements that track the LIA policy disclosure requirements

Statutory solutions have been adopted or proposed in a few countries

• Process based solutions – mimic national corporate debt restructuring frameworks

➢ xamples: IMF staff’s SDRM proposal in 20-3 and NY draft bill 2021

• Recovery based solutions – limit recovery to specified amount

➢ Examples: UK Debt Relief Act 2010, Belgium Anti-Vulture Law, NY draft bill 2022

• Asset based solutions – limit to seizing certain sovereign assets

➢ Examples: FrenchAnti-Vulture Law 2016, Iraq (UN Security Council Resolution)

• Several bills have been proposed in New York State to regulate the process and/or enforcement of sovereign debt

➢ 2021 Bill: Proposes a statutory process governed by NY state law to restructure all NY-law governed sovereign claims (like a bankruptcy law for sovereigns)

➢ 2022 Bill: Building on the model of the UK’s Debt Relief ct (2010), bill proposes limiting the recoverability of NY lawgoverned claims to debt relief provided by the official sector (e.g., through Common Framework).

➢ CSOs have also been garnering legislative support to revive the “Champerty” Doctrine (which prohibits the purchase of debt for purposes of bringing a lawsuit)

• Support outside of the CSO community appears limited and no current indication they will be considered in the near term by the New York legislature

• Issues include interaction with current international sovereign debt architecture, market implications and legal certainty

Bills have been proposed in New York State although there are design issues and support is limited