CACs at Work: What Next?

Abstract

In 2020, Argentina and Ecuador were the first sovereigns to conduct a debt restructuring using the cross series aggregation feature included in the International Capital Market’s standard Collective Action Clauses (ICMA CACs), published in 2014. The legal strategy of both countries articulated two features: (i) “re-designation” (ie, the possibility for the issuer, with bondholder consent, to re-define the pool of bond series to be considered for aggregation purposes); and (ii) the sequential use of the aggregation methods contemplated in the ICMA CACs (dubbed the “Pac-Man”). The combination of these two features in a sovereign debt workout could hypothetically result in a sovereign relying on a minority of its creditors to ultimately bind and restructure a majority. This new found flexibility initially led the creditor community to demand the eradication of the possibility to re-designate and the complete removal of the innovations introduced by ICMA in 2014 from Argentina’s bond documentation. Ultimately, Argentina and Ecuador persuaded their creditors to permit re-designation, as well as the sequential use of aggregation methods, and proposed adjusting the ICMA CACs by introducing certain limits that would foreclose the possibility for a sovereign to effect a restructuring over all creditors if its original offer failed to attract the support of a meaningful majority. This article describes the terms and processes of the Argentine and Ecuadorian debt workouts and argues that (i) in certain cases, the downside of prohibiting a sovereign from “re-designating” outweighs the benefits of re-designation, as it may turn a restructuring into an “all-or-nothing” game, further complicating inter-creditor dynamics, and (ii) the ability to use different aggregation methods sequentially, within certain limits, also advances the objectives of the ICMA CACs.