Collective Action Clause
Collective Action Clause (hereinafter: CAC) is a clause in bond conditions that makes any change to individual conditions dependent on the approval of the majority of creditors and, in the event of majority approval, is binding on all bond creditors. The English term "collective action" ( collective action ) was borrowed from sociology.
origin
The CAC comes from Anglo-Saxon law and was introduced after the national bankruptcy of Argentina (December 2001). The aim was to be able to handle sovereign debt crises in a controlled manner, when the interests of the creditors were atomistically distributed from large institutional investors , bank consortia to private bond creditors scattered around the world. Often a few, disagreeable bondholders were the reason why a debtor country was prevented from implementing a restructuring approved by the majority by a negative minority (“ holdout problem ”). For the most part, minorities consciously pursued the tactic of a “holdout” ( German “denial” ) in order to avoid the disadvantage of a haircut . Worldwide there was a need to improve crisis management and raise the CAC to the market standard. The first CACs were still inconsistent, so that the G10 felt compelled to introduce recommendations for harmonization. The first significant government bond with a CAC on the basis of the G10 proposals was a Mexico bond issued in February 2003 for US $ 1 billion, and in 2005 95% of all newly issued government bonds had this clause. In the Mexico bond, the CAC was still in contradiction to the conventional bond terms of other countries, but Uruguay and Brazil soon followed suit.
Legal issues
The CAC arose from the lack of a set of rules for state bankruptcies and the difficult negotiations between a debtor state and its atomized bondholders. The legal model was syndicated loans , for which similar approval clauses are used. In its standard contracts, the LMA , which is responsible for coordinating this, provides for the approval of 2/3 of the creditors in the event of significant contract changes; if this approval is given, all creditors are bound by the change. When the CAC was introduced, it was argued that the large number of bondholders could only be treated equally in the event of pending changes if the change to the bond conditions was voted on in a “concerted action” and the majority decision applied to all bondholders.
These are out of court restructurings made possible by the CAC. The core of the CAC is the determination of the majority decision, which in turn consists of 4 components. Required majorities usually start at 75%, but there are also 85% majorities. If the minimum quota required for the majority decision is reached, the CAC determines that this majority decision is binding for all bondholders. Although the CAC can affect all loan terms, its practical application is mostly limited to interest and repayment modalities , debt rescheduling , debt relief and consolidation . If the bond debtor ceases to pay, it is suggested that the decision on termination and filing of legal action should be made dependent on reaching a qualified minority of at least 25% of the outstanding nominal value.
In Germany, the Debt Securities Act (SchVG) of December 1899 regulates the way in which the creditors of a bond can influence the rights evidenced in the bonds by agreeing to certain changes to the bond conditions. This can be necessary for various reasons during the term of a bond, especially in the event of a crisis or the bankruptcy of the bond debtor . Since July 2009 the CAC has been included in § 5 SchVG, whereby a nominal value-related majority of 75% is required to change individual bond conditions. According to this, essential bond terms and conditions can be changed for all creditors as a whole , provided that only a majority of the creditors agrees. According to Section 4 SchVG, the bond conditions can only be changed by all creditors or by a 75% majority of creditors based on the nominal value, then effective for all creditors (Section 5 (2) SchVG) ( collective bond ), so that their equal treatment by the debtor is guaranteed. In Section 5 (3) SchVG, the law contains a non-exhaustive list of changeable bond conditions, in particular the reduction or change in the due date of interest and the main claim. According to Section 1 (2) SchVG, this law expressly does not apply to foreign issuers and German debtors in the legal form of a legal entity under public law (federal, state or city bonds). This means that the CAC will not be included in German public bonds. The reason is that the SchVG is intended to prevent the bond debtor from becoming insolvent, but German regional authorities are incapable of insolvency .
It is legally unclear whether the CAC constitutes an unreasonable disadvantage of the bond debtor or the minority of creditors according to § 307 BGB . The Federal Government is of the opinion that this is not the case if the CAC is based on the model of the SchVG.
Incorporation of the CAC into law
Many other states have now included the CAC in their financial legislation so that it can be used when needed. From January 2013 onwards, a standardized, identical debt rescheduling clause will be included in all government bonds of the EU member states in accordance with Article 12 (3) of the ESM Treaty. It will be compatible with US and English law. The ISDA is of the opinion that this statutory introduction of a CAC does not in itself trigger a credit event , so that, because of the mere statutory introduction, no payments from credit default swaps have to be made by their protection seller. Nevertheless, the application of the CAC can trigger a credit event. On March 10, 2012, the ISDA Determinations Committee decided to classify Greece's previous debt rescheduling campaign as a credit event, despite a high voluntary participation rate. According to Greek law, Greece wants to force all bondholders to waive their claims, because the country had already passed a precautionary law for this purpose that opens up the possibility of retrospectively equipping old bonds with CAC. The reason was that only 83.5% - instead of the required 90% - of the private bondholders agreed to a haircut and therefore the statutory rescheduling clauses intended for this case come into force. In this case, it was important to the ISDA that the precautionary legal introduction of the CAC was not already a credit event, but that the actual application of this law would lead to the compulsory approval of the minorities. If the majorities provided for in the CAC clause are achieved, debt rescheduling, debt relief or interest rate cut as a result of the vote will constitute a credit event. This results in payment obligations for the credit default swap, provided that one of these measures is defined as a “credit event”.
If CACs are included in government bonds, their security would no longer be guaranteed.
literature
- Julia Bodem: Collective Action Clauses and the involvement of private creditors to deal with the sovereign debt crisis in the European Economic and Monetary Union. GRIN , Munich 2011. ISBN 978-3-656-05389-7 .
Individual evidence
- ↑ Deutsche Bundesbank, Annual Report 2003 , p. 109 ( Memento of the original dated December 29, 2009 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice.
- ^ The G-10 Working Group, September 2002
- ↑ Randal Quarles, Herding Cats: Collective Action Clauses in Sovereign Debt , 2010, p. 29
- ↑ Sergio S. Galvis, Collective Action Clauses , February 2004, p. 5 ( Memento of the original from January 29, 2016 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice.
- ^ Mark M. Rossell, Can Collective Action Clauses Migrate to the Latam Corporate Bond Market? , December 2010, p. 1 (PDF file; 495 kB)
- ↑ Deutsche Bundesbank, op. Cit., P. 109 f.
- ↑ Declaration by the Federal Government on the admissibility of rescheduling clauses ; Printed in: Deutsche Bundesbank, Annual Report for 1999 , p. 117 ( Memento of the original dated February 3, 2007 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice.
- ^ Deutsche Bundesbank, Annual Report for 1999 , p. 117
- ↑ European Union, Collective Action Clauses in Euro area ( Memento of the original dated August 11, 2014 in the Internet Archive ) Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice.
- ↑ Overindebtedness and state insolvency in the European Union , Report 01/11 for the Federal Ministry of Economics, January 2011, p. 21 ( Memento of the original from December 8, 2011 in the Internet Archive ) Info: The archive link was automatically inserted and not yet checked. Please check the original and archive link according to the instructions and then remove this notice. (PDF file; 960 kB)
- ↑ FAZ.net of February 22, 2012, discussion about CDS from Greece
- ↑ The star of March 9, 2012, haircut is rated as a credit event
- ↑ Federal Association of German Banks : Defusing the sovereign debt crisis - only possible over a long distance , March 2011 ( Memento of the original from August 22, 2011 in the Internet Archive ) Info: The archive link was automatically inserted and not yet checked. Please check the original and archive link according to the instructions and then remove this notice. . Retrieved February 22, 2012
