纽约改写主权债务重组规则

New York rewrites the rules on sovereign debt restructurings

 

 

Daniel Reichert-Facilides is a senior counsel at the law firm Chatham Partners and a former partner of Freshfields Bruckhaus Deringer Proposals to block hedge funds from squeezing money out of sovereign debt restructurings have been floating around for some time, ranging from tweaking bond contracts to entirely new laws.

Such laws have already been enacted in the UK, France, and Belgium. Depending on where you stand, they are usually referred to as ‘anti- vulture-fund’ or ‘safe harbour’ laws. Except for a few distressed funds that focus on exploiting the dysfunctionalities of the existing legal framework, notably Elliott Management and NML Capital, market participants hardly took note.

The perception of safe harbour laws as a fringe idea has drastically changed since Assembly Bill A2970 passed the judiciary committee of the New York State Assembly last month. If enacted, the new law will limit the recovery of sovereign debt through New York courts to the burden sharing standards that have been set for the country in an international initiative for debt relief. In other words, it would make the longstanding Paris Club principle of comparable treatment enforceable as a matter of New York law.

On the day of the judiciary committee meeting, The Credit Roundtable had already issued a last-minute rebuttal. A few days later, law firm Clifford Chance published a client briefing on all three proposals currently pending in the New York legislature. Finally, on May 22, a group of trade associations including the International Capital Market Association and Institute of International Finance issued a joint statement suggesting that New York law would become a sinking ship if the bill was enacted.

As is to be expected from a group of this calibre, the objections reflect serious concerns. As can also be expected, not all are well-founded:

The least convincing concern is the knee-jerk objection that the law would apply retroactively: In a restructuring context this argument only has merit if a law interferes with some but not all types of debt, and thereby benefits other creditors to the detriment of those affected. On the other hand, retroactivity is not an issue if a new law indiscriminately captures all forms of non-preferred debt to achieve equal treatment, as A2970 actually does. In the US, this principle doesn’t seem to have been challenged since 1874, when a federal court in New York confirmed the constitutionality of a statute introducing restructuring by majority vote as an option for all pending and future bankruptcy proceedings.

Because the new law would apply irrespective of the governing contract law, there is also no reason why it should divert issuers and investors to other jurisdictions if they have opted for New York law in the past. No such effect has been observed after the UK introduced a similar statute to enforce debt relief under the HIPC (highly indebted poor countries) initiative in 2010. Indeed, the ability of safe harbour laws to capture types of debt that would otherwise escape the reach of collective action clauses under contract law is the main justification for legislative action.

For similar reasons, it seems highly implausible that the new law would affect market access or increase borrowing costs: If a country proceeds to a restructuring under the Common Framework or with the help of the Paris Club, it will inevitably have to obtain a debt sustainability analysis from the IMF. In other words, the size of the pie will have been defined already, and all the law does is to ensure that no creditor can snatch a bigger slice at the expense of others. Unless they reject comparable treatment together, rational investors will therefore have to base their pricing on the assumption that holdout strategies are a zero-sum game, and that the risk to come out at the wrong side of the equation is high for all but the most aggressive creditors. Thus, rather than increasing borrowing cost, enforcing equal treatment can be expected to result in a decrease, as has been demonstrated for collective action clauses.

A more rational concern relates to the use of equitably burden sharing standards set by an international initiative’ as a statutory benchmark. The broad reference means that creditors — and eventually a judge — might have to form a view on what exactly comparable treatment means in a specific scenario. Since the Paris Club has in the past emphasised flexibility at the expense of predictability, the margin of appreciation does indeed imply some ambiguity.

More clarity on how comparable treatment should be assessed will be one of the topics of a workshop announced by the Global Sovereign Debt Roundtable on April 12. In the meantime, it is worth reminding oneself that good faith is an even more generic concept than equitable burden sharing and comparable treatment. Yet the duty to co-operate in good faith has long been enshrined in New York contract law without affecting market confidence.

In the sovereign debt context, professors Lee Buchheit and Mitu Gulati have suggested that good faith could serve as the statutory basis for a new judicial doctrine to counter holdout strategies. Most recently, an unusually candid footnote by the judge in Hamilton Reserve Bank versus Sri Lanka suggested New York courts are finally losing patience: This Opinion [to deny a motion by Sri Lanka to dismiss the lawsuit] does not address the serious policy concerns raised by the filing of this litigation while the International Monetary Fund (“IMF”) is actively working with Sri Lanka to resolve its financial crisis. Indeed, as recently as March 20, 2023, the IMF approved a $3 billion loan to help Sri Lanka through its financial crisis. This ruling is confined solely to the legal issue presented and should not be construed either as an endorsement of litigation filed by beneficial holders of sovereign debt while the IMF addresses a grave crisis over that debt or an indication that such plaintiffs should be given priority in recovery during any debt restructuring negotiations that occur.

Before a much less predictable judicial storm breaks loose, institutional investors might be well advised not to mistake the safe harbour for a sinking ship.