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ICMA CACs v. 2.0: Mexico Moves in New York

posted by Anna Gelpern

Mexican-flag-300x225Mexico has just filed a registration statement with the SEC for New York-law bonds with a version of ICMA collective action clauses (CACs), cheered here just a few months ago, among other refinements. This is a big deal for three reasons: Mexico, New York, and the clauses. Bottom line -- a classy, confident move.

In 2003, Mexico led the market shift from unanimous consent to majority modification in New York. Once Mexico issued with CACs, everyone else followed. This time around, some expressed doubts that Kazakhstan, which adopted ICMA CACs in English-law bonds hot off the press in early October, could exert a comparable gravitational pull, especially in New York. As if to prove the point, a few Latin American issuers have issued in New York since Kazakhstan with revised pari passu clauses, but no new CACs. Mexico fixed both pari passu and CACs, and has a track record of bringing the market along.

New York is a big deal because all these contract reforms respond, at least in part, to U.S. court rulings, which (a) interpreted Argentina's pari passu clause as requiring ratable payment to holdout creditors, (b) said that CACs could cure the common cold, and (c) told market participants that they could avoid Argentina's fate by fixing their contracts. From this perspective, fixing English-law contracts is prudent; fixing New York-law contracts is imperative.

Mexico's refurbished contracts are notable in three ways.

  1. The new bonds would be issued under an indenture, with its attendant collective enforcement provisions. Holdouts would have to get 25% of their series to instruct and indemnify the trustee before bringing a lawsuit for accelerated principal. Not very mavericky.
  2. The pari passu clause has been stripped of all Latin, and disavows the ratable payment construction.
  3. ICMA majority modification terms march on in substance, but in sparser (New Yorkier?) language. Modification of key terms can now happen 

(a) with a 75% vote of each series (as in the traditional English or post-2003 New York CACs),

(b) with a 2/3 vote of the aggregated bond stock or subset, *plus* a 50% vote of each modified series (as in Uruguay et al post 2003 and in the Euro area post 2013), or

(c) with a single 75% vote of the aggregated bond stock or subset. Here the outcome must be "uniformly applicable" -- ie, everyone gets the same instrument or the same menu.

 So -- if you are into sovereign debt contracts, this is your iPhone 6. Behold the un-boilerplate.

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