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Figuring Out the Terms in the Lebanese Bonds (and Why Do the Agents in Sovereign Bonds Suck?)

posted by Mitu Gulati

My students have been valiantly trying to track down the Fiscal Agency Agreements (FAA) for Lebanon that tie in to the offering documents. Those are crucial for anyone trying to figure out a restructuring strategy for the government, which is one of our projects for the term.  And, although I am optimistic that my students will figure out a way to get them, they have so far been met by a brick wall.  None of the various parties who have the documents, such as the Fiscal Agent or the Ministry of Finance or the various advisers to the Lebanese government will do the least bit to help my students.  At the end of last week, some of my students even called the FA's offices to say that they were willing to take a little side trip from their spring break visit to Europe this week to go over to the FA's offices in Luxembourg to copy this precious document in person. The response: The person on the other end hung up. Really?  Is the government really so confident in the restructuring plan that it can afford to have its agent hang up on people willing to delve through the fine print of these documents for free to see if they can come up with helpful suggestions? Maybe Lebanon already has a kickass plan from its expensive advisers and does not need any help. Wait, I forgot that they have no plan.

For the life of me, I cannot understand why the agents in sovereign bonds behave in this way (this is not the first time I've encountered this idiocy). What possible interest can there be on the part of the Fiscal Agents (agents for the sovereign, let us remember) to deny us or any other member of the public from getting the contracts?  Should they not be on the ministry website?  Given that they have no plan of their own, why not allow a competition among those of us who study these things to come up with the best solution? After all the tournament model works quite well in many other settings. 

I realize that I'm tilting a windmills here.  Nothing will change. 

So, assuming you cannot find the FAA, what to do? Turns out that there are some strategies.  Sovereign bonds tend to be remarkably standardized (boilerplate, some might say).  The key though is to figure out which standard the particular bonds connect to. Lebanon's bonds, as we have discussed in prior posts are unusual creatures.

Lebanon was one of the first sovereigns using New York law to adopt Collective Action Clauses.  And they did so, with no urging or arm twisting by the IMF or the US Treasury, prior to 2003, which was when all of the other New York law issuers shifted to a form of CACs that were recommended by a G-10 committee.  (For the history of this, see herehere and here).  Researchers, starting with two Australian economists, Anthony Richards and Mark Gugiatti (here) -- the first to find these pre 2003 New York law CACs -- were of course intrigued as to what had driven Lebanon and a few other countries to be ahead of the curve in terms of innovating.  The answer that was widely given at the time was that the Lebanese lawyers, who happened to be in London, had cut and paste an English style modification clause by mistake (or mindlessly) without realizing that the CACs in the standard English law bond were non standard for New York law bonds. 

Why is the foregoing relevant to our efforts to figuring out the terms of the Lebanese bonds today(even if you are skeptical of the inadvertent copying story)?  It is relevant because it tells us that if we can figure out the standard English law bond contract terms being used in the pre 2003 era, then we can take a pretty good guess at what the Lebanese terms then were. And it turns out that Lebanon, while having been ahead of the curve in the pre 2003 era, refused to innovate further.  While the rest of the New York law governed sovereign market adopted new types of CACs in 2003 and then again in 2014, both of which were significant improvements on the prior models, Lebanon kept using its original English style template.  And that means that we can look to the standard English style template in the pre 2003 period to figure out what terms Lebanon likely has even today.  We can even go one step further to look at the four other sovereigns identified by Gugiatti and Richards as having used a Lebanese style CAC in their New York law bonds pre 2003. If memory serves, those were: Bulgaria, Egypt, Qatar, and Kazakhstan. 

Was this all inadvertent copying?  For a project that I did with the wonderful Anna Gelpern eons ago, Anna's skepticism of the inadvertent copying story resulted in her insisting that we track down every one of the lawyers who drafted these contracts to try and figure out whether they knew what they had done. If they had done inadvertent copying, we assumed, they would not be able to talk coherently about how innovative they had been.

Turned out that these lawyers did indeed have a very good grasp of what they were doing. (Either that or they were good at snowing us).  Many of them told stories of how they had worked on the Brady deals and had had to deal with holdout creditors there. Hence, when it came time to choose a standard template, they used the English style one which contained CACs (albeit, old fashioned ones with meetings and quorums and so on). And they were able to use the English style contracts because, even though they were issuing under NY law, their clients were mostly in the European market (yes, the story gets a bit wonky here).  One of them even gave us an autographed copy of what he claimed was the very first New York law CAC ever drafted -- Anna might have it on her wall at Georgetown Law.

To reiterate though, one should be able to figure out the terms in the Lebanese documents by looking at the pre 2003 English style CACs that are more fully described in many non Lebanese sovereign bonds issued at the time.  Or potentially even more informative, one could look at the bonds of the four aforementioned countries: Bulgaria, Egypt, Qatar and Kazakhstan from the pre 2003 period that used similar structures. 

A final clue: 18.75 is a potentially magic number. If I were a guest on the Slate Money podcast next week, that would be my contribution to the the numbers round that they do at the end of every podcast. (they did a super podcast on the Lebanese debt crisis/ponzi scheme just a couple of days ago -- with Felix Salmon and Emily Peck asking the resident expert on Lebanon, Anna Szymanski, tough questions about how this ponzi scheme got started and why it all completely fell apart yesterday). 

Addendum, March 13 (2020):

In response to the comment below, I need to clarify that although the claim was made in the CAC literature (particularly some of the econ articles) at the time that these London based NY law bonds with CACs were perhaps the product of inadvertent copying, it is not the claim that I made in the articles on CACs that I wrote with Mark and Anna.  Quite the contrary actually.  We were told -- quite plausibly, we thought -- that the clauses originated in the experience of some lawyers with the Brady deals.


Dear Professor Gulati:

I refer to your post entitled “Figuring Out the Terms in the Lebanese Bonds (and Why Do the Agents in Sovereign Bonds Suck?)”. As you may recall, I was part of the team that worked on Lebanon’s earliest Eurobond issuances in the US markets and one of the lawyers whom you interviewed in preparing your law review article “A People’s History of Collective Action Clauses” (54 Virginia Journal of International Law 1-95 (2014)), co- authored with W. Mark C. Weidemaier and available on your law school’s website at https://scholarship.law.duke.edu/faculty_scholarship/2710/ and also by link in your post.

In your post, you relay a claim that collective action clauses may have been included in the Lebanese sovereign bond terms by “mistake” or “mindlessly”. I think you are well aware that this is not true. In fact, in the cited law review article, you state that “It strikes us as difficult, by any stretch of imagination, to attribute these differences to inadvertence rather than design.” (p. 79). Moreover, you refer to my letter in 2008, noting that we “had deliberately sought to create a “hybrid” clause that “anticipat[ed] the need to restructure sovereign debt” without leaving open the possibility that a minority of bondholders could approve a restructuring (as in English-law bonds)”. (p. 79).

The reality is that the inclusion of the collective action clauses was discussed in detail with the banks acting as joint lead managers at the time, with the Ministry of Finance team and with counsel to the Lebanese Republic. To suggest that these parties accepted a clause inserted by mistake or mindlessly is frankly offensive to all involved. As you also note, other countries, including Qatar and Egypt, seeing the potential benefit of the introduction of a collective action clause, also included the clause, consciously following Lebanon’s lead. Overall, in stark contrast to your note, the adoption of the collective action clause in the New York-law instruments reflected a conscious, well-reasoned, fair and frankly wise approach to an issue that was overdue for correction.

Responding to your point regarding the availability of the Fiscal Agency Agreement, it is, on its terms, available for inspection only by Noteholders. This is fairly common and considered reasonable in the market.

Louise Roman

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