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Sovereign bond restructuring: The buy side starts to bite back

In a world where sovereign bondholders are disparate and disunited they are hard pressed to get a good deal if a defaulting sovereign and its bank advisers devise a unilateral exchange offer or other restructuring. With the often bitter experience of three such restructurings behind them, bondholders are getting together to protect their position.

Sovereign bonds have been successfully restructured by three countries to date.

Pakistan, Ecuador and Ukraine launched market-based operations, persuading holders of bonds these countries said they could not service to accept new bonds with longer maturities and lower returns.

The choice for investors was either to get nothing if the countries defaulted, or accept the new bonds on less favourable terms.

So far, these bond exchanges have satisfied the troubled countries, the international financial institutions, and the banks.

Only one group remains unsatisfied: the bondholders. Now they are getting organized and fighting back. From now on countries and banks are likely to have to do more than pay lip service to bondholders' and creditors' rights if they are to keep bringing successful exchange offers to market. And the debate now rages over whether it is possible to draft a broadly acceptable code of conduct for such debt negotiations, or whether each case must be resolved differently.

The system of sovereign bond restructuring as it stands was not designed with creditors' rights in mind. In fact it wasn't designed at all: it just happened in an ad-hoc kind of way after the Paris Club set the ball rolling by forcing Pakistan to bail in its private-sector creditors.

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