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Uruguay closes the loop

One key clause in Uruguay's proposed collective action clauses closes a loophole that Mexico left open in its own bonds: the question of whether the issuer could use exit consents on the payment terms of bonds with CACs. Exit consents, even on non-payment terms of bonds, are generally considered coercive and rather bad manners, even if a necessary evil for countries seeking to restructure their bonds.

Exit consents are used when a country is trying to get bondholders to switch out of a set of old bonds and into a set of new bonds. The country forces anybody making the switch to vote in favour of severely weakening the safeguards that were built into the old bonds. Since the switchers aren't going to hold any of the old bonds any more, such a vote doesn't affect the people who vote for it: it only affects those left behind. If the exit consents get enough votes (normally two-thirds or half), the holdouts in any exchange offer are left with illiquid instruments lacking basic protections such as a sovereign immunity waiver.

If there are CACs in a country's bonds, however, it can make exit consents much worse, by asking participants in an exchange offer to strip holdouts not only of their listing on the Luxembourg bourse, say, but also of their coupon and principal payments.

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