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Blazing a trail down Mexico way

Mexico was the first emerging-market issuer to include collective action clauses in an SEC-registered bond. That gave it a one-off opportunity to write its own documentation unburdened by precedent. Now the CAC route looks like the clear way forward.

AT THE END of February, Mexico, the most important bond issuer in Latin America, stunned the market with a new $1 billion bond that included collective action clauses (CACs). At a stroke, the sovereign had answered the most pressing question facing the emerging-market debt asset class: could it create a mechanism for sovereign workouts or not?

The bond was oversubscribed and Mexico made it clear that from now on CACs will appear in every bond it issues. CACs now seem certain to be included in forthcoming bonds from Uruguay, and will probably appear in Korea's next issue. In the case of Latin America, the hope is that these clauses will clear the way for capital to start flowing into the region again.

It's the culmination of a long debate. As one treasury official said at the annual meeting of the Inter-American Development Bank in Milan last month: "I love talking about this stuff, and even I'm sick of talking about this stuff." Huge amounts of time and energy have been expended by the IMF, the G7, the US Treasury and the private-sector trade associations. And while everybody agreed that the key aim was to try to restore private-sector capital flows to the region, it was clear that seemingly endless talk and no action was having the opposite effect.

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