Analysis-Wall Street backs New York sovereign debt bill By Reuters

By Libby George and Rodrigo Campos

LONDON/NEW YORK (Reuters) – Emerging market sovereign bond investors, alarmed by efforts to limit their debt restructuring options, are adding clauses to bond deals that would allow them to change jurisdictions to avoid such restrictions.

Two recent debt deals, one underway in Sri Lanka and another agreed last year in Suriname, included clauses that would allow investors to change the location where potential disputes are resolved.

Such moves show investors are increasing their defenses against legislative changes that supporters say would help poor countries secure debt relief, but which financial firms say could make emerging-market bonds too risky for investors or too expensive for borrowers .

“Ideas … are not going away,” Andrew Wilkinson, senior restructuring partner at law firm Weil Gotshal, said of the bills. “They will continue to appear, because there is a problem.”

Under proposed changes to the laws in New York state, which is where about half of international bond deals take place, commercial creditors could see their recoveries limited to the level of official bilateral creditors. They could also be forced to adopt a pre-set formula for deciding who gets what in a restructuring.

The reason is that it would streamline the default process and spare indebted nations from lengthy and expensive negotiations. But investors say they could be forced to take losses that might be manageable for government lenders but too steep for private ones.

“You will impose (the same) haircut when you have two different lenders with two completely different reasons for lending,” said Rodrigo Olivares-Caminal, chair of banking and financial law at Queen Mary University of London.

“You borrow millions and owe a fiduciary duty to your investors.”

Lenders also warn that changes like those proposed in New York could backfire, causing them to shy away from lending to poor countries or demand higher returns to justify the risk.

The bills in New York did not pass this year or last, but amid what the World Bank describes as a silent debt crisis, the costs of servicing emerging countries’ external debt are expected to reach $400 billion this year. year, support for changes to the law is growing for both. shores of the Atlantic.

SLOW AND PAINFUL

A series of recent defaults by Zambia to Ethiopia has fueled a debate over the equity of the debt – especially as Zambia’s restructuring has taken three painful years.

Debt justice advocates, including Ben Grossman-Cohen, director of campaigns for Oxfam America, supported the New York bills, and he said the clause in the Sri Lanka contract was “just an attempt to grab headlines.”

For others, like Olivares-Caminal, the Sri Lankan bond provisions mark a watershed moment.

“In Suriname it was a technicality and it went unnoticed. But Sri Lanka, I think it will send a strong message,” said Olivares-Caminal.

He said the clauses were a direct reaction to the “fires” in the two main jurisdictions – New York state and England, where similar proposals have gained renewed momentum since the Labor party took power.

In the case of Suriname, negotiators inserted a clause allowing 50 percent of bondholders to request a vote to change the jurisdiction underlying the bonds, while giving the country the power to oppose the request.

In Sri Lanka, just 20% of the holders of a particular bond could force a vote to change jurisdiction from New York to England or Delaware. The government has no right of veto.

NOT TO RUN AWAY?

Even those who support changes to make debt relief fairer for the developing world say lawmakers need to be careful.

Rebeca Grynspan, the secretary-general of the UN Trade and Development Agency (UNCTAD), told Reuters that several provisions introduced in the past decade already offer safeguards against rogue lenders holding up debt transactions in search of bigger profits.

Newer language, such as natural disaster clauses, also protects debtor countries, she said.

“Legal tools are important, but if we overdo it, the private sector will go elsewhere to issue debt,” she said.

Switching from New York to English law would be relatively straightforward, restructuring experts say, given that both locations have legal systems honed over decades to handle sovereign debt defaults and their legal complexities.

Moving elsewhere would be problematic, Weil Gotshal’s Wilkinson said.

“You don’t just create a restructuring regime out of cloth and expect it to work,” he said. “You need established law and you need judges with experience in applying it.”