Collective action clauses
(CAC) are very much discussed today as they are at the heart of the Greek
bond restructuring and its outcome.
A collective action
clause treats a very simple problem: If you pass a contract and on
both sides of this contract there are several parties, basic civil
law principles provide that every party must agree to any
modification of the contractual terms. The “pacta sunt
servanda.” principle says that every party must be in the
position to rely on the contents of the signed agreement without
running the risk of seeing the contractual terms changed against
one’s own will.
When we look at bond
issues to which a multitude of parties subscribe, the backdrops of
this principle are obvious:
- In practice, you will often not be able to reach all creditors to renegotiate.
- Because every bondholder has diverging interests, you will never find a solution.
- If you need every party to agree, each individual bondholder gains considerable bargaining power which may give rise to opportunistic behaviour.
Collective action clauses
intend to solve the above described problem by providing ex ante for
contractual mechanisms that facilitate decision-making processes in
times of crisis. The basic idea is pretty straightforward. As we know
that people will not be able to find an agreement in times of crisis,
we try to get their agreement beforehand, e.g. at a time when
everything looks fine.
However, there is no
concrete definition of which contents you can find in a collective
action clause.
Usually, it contains 2
main sets of rules: the quorum and type of majority required to
modify the terms of a bond’s deed of covenants and the quorum and
type of majority required to accelerate the bond.
As an example, I analysed
one Greek bond issue from 2004, whose CAC provisions may be
summarized as follows:
The principles of CAC
provisions are pretty much standardized in bond documentations.
However, the problem is that their individual design varies over time
and from one bond issue to another, reflecting both changing market
practices and changing balances of power between investors and bond
issuers. As a matter of fact, this is what contributes pretty much to
restructuring negotiations getting so complicated and time consuming.
