Subscribe to receive free updates on Sovereign debt. We’ll send you a daily email digest with the latest news in the world of Sovereign debt. Stephen Choi and Mitu Gulati, faculty members at New York University and the University of Virginia respectively, along with Ugo Panizza, a professor of economics at the Geneva Graduate Institute, discuss the ongoing debt crisis in Lebanon. They point out that Lebanon’s failure to implement necessary reforms and negotiate with private creditors has increased the risk of holdouts. The authors highlight the country’s decision not to use Aggregated Collective Action Clauses (CACs) as a contributing factor to this risk. These clauses, which allow a debtor to conduct a single aggregated vote across all bonds, were designed to discourage holdouts. However, Lebanon chose to stick with its old non-aggregated clauses. This, combined with the low trading value of Lebanon’s foreign currency bonds, attracts distressed-debt sharks.
The authors suggest that Lebanon could potentially leverage the “manifest error” clause found in its bond contracts. This clause typically covers minor technical corrections that can be made without creditor approval. However, Lebanon’s clause differs in two significant aspects. Firstly, it grants the Republic the power to add new provisions to the contract without trustee approval. Secondly, any changes must be made for the collective benefit of the bondholders. The authors argue that Lebanon likely has the authority to determine if a change benefits the bondholders. They highlight language in Lebanon’s offering circulars that supports this interpretation.
The authors propose that Lebanon could use this clause to implement an aggregated voting mechanism, similar to Greece’s approach in 2012. This would require an agreement from over 50% of creditors across all bond series to allow for a binding restructuring. They acknowledge that objections may arise, claiming that such a provision may not benefit all bondholders and could be used to impose a restructuring on dissenting creditors. However, the authors argue that the language in Lebanon’s clause suggests that the new provision only needs to benefit the bondholders as a class, rather than every individual bondholder. They point out that the Greek provisions, implemented through legislation, withstood multiple legal challenges.
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