Sovereign debt restructurings with private creditors

Table 3 Recent sovereign debt restructurings with private creditors main features

The recent experiences of debt restructurings with private creditors are very diverse.

Two recommendations dealt with creditor participation in reorganization proceedings (a) to limit the number of creditor committees to a single committee, except in extraordinary circumstances and (b) in smaller reorganization cases where creditors might have little interest in forming a committee, to provide for the appointment of a creditors' representative to monitor the case and negotiate a reorganization plan on behalf of unsecured creditors.

However, the Working Group was urged to consider such protective measures in a manner that ensured the equality of creditors, rather than establishing a preferential treatment of local creditors to the detriment of foreign creditors.

In the insolvency of a non grantor debtor, the creditor is an unsecured creditor with an unsecured claim against the non grantor debtor.

When a sovereign decides that its foreign debt is unsustainable, the government and its creditors have had to negotiate among themselves about what to do. For sovereign bonds held by other sovereigns, the Paris Club of creditor countries has developed procedures for handling the debt.

Some sovereign debtors and private creditors have been attempting to develop voluntary Principles of stable capital flows and fair debt restructuring in emerging markets , but progress has been slow.

These regimes, in seeking to ensure fairness to creditors as a whole, must reconcile the interests of two (or more) sets of creditors who have dealt with two (or more) separate corporate entities.

The Working Group considered the importance of elaborating provisions that ensured adequate protection of the interests of all creditors, including creditors in the enacting State.

To the extent that the value of the encumbered asset is insufficient to satisfy the secured creditor's claim, the secured creditor may participate as an ordinary unsecured creditor.

recognition 67 71 16 Article 19.

(b) Provide a temporal event for ordering priority among secured creditors and between a secured creditor and other classes of competing claimants.

(c) Ensure equitable burden sharing with private creditors

Argentina s interests and those of its creditors were thus aligned both wanted growth. It was the equivalent of a Chapter 11 restructuring of American corporate debt, in which debt is swapped for equity, with bondholders becoming new shareholders.

The Working Group discussed the question of the time limit within which foreign creditors could file their claims.

A Korean negotiating team met with a steering committee of international creditor banks to negotiate a restructuring of the short term debt.

(ii) A creditor of the assignor or

The most noteworthy was the IMF sovereign debt restructuring mechanism,29 which suggested some core features majority rule in restructuring decisions, a legal stay against claims by creditors, protection of creditors' interests, seniority of new money and a dispute resolution forum.

A note of caution was struck, however, in that regard, to the effect that such laws needed to strike an appropriate balance in the treatment of privileged, secured and unsecured creditors so as to become acceptable to States.

The law should provide that a secured creditor with a security right that is not effective against third parties has towards third parties no right other than as an unsecured creditor priority over unsecured creditors unless the unsecured creditor has taken steps to reduce its claim to a judgement or the grantor has become insolvent .

(e) Protection of the insolvency estate against the actions of creditors, the debtor itself and the insolvency representative, and where the protective measures apply to secured creditors, the manner in which the economic value of the security interest will be protected during the insolvency proceedings

(172) The insolvency law should specify whether secured creditors are required to submit claims.

Rather than imposing the costs of the ECB s and EFSF s losses on European taxpayers, the banks creditors could give up some of their claims in exchange for receiving shares from the banks owners. Debt equity swaps rescue the banks without rescuing their shareholders.

Debt equity swaps would be a much better way to recapitalize the banks. Rather than imposing the costs of the ECB s and EFSF s losses on European taxpayers, the banks creditors could give up some of their claims in exchange for receiving shares from the banks owners.

(f) Grantor means a person that creates a security right in one or more of its assets in favour of a secured creditor to secure either its own obligation or that of another person (see debtor).

NEW YORK Like individuals, corporations, and other private firms that rely on bankruptcy procedures to reduce an excessive debt burden, countries sometimes need orderly debt restructuring or reduction. But the ongoing legal saga of Argentina s fight with holdout creditors shows that the international system for orderly sovereign debt restructuring may be broken.

Right to notify the debtor

Treatment of foreign creditors

It was noted, however, that one of the reasons the mechanism had failed to gain support was that IMF could not be regarded as a neutral arbitrator, given its preferred creditor status.

Finally, portfolio equity flows also moved ahead.

The restructuring of debt owed to private creditors was also an important aspect of external debt crisis resolution. The introduction of collective action clauses and the development of a voluntary code of conduct by private creditors and sovereign debtors were the major ongoing initiatives in that area.

Rights and obligations of the grantor and the secured creditor

Where the security right at issue (which secures the debtor's obligation) is granted by the debtor, the term debtor also refers to the grantor.

Orthodoxy has always upheld the sacred rights of the creditor political necessity has frequently demanded relief for the debtor. Which side wins in any situation depends on the extent of debtor distress and the strength of the opposing creditor debtor coalitions.

(ii) Possessory security right means a security right in tangibles that are in the actual possession of the secured creditor or of another person (other than the debtor or other grantor) holding the asset for the secured creditor.

The lessons learned point to the need to reach an international understanding on debt restructuring modalities (including voluntary code and international arbitration or mediation mechanisms) which would bring together official and private creditors in a collaborative and constructive dialogue with a view to resolving debt problems in an expeditious and timely manner and to equitably protecting the interests of debtors and creditors.

Recognizing the current debate on sovereign debt restructuring, especially the efforts led by sovereign debtors and private creditors to develop a voluntary code of conduct, and stressing that modalities for sovereign debt restructuring should be voluntary, market friendly and flexible, with due consideration of the specific circumstances of individual countries, and should result from the participation of all relevant stakeholders,

2. The debtor may raise against the assignee any other right of set off, provided that it was available to the debtor at the time notification of the assignment was received by the debtor.

Paris Club creditors cancelled US 823 million of debt, and US 737 million was rescheduled.

Regarding situations in which there was significant external debt owed to private creditors, many participants encouraged continued efforts to establish an appropriately designed, independent debt restructuring framework.

A security right will have little or no value to a creditor unless the creditor is able to ascertain, at the time a transaction takes place, its priority in the property relative to other creditors (including an insolvency representative).

Creditors in insolvency proceedings

Creditors of a corporation cannot recover debts from a shareholder.

While agreeing in principle on the desirability that foreign creditors be notified in a language accessible to them, the Working Group felt that not all enacting States might be in a position to introduce such a requirement.