Publication of a document on majority voting provisions (MVPs) for inclusion in new sovereign loan agreements

A document on majority voting provisions (MVPs) for inclusion in new sovereign loan agreements has been published as the output of the work undertaken by the UK HM Treasury convened Private Sector Working Group on MVPs.

In recent years work has been conducted in the field of international sovereign bonds to incorporate majority voting concepts into the documentation to facilitate the restructuring of the underlying sovereign bond instruments in circumstances where that was necessary and to minimize holdout creditor risk. That work was carried out under the aegis of the US Treasury but it was not carried through into debt contracts in the form of loans.   An  IMF Staff Paper has noted that the lack of majority voting concepts in sovereign loan agreements is a gap in the current international architecture for resolving sovereign debt cases involving private creditors.

The United Kingdom, during its time as chair of the G7, took the lead through HM Treasury for the purposes of an initiative examining contractual provisions in sovereign loan agreements. The process of identifying the areas to be addressed and the associated suggested new provisions was assisted by engagement with the IMF, the Paris Club Secretariat, the Loan Market Association, the Loan Syndications and Trading Association, the Asia Pacific Loan Market Association, the International Capital Market Association, G7 treasuries, rating agencies, sovereign debt advisory firms, a number of sovereign debtors, legal counsel and a number of financial institutions and investors with an interest in this area over a period of between 18 months and two years. There has also been a regular process of dialogue with the Institute of International Finance and some of its members.

The output arising from this work is the formulation of drafting to reflect MVPs in new sovereign loan agreements for take-up by the loan market. The Guidance and Explanatory Note published today, which includes the specimen clauses for use in new sovereign loan agreements, reflects the efforts over this period. The key deliverable is a suggested majority voting threshold in sovereign loan agreements which, in the absence of an overarching international legal framework or treaty governing the restructuring of sovereign debt by all creditors or insolvency or bankruptcy regimes which apply to sovereigns, should facilitate, where necessary, the rescheduling of payments under sovereign loan agreements in certain situations, such as financial distress, with a view to minimising undue delays and holdout creditor risk.

The specimen clauses for agreements governed by English law have been drafted to work with LMA documentation.  It should be noted however that the LMA has not produced a facility agreement specifically for sovereign loans, and it is for market participants to make their own judgement on the suitability of the clauses for any particular transaction.

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