How the Greek debt reorganisation of 2012 changed ... - Allen & Overy

30 How the Greek debt reorganisation of 2012 changed the rules of sovereign insolvency – September 2012
Paris Club reschedulings and
comparability clauses
The comparability clause customarily used by
the Paris Club is an interesting example of a
more effective equality clause.
The Paris Club is an informal association of
creditor nations which deals with the
rescheduling of official debt, ie intergovernment
debt.
The key clause in the Paris Club Agreed Minute
settled between the club and a sovereign debtor
is the comparability requirement. A sample
clause is as follows:
“In order to secure comparable
treatment of its debt due to all its
external public or private creditors, the
Government of the Republic of
[ ] commits itself to seek
promptly from all its external creditors
debt reorganisation arrangements on
terms comparable to those set forth in
the present Agreed Minute, while trying
to avoid discrimination among different
categories of creditors.
Consequently, the Government of the
Republic of [ ] commits itself to
accord all categories of creditors and in
particular creditor countries not
participating in the present Agreed
Minute, and private sector creditors
treatment not more favourable than
that accorded to the Participating
Creditor Countries for credits of
comparable maturity.”
The clause requires comparable treatment, not
the same treatment, so there is some flexibility.
Credits to the IMF and the like are expressly
excluded. In addition, other excluded debt is
not caught, eg short-term trade debt and small
debt. So the main debt which is caught is
commercial bank and bond debt.
© Allen & Overy LLP 2012
Bank rescheduling agreements: most
favoured debt and pro rata sharing
clauses
The practices developed in the 1980s to
reschedule commercial bank debt were much
more protective of the equality of commercial
banks than sovereign bond restructuring
practice from 2000 onwards.
The most significant equality clause in the
context of bank reschedulings of sovereign
debt is the “most favoured debt” clause which
provides that if any other foreign currency debt,
eligible for the rescheduling, is paid out more
quickly, then the borrower must repay the
rescheduled debt. The clause will then go on to
exclude certain categories of debt which can be
paid in priority, eg IMF debt, trade debt,
foreign exchange contract obligations, interest
and other agreed categories. One effect of this
clause is to encourage all eligible creditors to
come into the rescheduling so the clause is
primarily directed against holdout creditors.
The clauses are theoretically difficult to monitor
but, in practice, states have an interest in
complying.
It has been unusual to find a most favoured
debt clause in sovereign rescheduled bonds
issued in exchange for old bonds since 1999.
Belize 2005 was an exception.
A pro rata sharing clause is another typical
bank equality clause. It provides that if any
bank receives a greater proportion of its share,
it must pay the excess to the agent bank which
redistributes to the banks pro rata and the
paying bank is subrogated to the claims paid.
These clauses appear only in bank syndications
and bank rescheduling agreements, not
sovereign bonds.
Rescheduled sovereign bonds do not normally
contain a pro rata sharing clause. The Greek
Co-Financing Agreement of 2012 discussed
above was an exception. But if there is a trustee
for bondholders, the trust deed may provide
that, after a default, the trustee will distribute
recoveries to the bondholders pro rata.