Sovereign Debt Restructuring: Overview

In an article for Practical Law written by James Newton, Amrit Khosa, and Andrew Kissner, the authors provide an overview of sovereign debt restructurings, including the participants, the key steps in the process, the issue of holdout creditors and how to prevent them by using collective action clauses, the “re-designation” and “Pacman” strategies, exit consents, anti-holdout creditor legislation and protocols, developments in sovereign debt litigation, and information on recent sovereign debt restructurings in Puerto Rico, Zambia, Ecuador, Argentina, Ukraine, Sri Lanka, and Ghana.

“Growing numbers of sovereigns are close to defaulting on bond payments or have already defaulted. According to the Committee for the Abolition of Illegitimate Debt’s Global Sovereign Debt Monitor 2022, 135 countries are ‘critically indebted.’ The twin crises of COVID-19 and the war in Ukraine have only increased instability, and economies that depend on tourism are facing increasing financial pressure and are struggling to afford energy imports.

“Unlike the situation for corporate debtors, no insolvency regime applies to countries, and there is no universally accepted method for a country to undergo debt restructuring. It typically involves one or more processes to manage the sovereign’s debt burden and can include the exchange of outstanding debt instruments like loans or bonds for new debt instruments or cash. This Note explains many features that are common to sovereign debt restructurings.”

Read the full article.