EU Economic and Financial Committee Launches Consultation on Single-Limb Collective Action Clauses for Amendments to EU Sovereign Debt Instruments
10/07/2019The EU Economic and Financial Committee sub-Committee on EU sovereign debt markets (the ESDM) has launched a consultation on its proposals to mandate the introduction of single-limb collective action clauses into euro area government securities issued from January 1, 2022. The ESDM has released a draft of the proposed CAC together with an explanatory note and seeks input on its proposals from selected market participants by October 28, 2019.
The introduction of the new 2022 CAC is part of a package of policy measures agreed at the Euro summit in December 2018, which aim to strengthen the EU economic and monetary union. CACs establish voting thresholds for bondholders to agree on modifications to the terms of their bonds, facilitating an orderly restructuring of bonds by an EU sovereign issuer. They were first mandatorily introduced into all euro area government bonds in 2013 in an attempt to protect financial stability following the financial crisis. Currently, euro area government bonds with a maturity above one year that were issued on or after January 1, 2013 must include the 2013 model CAC. Where a modification is intended to apply across several series of bonds (so-called “cross-series modification”), the issuer must, under the 2013 CACs, satisfy a two-limb voting threshold, obtaining approval from both 75% of the principal amount of all outstanding bonds represented by bondholders at a meeting (or 66 2/3% via a written resolution) and 66 2/3% of the outstanding principal amount of bonds of each series represented by bondholders at a meeting (or 50% via a written resolution). The EFC’s revised 2022 CAC amends this model by introducing a single-limb voting mechanism for cross-series modifications, meaning changes may be made across bond series if the issuer obtains approval from only 66 2/3% of the outstanding principal amount of bondholders of all relevant bond series within a voting group. The series-by-series vote will no longer be required.
The draft 2022 CAC retains the majority of the other features of the existing 2013 CAC. It will only apply to euro area government bonds with maturity above one year issued after January 1, 2022. Bonds issued prior to that date will not be affected. The ESDM expects to present the final version of the CACs to the EU’s Eurogroup Working Group by the end of November 2019 and to the Eurogroup by early December 2019.
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