Forthcoming in the Capital Markets Law Journal

Towards a More Robust Sovereign Debt Restructuring Architecture: Innovations from Ecuador and
Argentina
Ian Clark and Dimitrios Lyratzakis1

Key Points

 The Collective Action Clauses published by the International Capital Markets Association in 2014/2015
aim to facilitate orderly and consensual sovereign debt restructurings. The clauses were designed to give
sovereigns flexibility in structuring and consummating a transaction that would be capable of attracting
broad creditor support, while safeguarding the integrity of the process and the rights of creditor minorities.

 The recent restructurings of Argentina and Ecuador presented the first opportunities for the ICMA CACs
to be tested in practice, but the “re-designation” and “PAC-man” strategies first seen in the Argentine
restructuring revealed shortcomings in the ICMA contractual architecture.

 Argentina’s and Ecuador’s creditors responded by negotiating tailored refinements to the standard CACs
that would mitigate the risk that a sovereign could compel a restructuring that is not supported by the
requisite creditor supermajorities.

 The qualified restrictions on “re-designation” and “PAC-man” adopted by Ecuador and Argentina enhance
the ICMA architecture and provide strong incentives for a sovereign to engage constructively with its
private creditors in a consensus-building process that results in a restructuring proposal capable of achieving
supermajority support.
Introduction
Many developing and emerging countries face acute financial pressures as a result of COVID-19-related
expenditures, increased re-financing costs due to market volatility, and the global economic slowdown created by
the pandemic. In Argentina and Ecuador, these pressures exacerbated existing macro-economic imbalances and led
their governments to seek comprehensive restructurings of their public debts, including debt owed to international
capital markets investors.
In the absence of a sovereign bankruptcy regime, the resolution of sovereign debt crises is a matter of contract
(re)negotiation between the sovereign and its creditors. For a sovereign to obtain debt relief from its private
creditors, its creditors need to agree to either amend the payment terms of their existing contracts, or exchange their
existing obligations for new ones, in each case to reflect the sovereign’s restructuring objectives. As contract terms
define the respective rights and obligations of a sovereign and its creditors and therefore set the parameters of a
sovereign debt negotiation, standard contract terms in sovereign bonds have evolved over time to promote a fair
and orderly restructuring process.
Argentina’s and Ecuador’s parallel debt restructurings have put to the test contract terms that are considered
fundamental for orderly sovereign restructurings: the model Collective Action Clauses (“CACs”) that were first

1
Ian Clark is a Partner and Dimitrios Lyratzakis is an Associate at White & Case LLP. The authors were part of the team that advised
the Ad Hoc Argentine Bondholder Group and the Ad Hoc Ecuador Bondholder Group in the respective restructurings. Any views
expressed herein are strictly those of the authors and should not be attributed in any way to White & Case LLP or to any member of the
Ad Hoc bondholder groups.

White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability
partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships,
companies and entities. This article is prepared for the general information of interested persons. It is not, and does not attempt to be,
comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.

Electronic copy available at: https://ssrn.com/abstract=3700552

published by the International Capital Markets Association (ICMA) in 2014 and have subsequently garnered broad
support from the international financial community (the “ICMA CACs”). While these clauses were designed to
facilitate negotiated restructurings supported by a supermajority of creditors, their first application in the Argentine
restructuring illuminated certain flaws in the contract design.
Specifically, the “re-designation” and “PAC-man” strategies first seen in the Argentine restructuring revealed
shortcomings in the ICMA CAC framework that could be exploited by sovereign debtors who are unwilling or
unable to build the requisite consensus with their private creditors.2 In response, the largest bondholder groups in
the Argentine and Ecuador debt restructurings – comprising many of the world’s largest institutional investors who
share an interest in promoting efficient and consensual sovereign debt restructuring – negotiated specific
refinements to the ICMA CACs to rectify the identified flaws and safeguard the spirit of the ICMA architecture. In
the end, after consulting key international stakeholders to ensure that the changes requested by bondholders were
consistent with the policy objectives underlying the ICMA CACs, Ecuador and Argentina agreed to adopt the
creditors’ drafting proposals in their respective restructuring offers published in July and August 2020.
We proceed to explain below the identified vulnerabilities of the ICMA CACs and the adopted contractual solutions.
We believe the changes enhance the robustness of the ICMA restructuring framework, and reinforce the core
message that the path to a successful sovereign debt restructuring lies in constructive engagement between sovereign
debtors and their bondholders that results in a commercial proposal capable of gaining supermajority support.
The ICMA contractual architecture: flexibility, transparency, and supermajority rule
Collective action clauses are included in sovereign bonds to allow a bondholder supermajority that approves a
restructuring to bind a remaining minority. The clauses address the challenge – that naturally emerged as tradable
bonds replaced syndicated bank loans as the primary form of sovereign borrowing – of locating and negotiating
with individual holders of interests in global bonds lodged in the international clearing systems. Concurrently, the
clauses reduce the risk that a minority of bondholders seeking a higher value recovery or insisting on repayment in
accordance with original contractual terms will be able to hold out from a restructuring. Such behavior can disrupt
a restructuring that has (or would have) otherwise been accepted by a majority of creditors.3 This risk was plainly
demonstrated by the years of disputes with holdouts following Argentina’s 2005 restructuring; disputes that
ultimately delayed the sovereign’s return to the international capital markets and discouraged much-needed inbound
investment.
The design of CACs has evolved over time to respond to the evolving strategies and increased financial resources
of potential holdout creditors. The ICMA CACs represent the latest and most widely accepted iteration of the
clauses.4 ICMA first published the model clauses in August 2014, before revising the recommended language in
May 2015 to better adapt it for bonds issued, respectively, under New York law and English law.5 Both versions
provide the sovereign flexibility in selecting a collective action method to modify its bonds, as well as flexibility in
choosing which bond series to modify pursuant to a selected method.

2
The strategies have received substantial attention in the press. See Anna Szymanski, ‘Argentina Gets Too Cheeky With its Creditors:
CAC Handed’ (2020) Reuters Breaking Views <https://www.breakingviews.com/considered-view/argentina-gets-too-cheeky-withits-
creditors> accessed July 28, 2020; Colby Smith and Benedict Mander, ‘Argentina Debt Restructuring Talks Close to Collapsing’ (2020)
FT <https://www.ft.com/content/0ce01518-4b67-4a7d-b435-93386f7ea874> accessed July 28, 2020.
3 That is because either (i) the failure to restructure all the bonds prevents the sovereign from achieving its financial objectives or (ii)
creditors who would otherwise support the deal refuse to do so out of concerns about inter-creditor equity and burden sharing.
4
For a detailed discussion of the consultative process behind the inception of the ICMA CACs, see Mark Sobel, ‘Strengthening
Collective Action Clauses: Catalyzing Change – The Back Story’ (2016) 11/1 Capital Markets Law Journal.
5
The revision were meant to reflect different stylistic preferences of the two markets and other minor amendments. Both the 2014 and
2015 ICMA CAC provisions are available at http://www.icmagroup.org/resources/Sovereign-Debt-Information. The 2015 version that
includes the language for each jurisdiction will be hereinafter cited as “2015 ICMA Model CAC.”

Electronic copy available at: https://ssrn.com/abstract=3700552

 Voting method discretion
ICMA CACs provide three options for modifying the payment and other key terms (“reserved matters”) of
sovereign bonds: (1) a single-series (or “series-by-series”) option, which requires 75% supermajority of each
relevant series; (2) a “two-limb” option, which requires a 66 2/3 % supermajority across all series voting in a
designated pool and a 50% majority of each bond series; and (3) a “single-limb” option, which requires a75%
supermajority across all series voting in a designated pool and satisfaction of a “universally applicable” condition
as discussed below.
The single-limb option was the major new innovation of the 2014 ICMA architecture.6 In a single-limb voting
mechanism, a supportive bondholder supermajority across series can bind a dissenting minority, even if
bondholders in one or more individual series overwhelmingly oppose a restructuring offer. Application of this
mechanism does not require a per series vote; it only requires that the offer be "uniformly applicable" to everyone
in the voting pool.7 An offer is “uniformly applicable” if holders of each series are offered the same new instrument
or a choice from the same menu of new instruments.8
Each of the other two voting mechanisms included in the 2014 ICMA CACs had been seen before in the
international sovereign bond market. Long adopted in English law-governed issuances, single-series CACs were
first introduced in New York law-governed bonds in 1997 and became more prevalent after 2003.9 The two-limb
CAC, in turn, was an effort to construct a consent mechanism that would apply across series, to provide an
alternative to the single-series CACs that were considered prone to holdout behavior.10 Two-limb CACs have been
included in sovereign bond contracts since 2003, although before 2014 the aggregate and per series voting
thresholds were often set at higher levels (for example, 85% and 66-2/3% respectively) than in the current ICMA
CACs.
The wording of the ICMA two-limb CAC is not without its controversies. For example, a plain reading of the
ICMA language, standing alone, suggests that a successful vote depends on the sovereign obtaining the consent of
a simple majority of each series included in the initially designated voting pool.11 Such construction renders any
restructuring conducted pursuant to the two-limb CAC an “all or nothing” transaction,12 empowering holdout
creditors to block or at least delay the entire restructuring by buying more than 50% of a single series included in

6 In contrast to the other voting options, a single-limb CAC had never been included in a negotiated debt instrument – though it had been
retroactively included in Greek bonds by way of local legislation in Greece’s 2012 debt restructuring. See Jeromin Zettelmeyer,
Christoph Trebesch and Mitu Gulati, ‘The Greek Restructuring: An Autopsy’ (2013) 28 Economic Policy 513
7 For a detailed analysis of the design of the clause, see Anna Gelpern, Brad Setser and Ben Heller, ‘Count the Limbs: Designing Robust
Aggregation Clauses in Sovereign Bonds’ in Martin Guzman, José Antonio Ocampo and Joseph E. Stiglitz (eds.), Too Little, Too Late:
The Quest To Resolve Sovereign Debt Crises (Columbia University Press), 2016; Antonia Stolper and Sean Sougherty, ‘Collective
Action Clauses: How the Argentina Litigation Changed the Sovereign Debt Markets,’ (2017) 12 Capital Markets Law Journal
8
See 2015 ICMA Model CAC, 23.
9 See Mark Weidemaier and Mitu Gulati, ‘A People’s History of Collective Action Clauses’ (2013) 54 Virginia Journal of International
Law
10 The 2012 Greek restructuring proved that the single-series CAC is prone to holdout behavior, as holdouts successfully blocked the
restructuring of 19 out of 36 English law series that contained single-series CACs. See Zettelmeyer, and others (n. 6). However
subsequent restructurings, such as the Ukrainian restructuring in 2015 where only one series (100% owned by the Russian Federation)
held out, have been successfully completed in reliance on series by series CACs.
11 The two-limb ICMA clause provides that a modification may be made with “(i) the affirmative vote or consent of holders of more than
66⅔% of the aggregate principal amount of the outstanding Bonds of all the series affected by that proposed Modification (taken in the
aggregate), and (ii) the affirmative vote or consent of holders of more than 50% % of the aggregate principal amount of the outstanding
Bonds of each series affected by that proposed Modification (taken individually).” See 2015 ICMA Model CAC, 21
12
See Lee Buchheit and Mitu Gulati, ‘The Argentine Collective Action Controversy (with Spanish Translation)’ (2020) Capital Markets
Law Journal <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3656833>, last accessed August 10, 2020.

Electronic copy available at: https://ssrn.com/abstract=3700552

the initially designated voting pool.13 However, some commentators believe the provision should be read
differently. For them, failure to obtain majority support of a given series included within the voting pool only
means such series will be excluded from the restructuring, and the restructuring can proceed as regards the
remaining series if it has attracted the support of 66-2/3% of the bonds.14 On this reading, a holdout series in a two-
limb CAC would not prevent the completion of the entire restructuring transaction. This construction is arguably
more consistent with the expressed intent of the ICMA drafters who, when first recommending the clause for
adoption in 2013, indicated that a blocking series should not prevent “a restructuring of a sovereign debt succeeding
where broader acceptance has been obtained.”15
Bond selection discretion

In addition to providing broad discretion in selecting the modification method, the ICMA architecture also gives
the sovereign flexibility to select – or “designate” – the bond series whose terms will be modified pursuant to a
selected voting method. This allows the debtor to choose how to aggregate and sub-aggregate its bonds in a
restructuring.16 This flexibility, however, is not unconstrained.

Under both the New York and English law versions of the CACs, the sovereign is subject to a broad “information
delivery requirement,” requiring it to provide bondholders with a description of the proposed treatment of different
series of bonds (including those in other aggregation pools). At the same time, the express language in New York
law governed CACs (such as Argentina’s) requires that the sovereign’s selection of modification method and
pooling, once made, shall be final for purposes of a modification process.17 For some commentators, the finality
condition in New York law-governed CACs was intended, at least in part, to prevent a sovereign from recounting
votes ex-post to allow a restructuring to proceed with respect to a subset of bond series when it has failed to
command the support of the required bondholder supermajority.18 Perhaps unintentionally, however, the finality
condition also reinforces the all-or-nothing interpretation of the two-limb CAC which gives majority holders of a
bond series included within the voting pool the power to block a restructuring proposal under the two-limb CAC.

For reasons that are not immediately apparent, the recommended ICMA language for English-law bonds reads
differently. While it includes notice requirements for the selection of the bond series subject to a modification,
unlike the NY version it does not place a finality condition on such selection. Rather, it provides that “any
modification or action proposed under [a two-limb CAC or a single-limb CAC] may be made in respect of some
series only and, for the avoidance of doubt, the [two-limb CAC or single-limb CAC] may be used for different

13 See Deborah Zandstra et al., ‘New ICMA Sovereign Collective Action and Pari Passu Clauses’ (October 2014) Clifford Chance Briefing
Note
14 See International Monetary Fund, ‘Strengthening the Contractual Framework to Address Collective Action Problems in Sovereign Debt
Restructuring’ (October 2014) 19; Anna Gelpern, A Sensible Step to Mitigate Sovereign Bond Dysfunction (RealTime Economics Issues
Watch, blog of The Peterson Institute of International Economics, 29 August 2014)
15 ICMA Sovereign Bond Consultation Paper, December 2013, available at https://www.icmagroup.org/resources/Sovereign-Debt-
Information/archived-information/
16 For sovereigns with heterogenous debt stocks, sub-aggregation would allow the sovereign to group certain bonds together on the basis
of similar financial characteristics (such as maturities, currency of denomination, or other features).
17
The ICMA language provides “The Issuer shall have the discretion to select a Modification Method for a proposed Reserve Matter
Modification and to designate which series of Bonds will be included in the aggregated voting for a proposed Cross-Series Modification;
provided, however, that once the Issuer selects a Modification Method and designates the series of Bonds that will be subject to a
proposed Cross-Series Modification, those elections will be final for purposes of that vote or consent solicitation.” See 2015 ICMA
Model CAC, 21.
18
See Gelpern, ‘Count the Limbs’, 15 (‘When the sovereign borrower has a menu of options for restructuring, it commits to disclose its
choice before taking the poll. Any votes cast are only valid for that procedure. If, for example, an aggregated vote fails to obtain the
needed super-majority of all bond holders but there are enough votes to amend the terms of several individual bond issues, the issuer
cannot simply recount the votes to restructure the few issues.’)

Electronic copy available at: https://ssrn.com/abstract=3700552

groups of two or more series simultaneously.”19 Furthermore, the sovereign is required to provide additional notice
to bondholders of “any additional procedures which may be necessary and, if applicable, the conditions under which
a multiple series aggregation will be deemed to have been satisfied if it is approved as to some but not all of the
affected series of debt securities.”20 Plainly the ICMA-recommended language for English law bonds does not
support the same “all-or-nothing” interpretation of the two-limb CAC which has been read into the language for
New York law bonds, though the purpose of this divergence of approach is not immediately obvious.

Despite their differences, the common goal of the ICMA-recommended bond selection provisions in both New
York and English-law bonds and the corresponding notice requirements is to provide bondholders with a degree of
predictability and transparency regarding the restructuring process and possible outcomes.

ICMA design objectives

The ICMA CAC architecture sought to strike a balance between two important competing considerations.21 On the
one hand, to provide the sovereign flexibility to structure a proposal that could be ratified by a defined bondholder
supermajority and bind the remaining bondholders to mitigate holdout risk. On the other hand, to ensure the
transparency of the restructuring process and provide substantive protection to dissenting bondholders (by ensuring
that an offer is “uniformly applicable” to all bondholders in the case of a single limb CAC or that a series would
not be bound in a restructuring by a two-limb CAC absent majority support within such series). This balanced
framework aims to promote orderly, predictable, and transparent restructurings benefiting sovereigns and creditors
alike.
Stress-Testing the ICMA CAC framework
In April 2020, Argentina launched an exchange offer and consent solicitation relating to $64 billion of sovereign
bonds employing the as-yet untested ICMA CACs.22 Ecuador followed with an exchange offer and consent
solicitation relating to $17.4 billion of sovereign bonds in July 2020, also using the ICMA CACs. Both sovereigns
structured their transactions to utilize the two-limb ICMA CAC. In contrast to Ecuador, Argentina launched its
initial restructuring offer without first reaching an agreement with a critical mass of its bondholders and without
conditioning the completion of the restructuring on a minimum level of bondholder participation. Argentina
structured its initial offer so as to retain for itself the discretion to proceed with a partial restructuring – where
potentially a majority of bonds within the perimeter of the offer decline to participate.
Many of Argentina’s largest creditors, as well as expert commentators, were taken aback by Argentina’s approach
under the circumstances. 23 Concerns focused on two strategies articulated in the initial exchange offer: Argentina’s
proposed use of “re-designation”, and its expressed readiness to use the ICMA CACs in successive iterations
(colloquially, the “PAC-man” strategy). In the context of a restructuring offer that was launched before any
agreement had been reached with Argentina’s most significant bondholders and which did not include a “minimum
participation threshold”, many bondholders felt those strategies were designed to pressure them to accept
restructuring terms that were, on their face, unacceptable to a majority of bondholders. Following the launch of the
offer, a broad consensus in the private sector emerged to the effect that Argentina’s strategies, which were carefully
19 2015 ICMA Model CAC, 5, 7.
20 2015 ICMA Model CAC, 2
21 See Sobel, ‘Strengthening Collective Action Clauses’, 7.
22 Argentina’s $64 billion external debt stock was divided into c.$40 billion of “Global bonds” issued after 2016, containing the ICMA
CACs, and c.$24 billion of “Exchange bonds” issued in Argentina’s prior restructuring in 2005 and 2010, which did not contain ICMA
CACs. This paper accordingly only focuses on Argentina’s proposed treatment of the Global bonds.
23 See Mitu Gulati and Mark Weidemaier, ‘The Argentine Re-designation Drama: Note from Two Frustrated Readers’ (Credit Slips, 9
June 2020) <https://www.creditslips.org/creditslips/2020/06/the-argentine-re-designation-drama-notes-from-two-frustrated-
readers.html> last accessed August 20, 2020; Anna Gelpern, ‘Keeping Cosy by the Dumpster Fire: Argentina Reads its
Contracts…Twice…Quel Scandale!’ (Credit Slips, 10 June 2020) <https://www.creditslips.org/creditslips/2020/06/keeping-cosy-by-
the-dumpster-fire-argentina-reads-its-contracts-quel-scandale.html> last accessed August 20, 2020

Electronic copy available at: https://ssrn.com/abstract=3700552

designed based on the existing contractual framework of the ICMA CACs, revealed gaps in the ICMA architecture
which undermined certain of its core objectives.

Re-designation

The first of Argentina’s controversial innovations was its proposed use of “re-designation” to allow the exclusion
of series of bonds from the voting pool in a two-limb CAC after the expiration date of the consent solicitation (i.e.
after the votes have been cast and counted).24 This conflicts on its face with the finality condition in the ICMA
New York law CACs (which provides that the issuer’s selection of a modification method and voting pool shall be
final once made), except that the finality condition is not a “reserve matter” under the ICMA CACs. This means
that the relevant restriction can be modified, or entirely waived, with the consent of a simple majority of holders of
each series, rather than a supermajority. Effectively, with the consent of just 50% of bonds in one or more series,
a sovereign can escape the re-designation restriction in New York law-governed bonds. This means that the voting
framework in a cross-series restructuring is subject to change by a substantially less rigorous majority than that
required for substantive amendments and the enactment of restructurings terms.

The ability of a sovereign to change the voting framework (i.e. “re-designate” voting pools) on a single-series basis
without giving notice and/or revocation rights to bondholders – particularly outside the context of an offer that has
received supermajority support – raises procedural and substantive concerns. If bondholders do not have
transparency as to how their votes (and the votes of their fellow investors) will be counted at the time they are
casting their vote, the voting integrity and procedural fairness of a restructuring are cast in doubt. Transparency
matters because it shapes expectations about the range of potential restructuring outcomes. This is critical for
bondholders in a comprehensive, cross-series restructuring because their voting decisions will be informed by both
their own economic preferences and by their expectations as to the behavior of other holders.25

Re-designation, as proposed by Argentina and implicitly permitted under the New York ICMA language, can affect
the substantive outcome of a voting process conducted under the two limb CAC in a way that frustrates bondholders’
reasonable expectations. The apparent intent of the ICMA architecture is that a restructuring offer under a two-
limb CAC that has not garnered the support of 66-2/3% of bondholders should fail. Re-designation can alter this
outcome. If the offer fails to attract the support of a supermajority of bonds across the original voting pool but
nonetheless succeeds in attracting sufficient support to meet the voting thresholds from a subsection of bond series
within such pool, then re-designation would give discretion to the sovereign to achieve a restructuring with respect
to such series only, leaving the remaining series un-restructured and potentially vulnerable to subsequent “uniformly
applicable” restructuring offers employing the single limb CAC (as discussed below). This outcome would
arguably violate both the objective of the ICMA architecture and the expectations of bondholders who agreed to be
bound by the ICMA CACs.

It is worth noting that although Ecuador also announced a re-designation strategy in its restructuring offer,
Ecuador’s largest bondholder group – comprising many of the same institutions as participated in Argentina’s
largest group – did not react negatively, for two reasons. First, even though Ecuador’s bonds are governed by New
York law, they did not restrict re-designation. Ecuador’s indentures included the ICMA CACs recommended for
bonds issued under English law which, as explained previously, do not impose the same “finality” condition on
designation as the New York law version. More importantly, Ecuador’s restructuring offer was the outcome of a
negotiated process with the country’s largest creditor group, and was designed to attract the support of a
supermajority of Ecuador’s bondholders in a two-limb CAC process. Although the language of the English-law
ICMA CACs is no less flawed than the New York language (in permitting a sovereign to consummate a restructuring
that is only supported by a small subset of an originally designated pool of bonds), re-designation as proposed in

24 See Republic of Argentina Prospectus Supplement dated April 21, 2020, S-11, 12.
25 See Gelpern, ‘Count the Limbs’, 14.

Electronic copy available at: https://ssrn.com/abstract=3700552

Ecuador’s case was seen by creditors as helping the sovereign implement a consensual restructuring supported by
a supermajority of Ecuador’s bondholders, rather than facilitating a restructuring supported by only a minority of
bondholders.

Evidently and unsurprisingly, context mattered. The market was plainly more concerned about re-designation that
leads to a partial restructuring of the sovereign’s bonds, rather than re-designation employed (as in Ecuador) to help
achieve a majoritarian restructuring.

“PAC-man”

“PAC-man” is the colloquial reference to a sovereign’s strategy to use the voting power of bonds tendered or
modified in an initial restructuring round to force dissenting creditors from the initial round to accept, in successive
restructuring rounds, the same (or slightly improved) commercial terms. This is done by using the single-limb
ICMA CAC on a sequential basis. Recall that application of the single-limb CAC requires the consent of 75% of
bonds across all pooled series in an offer that is uniformly applicable to all affected bondholders. Under the ICMA
CACs there is no restriction on the bonds that can be pooled together, as long as bonds are issued under the same
indenture or under indenture containing similar aggregation provisions.

This strategy is premised on the sovereign’s ability to restructure certain bonds with the support of less than a
supermajority (and potentially even a minority) of bondholders and then subsequently proceed to aggregate, using
the single-limb CAC, those restructured bonds with the remaining un-restructured bonds. For example, the
sovereign could aggregate all series of restructured bonds that emerged from an initial restructuring process with
one series of un-restructured bonds using the single limb ICMA CAC in a proposed restructuring that offers all
bondholders within the pool commercial terms that are, on one hand, marginally better for the bondholders who
have already been restructured, but, on the other, substantially worse for the bondholders holding un-restructured
bonds. Notwithstanding the different economic incentives of the two bondholder groups to participate in that offer,
the offer is technically “uniformly applicable” because it offers all bondholders within the pool the same terms. As
such, the restructured bonds (if they have sufficient voting power within the voting pool selected by the sovereign)
can bind into the new offer the holders of un-restructured bonds, even if there is little or no support for the new
terms amongst the latter holders. This process can in theory be repeated iteratively under the contracts, each time
dragging along an additional series of originally un-restructured bonds so that in the end the original consenting
minority of bondholders would have been able to cram down – or “devour” – the original dissenting majority,
achieving a comprehensive restructuring outcome that would not have been originally possible.26

It should now be clear why Argentina’s strategies, though arguably technically compliant with the 2014 ICMA
CAC framework, gave pause to the bondholder and broader international community. Combined, they can allow
a creditor minority to receive new bonds and empower it to bind, in succession, outstanding dissenting series
controlled by an outright majority of bondholders.

26 A simple numerical illustration may be useful. If there are five series of outstanding bonds, each with a principal amount of 100, and
the issuer announces a restructuring offer that only gathers the support of 40% of each series, then permitting those supporting bonds to
be exchanged into one or more new bonds (notwithstanding the fact that the original offer has failed to meet any CAC thresholds) would
result in the issuance of new bonds with an aggregate principal amount of 200 (we assume for this purpose the new bonds are issued
without a haircut). The newly issued bond series can thereafter be pooled with series of non-exchanged bonds that now have a principal
amount of 60 each. Aggregating the new bond series with any series of the non-exchanged bonds would lead to the latter series being
restructured, as long as close to 100% of the new bonds consent to the terms of the new offer. As explained, it should be easy for the
issuer to obtain close to 100% participation of the new bonds by offering marginally better terms than those of the new bonds. Repeated
iteratively, the strategy could result in all the originally un-restructured bond series being “devoured” Of course the reality is always
more complex. The ultimate success of PAC-man would depend on the voting behavior of bondholders who may hold both “new” and
“existing” bonds, as well as on whether the new bonds were issued with a significant haircut that would affect their voting power. But
nonetheless, this does not prevent the sovereign from using the “PAC-man” strategy as a credible threat against non-participation

Electronic copy available at: https://ssrn.com/abstract=3700552

Refinements to the ICMA architecture

Soon after Argentina announced its initial exchange offer in April 2020, a debate began in private sector, official,
and academic circles as to whether the re-designation and PAC-man strategies were faithful to the letter of the
ICMA clauses and the underlying policy objectives. The prevailing view among private bondholders, subsequently
espoused as well by the broader international community, was that the strategies were not contractually prohibited
but were inconsistent with the objectives of the ICMA architecture.

The question then became how best to address the newly perceived deficiencies in market-standard CACs in the
context of “live” restructuring transactions in Ecuador and Argentina, with the prospect of further sovereign
restructuring transactions around the world to follow.

To this end, and in the context of their respective negotiations, Argentina’s and Ecuador’s major creditor groups
each decided to negotiate the inclusion of modified contractual provisions in the new indentures for restructured
bonds. The bondholders sought pragmatic and tailored solutions that preserved the original purpose of the ICMA
architecture while addressing the identified shortcomings, in line with the emerging international consensus.

Ecuador was the first to agree to the requested contractual refinements.27 Modifications to the ICMA CACs were
included in Ecuador’s published exchange offer and consent solicitation launched in July 2020, which attracted
support of more than 97% of Ecuador’s bondholders. Subsequently, Argentina reached agreement with its largest
bondholders to include similar changes in the terms of its new bonds. The changes were reflected in Argentina’s
final revised exchange offer and consent solicitation launched in August 2020, which was supported by 94% of
Argentina’s bondholders. Both exchanges successfully settled in early September 2020, incorporating the agreed
changes to the ICMA CACs alongside the commercial modifications to bond terms.

Addressing Re-designation

The first refinement accepted by the two sovereigns is a qualified restriction on re-designation. The new clause28
requires that any re-designation of voting pools or of the selected voting mechanism in the context of a cross-series
modification be done with five days’ notice to bondholders. This will give bondholders reasonable time to consider
the implications of the re-designation and – if appropriate – revoke or change their vote. This restriction can only
be bypassed, and the issuer can unilaterally re-designate the series of bonds included in an aggregated voting pool

27 Ecuador voluntarily opted to conform its new indenture to the New York ICMA model as part of the restructuring, so the refinements
were applied on the New York law ICMA form, rather than on the English law ICMA form of Ecuador’s existing indentures. That said,
the principles underlying the contractual refinements would apply equally in a restructuring that utilizes the English law CACs, and the
adopted solutions could be replicated on the English law ICMA form as well.
28 ‘At the time the Republic proposes a modification constituting a reserve matter, the Republic shall specify to holders of each series of
debt securities issued on or after the Settlement Date to be affected the modification method(s) it has selected for such modification.
The Republic shall have the discretion to select the modification method(s) for a proposed reserve matter modification and to designate
which series of debt securities will be included in the aggregated voting for a proposed modification constituting a reserve matter to the
terms and conditions of the debt securities of two or more series (the “initially designated series”); provided, however that, except as set
forth in the following sentence, once the Republic selects the modification method(s) and the initially designated series, such selection
may not be changed, modified or supplemented without providing written notice of such change, modification or supplement to holders
of debt securities to be affected (specifying which series, if any, have been excluded from the list of initially designated series) and
granting such holders no less than five business days from the date of such notice to cast, revoke or change any vote or consent delivered
in connection with such proposed modification. Notwithstanding the foregoing, at any time prior to the effectiveness of the modification
constituting a reserve matter and without prior notice to holders of any debt securities of the initially designated series, the Republic
shall have discretion to re-designate which series of debt securities will be included in the aggregated voting for a proposed modification
constituting a reserve matter to the terms and conditions of the debt securities of two or more series if at the time of such re-designation
the Republic has received the affirmative vote or consent of holders of more than 66⅔% of the aggregate principal amount of the
outstanding debt securities of all the initially designated series.’ See Republic of Argentina Amendment No. 2 to Prospectus Supplement
dated April 21, 2020, S-93, S-94

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(as well as the applicable voting method), if the offer has been approved by holders of more than 66⅔% of the
principal of the originally designated pool. Any change to this re-designation provision would be treated as a reserve
matter requiring supermajority approval, ensuring that any amendments to the voting framework are subject to the
same rigorous voting standard as substantive amendments to the material terms of the bonds.

Setting a 66-2/3% supermajority threshold for unilateral re-designation achieves two objectives:

First, it limits the debtor’s ability to complete a restructuring using the ICMA CACs with the support of less than
66-2/3% of the bonds in the originally designated voting pool (currently possible under both New York and English
law clauses). Should re-designation be proposed by the sovereign in this circumstance, bondholders will have the
right to revoke or modify their vote for a five day period – which allows them to reconsider their voting preferences
in the case where the voting threshold for a two limb modification has not been reached.

Second, as a mirror image to the first objective, it enables a sovereign debtor to use re-designation without
restriction in order to efficiently consummate a restructuring that has attracted the support of 66-2/3% of
bondholders in the original voting pool. In effect, inserting a clear re-designation threshold modifies the “all or
nothing” nature of the two-limb CAC, minimizing the power of holdout creditors to block or delay a restructuring
transaction otherwise commanding broad bondholder support by controlling a majority of the bonds within a single
series included within the voting pool.

At the same time, this formulation preserves the protections from discrimination or abuse that ICMA CACs afforded
to minority bondholders, since (i) a series in which more than 50% of bonds have voted against the offer cannot be
restructured using a two-limb CAC even following re-designation, and (ii) if re-designation results in such series
being aggregated with other series in a single-limb process, the holders of the series will have to be given uniformly
applicable treatment.

Addressing successive single-limb aggregation

The second refinement agreed by the two sovereigns is a qualified restriction on the use of the single-limb CAC in
a sequential modification process. In the context of a restructuring offer structured as an exchange offer and/or
consent solicitation using the two-limb ICMA CAC that has amassed the support (or participation) of less than 75%
of the bonds included in a designated voting pool, the sovereign shall be prohibited for a period of three years from
aggregating in any subsequent single-limb CAC process (i) any bonds of a series that had been designated for
modification pursuant to a two-limb CAC but were not so modified or bonds that were included in an exchange
offer but chose not to participate, and (ii) any bonds that were issued pursuant to the two-limb CAC restructuring
process or in connection with the settlement of the exchange offer (or into which any such bonds described in (ii)
are subsequently modified, exchanged or substituted).

In the context of a restructuring offer that attracts the support or participation of 75% of the bonds included in the
original voting pool, however, the sovereign is not subject to the foregoing restrictions and can thereafter freely
aggregate outstanding series of bonds issued in the restructuring using the single limb ICMA CAC.

The new provision29 was carefully designed to address the identified “PAC-man” problem but not to undermine the
overall architecture and principles of the ICMA CACs. In this context, three important features are noteworthy.

29 ‘If after the Settlement Date the Republic selects a cross-series modification with two-tier voting as the modification method for a
modification constituting a reserve matter to the terms and conditions of the debt securities of two or more series or if the Republic
launches a “restructuring exchange offer” (as defined below), the Republic will not, for a period of thirty-six (36) months following the
effectiveness of such modification or the settlement of such restructuring exchange offer, select a cross-series modification with single
aggregated voting as the modification method for a proposed reserve matter affecting (i) any of the 2016 Indenture New Bonds of the
initially designated series that were not successfully modified pursuant to such cross-series modification or any series of 2016 Indenture
New Bonds invited to be exchanged pursuant to the restructuring exchange offer and (ii) any series of debt securities successfully

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First, the restriction only applies when the sovereign – in its initial restructuring offer – employs a two-limb
aggregation CAC and/or an exchange offer structure in order to achieve the required changes to commercial terms.
The bonds issued as part of such process(es) are subject to the restriction. If the initial offer was made using the
single limb CAC (which requires that the offer be uniformly applicable to the whole voting pool if it achieves the
required 75% consent), there is no restriction on the sovereign making a subsequent offer using the single limb
CAC. With respect to exchange offers, only bonds issued in distressed exchanges where participants are asked to
accept a significant NPV loss are covered. Bonds issued in non-distressed exchanges, as part of a sovereign’s
normal liability management, are not covered because of the limited scope for strategic behavior in connection with
such exchanges.

Second, the period of restriction is not indefinite but is limited to three years. While bondholders initially felt that
the restrictions should apply indefinitely, so that any bond series issued as part of the initial restructuring offer could
never be aggregated with holdout series from such initial offer in a subsequent single limb process, pragmatic
considerations dictated that there should be some time limit to the restriction because of issues of tracing and
ongoing monitoring of compliance. As the “PAC-man” strategy is most potent as a threat if employed in a short
timeframe after settlement of the first restructuring offer, establishing an adequate time buffer would minimize the
credibility of the threat. A three year period provides sufficient time to ensure that the second offer is not linked as
part of a broader restructuring strategy to the first, as it is hard to imagine a sovereign pursuing a strategy that would
allow a defaulted holdout series to remain outstanding for three years after the initial restructuring. In that unlikely
scenario, holders of such securities are free to sell their positions or to assert and enforce their contractual rights
against the debtor.

Third, the restriction is disapplied where 75% of bonds invited to participate in the initial restructuring offer either
vote in favor of the modification or tender in the exchange. In this case, such a high level of support for the initial
restructuring proposition across all series included in the original voting pool would have been sufficient to meet
the supermajority threshold under the single limb CAC (setting aside the question of whether the offer met the
uniformly applicable condition). With such a high level of support, the interests of the sovereign debtor and the
majority bondholders are aligned in seeing the restructuring completed as speedily and efficiently as possible. The
dissenting minority of bondholders is still protected by the uniformly applicable condition in the single limb CAC
from receiving worse treatment than that afforded to other bondholders. It is therefore appropriate in these
circumstances (as an exception to the general rule) to provide the sovereign with the powerful tool of being
immediately able to aggregate newly restructured bond series with holdout series from the initial restructuring in a
single-limb CAC process.

Two additional features were agreed upon to protect against an end-run around this restriction. First, that any
changes to the restriction will be treated as a reserve matter that requires the approval of a creditor supermajority.

modified, exchanged or substituted for pursuant to such modification or any series of debt securities into which debt securities were
exchanged pursuant to such restructuring exchange offer (or any series of debt securities into which any of the foregoing is subsequently
modified, exchanged or substituted), unless such prior modification or restructuring exchange offer received the affirmative vote or
consent or participation, as the case may be, of holders of more than 75% of the aggregate principal amount of the outstanding debt
securities of all the initially designated series to be included in that modification or invited in such restructuring exchange offer. The
foregoing limitation shall not be modified pursuant to a cross-series modification with single aggregated voting. “Restructuring exchange
offer” means an offer inviting holders of more than one series of debt securities to exchange such debt securities for new debt securities
(other than an invitation to exchange where (i) the debt securities to be exchanged are trading above 90% of their par value (or accreted
value in the case of debt securities initially issued at a discount) on an internationally recognized financial information platform (such
as Bloomberg) at 4:00 p.m., New York City time, as reported on the business day immediately prior to the date on which the offer is
launched, and (ii) the sum of the net present values of the new debt securities and any other consideration delivered in the exchange is
not less than 90% of the sum of the net present values of the debt securities and any other consideration to be exchanged, in each case,
discounted at the same rate of return).’ See Republic of Argentina Amendment No. 2 to Prospectus Supplement dated April 21, 2020,
S-94

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On top of that, it was agreed that the restriction cannot be amended pursuant to a single-limb voting method. This
ensures that (in the context where an initial offer has received less than 75% support) holders of new bonds cannot,
in a subsequent single-limb modification, modify or remove the protections against such modification afforded to
holders of holdout bonds. Permitting the restriction to be amended pursuant to a two-limb voting method does not
jeopardize the rights of holdout creditors since, by default, they hold more than 50% of a given holdout series and
have the power to block the relevant amendment under a two-limb CAC.

Most importantly, correcting the identified flaws in the ICMA CAC architecture by including qualified limitations
on certain practices, rather than absolute restrictions, aims at encouraging constructive engagement with creditors
by sovereign debtors. Setting supermajority thresholds for both acceptable re-designation and aggregation – in each
case consistent with the original purposes of the ICMA clauses – should deliver a strong ex-ante incentive to
sovereign debtors to design restructuring proposals that will attract supermajority support from bondholders in the
first instance. In most cases this will be accomplished most efficiently through good faith negotiation between the
sovereign debtor and a single representative creditor committee or group capable of delivering the required
restructuring outcome.

Conclusion and Policy Implications

The drafters of the ICMA CACs were concerned to combat the risk of minority holdout bondholders whose
unwillingness to agree to restructuring terms supported by a substantial majority of the sovereign’s bondholders
could imperil a restructuring transaction that is in the interest of the sovereign and the broader market. Furthermore,
disruptive behavior by holdouts in a sovereign debt restructuring can imperil the stability of the international
financial system if it results in delays and/or enhanced litigation risk both to the sovereign and to bondholders
participating in the restructuring. For these reasons sovereign debtors and bondholders alike support the objectives
of the ICMA CACs, and share an interest in ensuring the identified weaknesses in the existing architecture are
remedied. The remarkably speedy and consensual process by which Ecuador and Argentina, in consultation with
their respective most significant bondholders as well as other international stakeholders, reached agreement on
improvements to the existing CAC architecture bodes well for the future direction of sovereign debt restructuring
in the COVID-19 era.

While the changes to the standard ICMA CAC language agreed in the Ecuador and Argentine restructurings mitigate
the identified risks associated with re-designation and iterative single-limb aggregation, permitting these strategies
in circumstances where the debtor has received supermajority support for its initial restructuring offer creates the
appropriate incentives for a productive negotiation. There can no longer be any doubt that a successful and timely
sovereign debt restructuring is best achieved through a collaborative, good-faith process between a sovereign debtor
and its international creditors.

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