If Boilerplate Could Talk: The Work of Standard Terms in Sovereign Bond Contracts

Abstract

Standard contract terms are “sticky”: they rarely change, even if change appears to be in the parties’ interest. Multiple theories to explain stickiness do not reach consensus on its causes. We investigate the role of stickiness in sovereign bond contracts, where it would be especially costly and therefore puzzling. In our interviews with more than a 100 officials responsible for the bond contracts of twenty-eight countries, they linked reluctance to change non-financial contract terms and the imperative of following a “market standard” for such terms. When a term could be described as standard for the government’s debt stock or borrower cohort, its content often came across as secondary. Sovereign debt managers seemed willing to forgo some of the benefits of contract terms for dealing with contingencies and revealing private information to avoid negative signals and maintain the liquidity of primary and secondary debt markets. Interviews with investors suggested a similar focus on standard form and a limited engagement with contract substance.

Debt Transparency in Developing Economies

“…For example, Ghana's PFM Law of 2016 (Article 56) and Nigeria's Debt Management Office Act (Article 27) call for approval by Parliament of such standard terms and conditions. Standardization may include adaptations for contractual provisions related to standard covenants, such as: confidentiality, events of defaults, dispute resolution mechanisms, waivers of sovereign immunity, choice of law, governing law, and provisions related to debt standstills and moratoria or the restructuring of contract terms (Gelpern et al, 2017).…”

Ties that bind and blur: financialization and the evolution of sovereign debt as private contract

“…After all, as Buchheit and Martos ( 2014 : 492) point out: “Never having had a clear idea of what purpose the pari passu clause actually served in a cross-border debt instrument, underwriters and most investors will surely not have a clear idea of the implications of not having it.” Yet, relative inertia rules debt contracts, and it is deliberate. Interviews with debt managers and investors conducted by Gelpern et al ( 2019 : 620) revealed that they prefer standard form contracts (common in commercial deals) even where a “market standard” is not clearly or formally defined (Choi and Gulati 2006 ). The financialization of state debt, after all, imbues debt management with the imperative of selling debt at the lowest possible cost to the issuing government.…”

“…Debt managers try to avoid the risk that any changes in contractual terms may negatively differentiate a sovereign in its cohort of issuers. Standardization implies “continuity of the debtor-creditor relationship and consensus on market practices” (Gelpern et al 2019 : 620).…”

“…As Gelpern et al ( 2019 : 629) put it: “the ink had barely dried on the IMF executive board’s endorsement of ICMA CACs before adoptions began in countries as different as Kazakhstan, Vietnam, and Mexico.” In fact, 88% percent of all 510 international sovereign bond issuances since October 1, 2014 (totaling US$ 620 billion) included the enhanced CACs that allow for a supermajority of creditors to determine the voting outcome on restructuring terms (IMF 2019). The decision to include enhanced CACs in their contracts did not increase the cost of credit for sovereign borrowers, according to recent empirical investigation by Chung and Papaioannou ( 2020 ).…”

Pricing Sovereign Debt: Foreign versus Local Parameters

“…Sometimes, there is the reverse effect; we have to go foreign even though we have arranged for low rates locally through regulation. If corporates need to borrow locally, we will go foreign even if we can get a good rate locally – because we don't want to crowd out the ability of domestic corporates to raise funds on the local market (Gelpern et al, ).…”