Collective action clauses: how sovereigns bind holdout creditors

Sovereign bonds under New York law traditionally required unanimous consent to change any payment term, principal, interest, or maturity. A single bondholder could refuse a restructuring, sue for full payment, and if successful create a legal precedent that undermined the whole deal.

The Argentine default of 2001 turned that risk into reality. A group of distressed-debt funds refused the 2005 and 2010 exchange offers, sued in New York, and after a decade of litigation obtained a pari passu injunction in NML Capital v. Argentina that blocked payments to consenting bondholders. Argentina remained locked out of markets until it settled in 2016.

A CAC specifies a voting threshold (typically 66.67% or 75% of outstanding principal) above which agreed modifications become binding on all holders of that bond series. Earlier CACs voted series by series: a large holder in one small series could still block a modification to that series, even if all other series accepted.

The 2014 ICMA model CAC introduced single-limb aggregation: a single vote across all covered bond series, at a 75% threshold, binds every holder. It also introduced two-limb aggregation as a fallback (a lower cross-series threshold combined with a per-series minimum). Ecuador (2020), Argentina (2020) and Zambia (2024) all used the single-limb mechanism.

For a long-only sovereign investor, CACs make restructurings faster and cleaner but leave less room to hold out for better terms. The economic recovery is set by the majority; a small holder cannot extract improved terms by threatening litigation.

For a distressed specialist, CACs shift the strategy toward accumulating a blocking position (25%-plus of the aggregated pool if the issuer uses single-limb) early enough to negotiate. Once a supermajority is achieved, the game is over.

Read the CAC section carefully. Note the aggregation mechanism (single-limb, two-limb, or series-by-series), the voting thresholds, and whether 'reserved matters' (payment terms) are subject to modification at all. Older bonds (pre-2003 for New York law, pre-2014 for the modern ICMA standard) may lack CACs entirely.

Also check governing law and jurisdiction. English law bonds traditionally included CACs; New York law bonds did not, until the shift after 2003. The forum for disputes matters as much as the substantive terms.