New Mexico Bonds Learn From Argentina

Nov 13 2014 | 7:51am ET

Mexico isn’t having any trouble servicing its debt. But if it ever should, it wants to make sure it doesn’t wind up like Argentina.

The country unveiled a new collective-action clause and weaker pari passu clause for its latest debt issuance. The former will require a holdout creditor to buy a much larger chunk of debt—25%—to avoid being forced to accept a restructuring by a majority of bondholders, and the latter seriously weakens the requirement that all creditors by treated equally.

The lack of a collective action clause and a strong pari passu clause enabled hedge-fund holdouts from Argentina’s 2001 default to first reject the country’s debt exchange, and then to convince a U.S. court to block Argentina from servicing its restructured debt without also paying them. Argentina has refused, leading to another default in July.

The new restrictions come as the International Monetary Fund and International Capital Market Association work on a new standard for sovereign debt that would avoid crises like that facing Argentina. Mexico’s collective-action clause is a version of that being pushed by ICMA.

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