Collective Action Clause

Collective Action Clause (hereinafter CAC ) is a clause in the terms and conditions, which makes a change of individual conditions of the approval of the majority of creditors dependent and in the case with the majority approval of all bondholders is binding. The English term " collective action " ( collective action ) was borrowed from sociology.


The CAC is derived from the Anglo -Saxon law and was introduced after the bankruptcy of Argentina ( December 2001). Was concern to be able to handle controlled government debt crises when large institutional investors, banking syndicates to globally scattered private bondholders creditors' interests were distributed atomistic. Often were few dissenting bondholders of the reason that a debtor state was prevented from enforcing a approved by the majority restructuring by a negative minority ( " holdout problem "). In most cases, minorities persecuted aware of the tactics of " holdouts " ( "refusal " ) to prevent the disadvantage of a haircut for themselves. Worldwide there was a need to improve crisis management and to raise the CAC to the market standard. The first CAC were still inconsistent, so that the G10 felt obliged to introduce recommendations on harmonization. The first major government bond with CAC on the basis of the G10 proposals was a Mexico - bond in February 2003 on U.S. $ 1 billion, and already in 2005, 95 % of all newly issued government bonds were equipped with this clause. In Mexico, the CAC bond was still at odds with the conventional loan terms of other states soon followed but then Uruguay and Brazil.

Legal Issues

The CAC was created from the lack of a regulatory framework for sovereign defaults and the difficult negotiations of a debtor country with its atomized bondholders. Disclaimer model were syndicated loans, in which similar agreement clauses apply. The coordinating relevant here LMA will include in its standard contracts for major contract changes before the approval of 2 /3 of the creditor; is this agreement before, all creditors are bound by the amendment. Upon introduction of the CAC has been argued that the large number of bondholders could only be treated the same for pending changes if " concerted action " on the change in loan terms will coordinated within the framework of, and applies to the majority decision on all Noteholders.

It is extrajudicial restructuring that allows the CAC. Core of the CAC is the determination of the majority decision, which in turn consists of four components. Required majorities usually start at 75 %, but there are also 85 % majorities. If the required minimum ratio for the majority decision is reached, the CAC determines that such majority shall be binding on all bondholders. Although the CAC can relate to all terms and conditions, but their practical application is usually limited to interest rate and repayment terms, debt restructuring, debt relief and consolidation. For payments by the obligor is encouraged to make the decision on dismissal and legal action on the achievement of a qualified minority of at least 25 % of the notional amount outstanding dependent.

In Germany, the Bond Act ( Bond Act ) regulates December 1899 the way in which the holder of a bond may act on their securitized debt instruments rights by agreeing to certain amendments to the indentures. This may be necessary during the term of a loan for various reasons, especially in a crisis or in the insolvency of the debtor's debt. Since July 2009, the CAC is contained in § 5 SchVG, with a rated value orientated majority of 75 % on changing individual terms and conditions is required. Then also essential terms and conditions may be changed in total for all creditors, if only agrees to a majority of creditors. The terms and conditions may in accordance with § 4 Bond Act Bond Act only by all creditors or by a 75% rated value orientated majority of creditors, to be effective for all creditors (§ 5 para 2 Bond Act ), as amended ( collective bond ) so that equal treatment is guaranteed by the debtor. The Act contains in § 5 para 3 SchVG a non- exhaustive list of change capable bond conditions, in particular the reduction or change the maturity of interest and principal claim. According to § 1 paragraph 2 SchVG this law expressly does not apply to foreign private issuers and German borrowers in the legal form of the legal person under public law ( federal, state or city bonds). Thus, the CAC is not included in German public bonds. Reason is that the Bond Act is intended to prevent the insolvency of the debtor's bond, but German authorities are incapable of insolvency.

Is legally unclear whether the CAC represents an unreasonable disadvantage of the bond debtor or the creditors pursuant to § 307 BGB minority. The Federal Government is of the opinion that this is not the case, unless the CAC is based on the principles of the Bond Act.

Recording the CAC in laws

Many other states have now joined the CAC in its financial legislation, so it can be retrieved when needed on them. From January 2013, a standardized, identical rescheduling clause should be included in all government bonds of EU Member States. It will be compatible with U.S. American and English law. ISDA believes that this statutory introduction of CAC itself triggers a credit event, so no payments from credit default swaps to be paid by the guarantor due to the mere legal introduction. Nevertheless, the application of the CAC can trigger a credit event. On 10 March 2012, the ISDA Determinations Committee had decided to classify the previous rescheduling action Greece despite a high voluntary participation rate as a credit event. Greece would force them to waiver all Noteholders under Greek law, because the country had already adopted a precautionary measure to this end a law that opens the possibility of retroactively equip old bonds with CAC. Reason was that only 83.5 % - were in agreement with an average debt of private bondholders and therefore the derogations provided for this case legal action clauses into force - instead of the required 90%. In this case it was the ISDA to the fact that not already the precautionary legal introduction of the CAC a credit event, but only the concrete application of this law, which then leads to a forced consent of the minorities. Come, therefore, the measures provided for in the CAC clause majorities, so provides a debt rescheduling, debt forgiveness or interest rate reduction as a result of the vote, a credit event dar. This causes obligations to pay the Credit Default Swap, if one of these measures is defined as " credit event ".

If CACs included in government bonds, their ward security would no longer be guaranteed.