Flipping out over the latest attempt to change sovereign bond contracts
Contractual provisions come in and out of vogue, even in stultifyingly standardised financial instruments. The latest burst of creativity has been triggered by several pieces of proposed legislation introduced into the New York State legislature.
These bills, none of which has yet passed or been enacted into law, have a common objective — to facilitate the restructuring of sovereign debt instruments governed by New York law and to render those exercises less vulnerable to exploitation by holdout creditors that refuse to join a debt workout supported by a supermajority of fellow lenders.
Some investors seem to believe that any statutory changes that make restructuring government debt a little easier will inevitably erode the creditors’ leverage. This fear has led to the introduction of so-called “Flip Clauses” in several recent bond sales.
A Flip Clause is a provision permitting a specified majority of the holders of a sovereign bond to change the chosen governing law of the instrument (and the related submission to court jurisdiction) if they discern some ominous alteration in the legal regime initially chosen.