In its 2024 legislative session, New York’s State Legislature again considered proposed laws with potential implications for sovereign debt. The most ambitious proposal, entitled the “Sovereign Debt Stability Act,” sought to: (i) create a mechanism for restructuring sovereign debt or (ii) limit recovery on claims against sovereigns participating in certain international debt relief initiatives1. Under the proposed law, a sovereign debtor with New York law governed debt obligations could opt into one of these two mechanisms.
Although well-intentioned, the proposed law had many of the same shortcomings as its predecessors2. The practical, legal, and constitutional challenges it faces could sow uncertainty in markets, increase borrowing costs and cause the migration of sovereign debt from New York law to other jurisdictions’ laws, as we have detailed in a recent client alert3.
Another option that the New York State Legislature considered was to enact more limited reforms to the champerty defense and statutory interest rate for sovereign debt. The legislative session concluded on June 6, 2024 without any of the above proposals becoming into law. We anticipate similar proposals will be up for discussion in the next legislative session.
In its 2024 legislative session, New York’s State Legislature again considered proposed laws with potential implications for sovereign debt. The most ambitious proposal, entitled the “Sovereign Debt Stability Act,” sought to: (i) create a mechanism for restructuring sovereign debt or (ii) limit recovery on claims against sovereigns participating in certain international debt relief initiatives1. Under the proposed law, a sovereign debtor with New York law governed debt obligations could opt into one of these two mechanisms.
Although well-intentioned, the proposed law had many of the same shortcomings as its predecessors2. The practical, legal, and constitutional challenges it faces could sow uncertainty in markets, increase borrowing costs and cause the migration of sovereign debt from New York law to other jurisdictions’ laws, as we have detailed in a recent client alert3.
Another option that the New York State Legislature considered was to enact more limited reforms to the champerty defense and statutory interest rate for sovereign debt. The legislative session concluded on June 6, 2024 without any of the above proposals becoming into law. We anticipate similar proposals will be up for discussion in the next legislative session.
Background
The lack of an international bankruptcy or insolvency mechanism for sovereign debtors has drawn increased attention as sovereign debt levels have soared since the COVID-19 pandemic. Most sovereign debt restructurings today rely on contractual collective action clauses (“CACs”) in bonded debt, and consensual agreements with creditors holding other debt. In a typical CAC, bondholders agree to be bound to a sovereign’s restructuring proposal if a specified supermajority of holders approves it4. However, CACs are not a panacea because bondholders may still “hold out,” and sovereign debt instruments other than bonds typically do not include them.
Since 2021, certain New York legislators have repeatedly tried to leverage the predominance of New York law in sovereign bonds5 by introducing debt relief legislation that would superimpose a CAC-like restructuring mechanism into all New York law governed debt instruments, among other proposals. So far, none of the bills have passed.
Background
The lack of an international bankruptcy or insolvency mechanism for sovereign debtors has drawn increased attention as sovereign debt levels have soared since the COVID-19 pandemic. Most sovereign debt restructurings today rely on contractual collective action clauses (“CACs”) in bonded debt, and consensual agreements with creditors holding other debt. In a typical CAC, bondholders agree to be bound to a sovereign’s restructuring proposal if a specified supermajority of holders approves it4. However, CACs are not a panacea because bondholders may still “hold out,” and sovereign debt instruments other than bonds typically do not include them.
Since 2021, certain New York legislators have repeatedly tried to leverage the predominance of New York law in sovereign bonds5 by introducing debt relief legislation that would superimpose a CAC-like restructuring mechanism into all New York law governed debt instruments, among other proposals. So far, none of the bills have passed.
Sovereign Debt Stability Act
The Sovereign Debt Stability Act combined two of the three lapsed proposals from 2023 – the restructuring mechanism and the limitation on recovery mechanism. The proposal sought to allow a sovereign debtor to choose one of the two mechanisms, with the option to change its election once during a restructuring. A sovereign debtor could not waive its right to elect the treatment of claims under the proposed law.
Sovereign Debt Stability Act
The Sovereign Debt Stability Act combined two of the three lapsed proposals from 2023 – the restructuring mechanism and the limitation on recovery mechanism. The proposal sought to allow a sovereign debtor to choose one of the two mechanisms, with the option to change its election once during a restructuring. A sovereign debtor could not waive its right to elect the treatment of claims under the proposed law.
The Limitation on Recovery Mechanism Option
This mechanism limits recovery on claims against sovereigns participating in certain international debt relief initiatives, to the extent those claims are enforced under New York law. Recovery on those claims would be limited to the amount “recoverable by the U.S. federal government under the applicable international initiative,” and the claims must satisfy burden-sharing and disclosure standards. Examples of qualifying “international initiatives” include the IMF and World Bank’s Heavily Indebted Poor Countries Initiative, the G-20’s Debt Service Suspension Initiative, and the Common Framework for Debt Treatments.
A sovereign would lack discretion over which New York-law debt to submit to the mechanisms, reducing flexibility in a restructuring.
To avoid the mechanisms, investors may require that sovereigns issuing new debt (or seeking relief under existing debt) choose other jurisdictions’ laws. The ensuing migration of sovereign issuers from New York law would further fragment sovereigns’ mixes of debt and, with the partial application of the mechanisms, complicate future restructurings.
By its own terms, the proposal already would not apply to the non-New York-law instruments that comprise the vast majority of sovereign debt, including local law governed debt, official sector debt, or loans by China and its state-owned banks. It thus ignores a crucial challenge of sovereign debt today: how to restructure official sector and bilateral debt held by state entities.
The restructuring mechanism’s supermajority voting thresholds may prove less protective than existing CACs.
The required separate classification of governmental claims could favor official creditors.
An independent monitor with ill-defined authority would displace the IMF’s well-accepted role.
The approval procedure for new borrowings and their required repayment before existing claims would impede both restructurings and ordinary course financings.
The limitation on recovery mechanism is ambiguous. Interpretations of recovery standards have varied within international initiatives, so the cap based on the U.S. government’s recovery under each initiative would be indeterminate. With their recoveries capped and immeasurable, private sector investors may reduce funding for low- and middle-income countries.
Since the proposed law does not automatically stay enforcement proceedings, sovereigns would remain subject to current litigation risks. Indeed, creditors may compete to bring litigation before a sovereign opts into the proposed framework.
In addition to litigating specific restructurings, creditors could challenge the validity of the mechanisms themselves, arguing a lack of jurisdiction over international creditors and the unconstitutionality of the law (for example, if the proposed law retroactively impaired collateral), among other challenges. Perhaps anticipating these challenges, the proposed law’s sponsors drafted it so that one mechanism can survive if another is invalidated.
The proposed law was well-meaning but failed to anticipate the market’s response. Eight prominent industry groups issued a joint press release concluding that the proposal would deal “a major blow to New York law’s position as the gold standard”6. Instead of solving sovereign debtors’ problems, the proposed law could cause a costly migration from New York law.
The Act also neglected more significant challenges, such as dealing with bilateral debt held by countries and multilateral institutions with different views on restructuring. If enacted, the proposal could have limited, rather than expanded, access to private capital for countries that desperately need it to meet their development objectives.
Champerty Bill
Given the proposed Sovereign Debt Stability Act’s shortcomings, momentum grew in Albany towards the end of the legislative session to instead enact more limited reforms to the champerty defense and statutory interest rate for sovereign debt.
On June 3, New York State Senator and Finance Committee Chair Liz Krueger and Assembly Member Jessica González-Rojas introduced a revised Champerty Bill after soliciting comments on an earlier proposal7. The Champerty Bill sought to restore the champerty defense, which prohibits a person or entity from acquiring debt “with the intent and for the purpose of bringing an action or proceeding thereon,” with respect to claims greater than $500,000 against foreign countries and their subdivisions or issuers of debt guaranteed by them.
Further, the Champerty Bill sought to change the statutory interest rate on sovereign debt claims from the current 9% to the weekly average one-year constant maturity Treasury yield for the calendar week preceding the date of entry of the judgment awarding damages, in line with the federal statutory interest rate.
The legislative session concluded on June 6 without the passage of either the Sovereign Debt Stability Act or the Champerty Bill. We anticipate similar proposals will be up for discussion in the next legislative session and will continue to monitor these proposals, addressing them in future updates.
Champerty Bill
Given the proposed Sovereign Debt Stability Act’s shortcomings, momentum grew in Albany towards the end of the legislative session to instead enact more limited reforms to the champerty defense and statutory interest rate for sovereign debt.
On June 3, New York State Senator and Finance Committee Chair Liz Krueger and Assembly Member Jessica González-Rojas introduced a revised Champerty Bill after soliciting comments on an earlier proposal7. The Champerty Bill sought to restore the champerty defense, which prohibits a person or entity from acquiring debt “with the intent and for the purpose of bringing an action or proceeding thereon,” with respect to claims greater than $500,000 against foreign countries and their subdivisions or issuers of debt guaranteed by them.
Further, the Champerty Bill sought to change the statutory interest rate on sovereign debt claims from the current 9% to the weekly average one-year constant maturity Treasury yield for the calendar week preceding the date of entry of the judgment awarding damages, in line with the federal statutory interest rate.
The legislative session concluded on June 6 without the passage of either the Sovereign Debt Stability Act or the Champerty Bill. We anticipate similar proposals will be up for discussion in the next legislative session and will continue to monitor these proposals, addressing them in future updates.
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