2004 Reports

How CACs Became Boilerplate, or, The Politics of Contract Change

Gelpern, Anna; Gulati, Mitu

In 1997, a developing country defied convention. It issued New York law bonds that let 75% of the bondholders change key financial terms. Until then, standard form New York law contracts required unanimous consent. But no one seemed to notice the innovation, and just about no one followed suit. In 2003, another developing country issued New York law bonds with a 75% amendment threshold. The world of international finance erupted in applause and criticism. Major press outlets, finance ministers and senior executives publicly pondered the shift. Other countries adopted similar provisions under the rubric of "collective action clauses" or "CACs". Academic study of sovereign debt contracts took on new importance. This chapter reports on an effort to understand what happened and what it means.