The confluence of the COVID-19 pandemic, high inflation, and increased borrowing costs culminated in countries incurring record levels of debt. Despite this global debt crisis, there is currently no comprehensive set of rules or body of law to govern the restructuring of sovereign debt. Instead, when a sovereign restructures its debt, it is usually guided by contractual collective action clauses (“CACs”) through which bondholders agree to be bound by a restructuring proposed by a sovereign if a specified majority of bondholders approves the proposal.
Until now. New York is now taking a stab at improving the mechanisms available to sovereigns restructuring their debt. This comes as no surprise, because New York law governs approximately half of all sovereign bonds issued globally. The New York legislature is considering three types of reforms to its law governing sovereign debt: (i) a comprehensive mechanism for restructuring sovereign debt; (ii) limits to recovery on certain sovereign debt claims; and (iii) changes to the champerty defense.