The Financial Times reported that the option to restructure one of Pakistan’s near-maturity dollar bonds may have a significant issue, and that the bond’s issuing authority is to blame. According to the study, the issuer must approve an onerous or exceptional resolution in order to restructure any foreign currency bond. This resolution must be voted on by the bond holders; if a minimum number of voters are present, the resolution is approved.
According to the research, this barrier was maintained until 75 percent as early as 2003. In reality, this criterion was set at 66 percent or below for the majority of the bonds issued in 2014, the year this specific bond was issued, lowering the risk of default in the event of a holdout. Countries and other entities maintained this barrier low to protect their future interests because there was no punishment for doing so. The issuing authorities in Pakistan, on the other hand, shown a complete lack of market knowledge by maintaining a 90% approval rate for an onerous resolution.
And the problem with this link goes beyond just that. The paper goes on to describe how there is still another problem with the definition of voters. An Extraordinary Resolution is described as one that is “duly carried by not less than 90% of the votes cast” as opposed to “threshold as a proportion of the aggregate principle amount.” As a result, someone with just $1000 worth of the bond might have the same impact on the restructuring process as someone with $100 million.
To read our blog on “Bond price decline is justified by Pakistan’s problems: JPMorgan”, click here
