Multilateral-guaranteed debt constitutes a growing slice of outstanding emerging markets sovereign debt, in particular in Sub-Saharan Africa. The multilateral community shows increasing willingness to arrange guarantee products, which create balance sheet advantages for both that multilateral and the underlying sovereign debtor in preference to a direct loan. Crucially, they are proven to successfully deploy private capital for public development purposes. Multilateral credit guarantees are flexible by definition, and any sovereign payment obligation is in principle capable of being guaranteed or insured, from loans, bonds, swaps and derivatives through to long-term power purchase commitments. The leading commercial banks and financial institutions can have considerable appetite for multilateral guarantee transactions, which benefit from AAA-rated credit support as well as the environmental, social and reputational stamp of approval of a development finance institution. The major multilateral institutions include African Development Bank, Asian Development Bank, Inter-American Development Bank, Islamic Development Bank and the World Bank.
With the issue of sovereign debt relief in Sub-Saharan Africa having shot to prominence on the global agenda of late, significant attention has focused on outstanding bilateral and multilateral debt. The World Bank and IMF made a request to official creditors on 25 March 2020 to consider any standstill requested by IDA-eligible countries. Meanwhile on 9 April 2020, a group of prominent Africans including Tidjane Thiam, the Ivorian former CEO of Credit Suisse, led a call for a two year standstill on all external debt owed to the private sector, including principal and coupon under $115bn of Eurobonds issued by African sovereigns. Yet multilateral-guaranteed debt comprises a distinct and hybrid class of debt, neither solely multilateral nor commercial.
Standstill or moratorium ? And does it matter?
Mr. Thiam has been at pains to label his proposal as a "standstill" rather than a "moratorium", to avoid perceived negative connotations and presumably to facilitate continued access to markets where possible. A moratorium would typically imposed by a sovereign debtor, rather than agreed by a creditor body, but in this context the practical distinction seems limited.
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Against this background – what of multilateral-guaranteed debt issued by sovereigns or SOEs and held by commercial banks as lender of record? And in particular, where that guarantee is only a partial credit guarantee, with the remainder held by that lender on its own books or with political risk insurance or other commercial credit protection? In the current climate, sovereigns seeking forbearance will have to navigate potentially divergent interests and incentives as between multilateral credit support providers and the commercial lenders who benefit from that coverage. This interaction is complex and we set out some of the relevant legal and documentary considerations below:
Requirement for multiple consents
Should a sovereign seek a waiver of its payment obligations on a multilateral-guaranteed or -insured transaction, typically a commercial lender will not be able to consent to any such extension without the express prior written approval of the multilateral guarantor. That multilateral's approval must be obtained in accordance with the terms of the relevant guarantee instrument, and is not assumed because of any public statement of policy or press release. Failure to obtain the consent of the relevant credit support provider, documented and approved in accordance with the terms of that instrument, may risk invalidating the coverage. Likewise the consent of a guarantee holder should not be assumed because the multilateral is willing to grant such consent, in which case that beneficiary may simply elect to call on its multilateral credit support at the earliest permitted time.
Extended grace periods
In many cases, multilateral guarantees provide the sovereign with lengthy grace or cure periods after payment default and before a call under the guarantee is permitted. These are intended to protect the role of the multilateral as "lender of last resort" and to provide time to the sovereign to resolve credit and cash flow issues. However they will likely not prevent cross-default or similar consequences being triggered under that sovereign's other external debt instruments where amounts above a designated threshold are not paid when due.
Preferred creditor status and pari passu claims
To the extent that commercial lenders do call under multilateral guarantees and are paid out, those lenders need to be mindful of the multilateral's rights of subrogation in relation to the guaranteed debt and how those may interact with the other outstanding commercial debt – in particular if the multilateral asserts or is granted preferred creditor status by the relevant sovereign, whether de facto or otherwise. A multilateral guarantor's preferred creditor status may have the practical effect of overriding pari passu status and subordinating the position of guaranteed lenders in relation to non-guaranteed outstandings.
Split voting in partial credit guarantees
In the partial credit context, lenders will want to carefully consider the possibility of split voting under the relevant loan instrument, in the event of conflicting directions from multilateral guarantor and commercial political risk insurers. In the absence of split voting provisions, the terms of the loan agreement will need to be analysed and other solutions considered.
Partial payments waterfall
Lenders will want to carefully consider partial payments waterfall, and to what extent amounts uncovered by the multilateral guarantor may be recovered in excess to the covered amounts to the extent that a commercial lender actually makes a direct partial recovery.
Claim mechanics in syndicated transactions
Lenders will want to carefully consider their individual standing to claim on the multilateral guarantee instrument, and whether claims can be made individually, acting in a bloc or via the agent. This point may take on particular importance in a negotiated restructuring scenario.
Information obligations
Lenders will want to consider their ongoing information obligations towards the relevant multilateral, in particular insofar as they hold information as to a potential sovereign credit event. Multilaterals do impose information obligations on guaranteed creditors and these need to be carefully policed to avoid risking any impairment to the guarantee.
Debt purchase and transfer rights
Many multilateral guarantee instruments confer upon the multilaterals the right, but not the obligation, to purchase all of a guaranteed lender's debt (including amounts not covered by that institution). If the various stakeholders in such a financing are not able to agree terms for any waiver or forbearance, multilaterals may consider exercising such purchase options. Similarly a commercial lender which does not provide consent may be required to transfer its debt at par to another lender selected by the relevant multilateral or sovereign. The terms of such transfer, including liability for pre-transfer acts of the exiting lender, would need to be carefully negotiated and documented.
Multilateral guarantee documentation tends to be both sophisticated and bespoke, and the outcome of considerable discussion and debate. For guaranteed lenders, ensuring debt sustainability will be a key factor in any decision to grant a sovereign debtor waiver or forbearance. That said any assessment of a waiver needs to take into account the latent complexities of multilateral guarantee documentation, which may operate in ways which are not obvious. Sovereigns will need to understand the three-way negotiation dynamic created by a multilateral guarantee, and the requirement for multiple consents as part of this process. Well-advised lenders meanwhile will only grant any such waivers in full contemplation of their inherent rights under such guarantee instruments.
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