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Collective Action Clause (CAC)

A Collective Action Clause (CAC) is a provision included in the terms of sovereign bond contracts that allows a supermajority of bondholders to agree to changes in the payment terms, such as extending the maturity, reducing the interest rate, or restructuring the principal, even if some bondholders dissent. CACs are designed to facilitate the orderly restructuring of sovereign debt in the event of a default, preventing holdout creditors from blocking restructuring agreements that are supported by the majority.

Example

If a country is facing a debt crisis and seeks to restructure its bonds, a CAC would allow 75% of the bondholders to agree to a new repayment schedule, and the changes would apply to all bondholders, including those who opposed the restructuring.

Key points

• CACs allow a supermajority of bondholders to agree to debt restructuring, even if some oppose it.

• Helps prevent individual bondholders from blocking restructuring deals.

• Commonly used in sovereign debt to facilitate smoother debt restructuring in case of default.

Quick Answers to Curious Questions

They allow the majority of bondholders to agree to changes in debt terms, preventing holdouts from blocking restructuring deals, which helps avoid prolonged debt crises.

A CAC requires a supermajority (typically 75%) of bondholders to approve changes to the bond's payment terms, making the changes binding for all bondholders.

Not all bonds include CACs, but they are increasingly common in sovereign debt contracts to manage potential defaults and restructurings more efficiently.