Collective action clause

A collective action clause (CAC) is a provision written into sovereign or corporate bond contracts that allows a defined supermajority of bondholders—typically 66⅔% or 75% by principal amount—to approve changes to payment terms (maturity, coupon, principal) that are then binding on every holder of the issue, including dissenters. CACs exist to solve the holdout problem in debt restructurings, where a small minority of creditors refuses a deal and sues for full payment, as famously occurred when NML Capital and other "vulture" funds litigated against Argentina after its 2001 default.

Historically, sovereign bonds issued under New York law required unanimous consent to alter payment terms, while English-law bonds had long permitted majority action. After the Argentine crisis, the IMF and G10 pushed for CACs in international sovereign issuance. Mexico became the first major emerging-market sovereign to include a CAC in a New York-law bond in February 2003, breaking the market taboo. CACs subsequently became standard in emerging-market debt.

Following the Greek debt crisis, the euro area mandated standardized CACs in all new euro-area sovereign bonds with maturity over one year, effective 1 January 2013, under the Treaty Establishing the European Stability Mechanism. Greece's March 2012 restructuring (PSI) retroactively inserted CACs into domestic-law bonds via legislation, enabling a forced haircut of roughly 53.5% of face value.

In 2014, the International Capital Market Association (ICMA) published a model "single-limb" or "enhanced" CAC allowing a single aggregate vote across multiple bond series, eliminating the ability of holdouts to acquire a blocking stake in one small series. The IMF endorsed this model, and Ukraine's 2015 restructuring was an early test. Single-limb CACs were central to Argentina's 2020 and Ecuador's 2020 restructurings.

Critics argue CACs still leave gaps—e.g., bilateral official creditors, collateralized debt, and pre-CAC legacy bonds remain outside their reach.