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Friday, June 05, 2009


political risk covenants

via david goldman -- a post by kenneth anderson at the volokh conspiracy regarding an increasing interest in political contingency clauses in bond offerings among corporate america.

As I watch the Detroit restructurings unfold, particularly the strong-arming of senior and secured creditors, I wonder what new covenants creditors might want to put into new bond issuances by US businesses that might eventually become entangled with government. I've been reflecting on this looking back over the standard documents that I have used over the past twenty years. Interestingly, the contract forms I've used do not have very many special political risk terms.

Why not? Because the general assumption is that no political risk covenant can really protect you in a place where contracts are not enforced — political risk of that kind involves yanking the floor out from under the investor altogether. If a contract term that provides for secured creditor status will not be enforced, why think that a covenant requiring repayment in case of political risk such as expropriation will be enforced either? The nature of political risk is that it is a risk running to the very rules of the game.

Of course that is not completely true. There are political risks and there are political risks, if you are investing in the developing world or, alas, today the United States. The United States seems, in these contract matters, not to resemble the rule of law in Angola, sure — but it is distinctly starting to resemble, ever so little-bit-by-little-bit, the rule of law in China. There is a certain amount of neutral contract enforcement, but also a hefty amount of political thumb on the scale, and many uncertainties attached — and without getting hysterical about it, the American trend line is going that direction. It might be most useful to look at Western contracts with Chinese companies to get good ideas on "mixed" cases of this 'sort-of-rule-of-law, sort-of-not', because that seems to be the drift of Obama administration industrial policy.

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