THE LONDON CLUB GLOSSARY OF SELECTED TERMS (continued)

Free Rider
Any bank or financial institution which has a debt obligation that needs to be rescheduled under a restructuring agreement but refuses to join the restructuring agreement.

Heads of Terms
Set out the basic terms of the restructuring. Negotiation of the Heads of Terms seek to identify the obligor, the agent, the consolidation period, the cut-off date, what constitutes debt that is going to be rescheduled (eligible debt), what debt is not going to be included in the rescheduling and agreement on the interest rates or rates to be chargeable on the rescheduled tranches (excluded debt), any currency options available to the creditors, the conditions precedent to the restructuring of any of the maturities, any menu of options to be included, any information to be provided by the government, treatment of taxes, clauses relating to voluntary prepayments, treatment of expenses, governing law and procedure of debt reconciliation.

Information Memorandum
A document usually prepared by the debt management team of Sovereign which is meant to advise the creditor banks and other financial institutions of the specific economic, financial and political situation of the Sovereign, why the problem of a restructuring has arisen, what steps are being taken to correct it, etc. This memorandum may include information on population, constitution and government, membership of international organizations, economic trends in the country and economic policies and objectives of the government, any adjustment or other programme which has been agreed upon with multilaterals, changes in the economic policy and the programme to be put in place to meet the financing gap, provide data on the external public debt with debt service projections.

Layering
A layering involves a structure whereby the underlying agreements will remain in place, the restructuring agreement will set out by contract the new maturity schedule and the creditors will agree not to enforce the underlying agreements so long as the new terms are met. Layering is one form of restructuring - other forms include consolidation or refinancing.

Linkage
Linkage that must exist before a co-ordinated restructuring programme can be undertaken by a sovereign in terms of its official debt and commercial debt. See equal treatment, comparability.

Majority and Extra Majority Creditors
In debt restructuring, a particular bank or financial institution is a majority creditor depending on whether or not it has the percentage of the relevant amount outstanding under the agreement which is needed for the formulation of majority decisions. For example, many agreements provide that the relevant majority is over fifty percent with regard to all matters other than specified matters of importance like waivers of conditions precedent and acceleration resulting from a default. Amendment of fundamental terms is subject to agreement by the relevant extra majority banks. Often the extra majority is defined as ninety-five percent in number of the creditors rather than the net amount of the debt.

Majority Rule
This rule states that only a majority consent is required for there to be a waiver or amendment and it is usually in relation to events of default such as breach of covenants and waivers, misrepresentation or non-payment.

Mandatory Prepayment Clause
This clause is designed to provide remedies to bank and financial institutions which have restructured their debt if the obligor concerned services comparable indebtedness in a manner which is more preferential to that of the restructuring or new money agreement. For example, the clause would require that if the obligor pays 10% of the debt to a free rider, then the creditors who have restructured are entitled to 10% of the debt owing to them (at most), or the actual amount paid to the free rider (at least), depending on how the clause is drafted.

Moratorium
Condition when a borrower declares his inability to pay some or all of an outstanding debt, or when the borrower ceases paying the debt service on a loan. If a moratorium is declared by a sovereign borrower, it generally leads to rescheduling of the loan with a longer term.

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