The Pari Passu Dilemma in the Sovereign Debt Context
The Pari Passu
Dilemma in the
Sovereign Debt
Context
Prof. Rodrigo Olivares-Caminal
Nottingham, UK
September, 2013
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The Pari Passu Dilemma in the Sovereign Debt Context
Time constraint, just to ignite the discussion.
Only substantial aspects—no UK/US procedural issues.
Opinions are personal.
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The Pari Passu Dilemma in the Sovereign Debt Context
PARI PASSU—STRUCTURE AND INTERPRETATION
T H E PAR I PAS S U C LAU S E
Structure & Interpretation
Clause Structure
Clause Interpretation
1. INTERNAL LIMB: the bonds
rank pari passu with each other
1. NARROW or RANKING
INTERPRETATION: obligations
rank and will rank pari passu with
all other unsecured debt
2. EXTERNAL LIMB: the bonds
rank pari passu with other
unsecured indebtedness of the
issuer
2. BROAD or
INTERPRETATION:
debtor is unable to
obligations, they will
a pro-rata basis
Two Limbs
Two Interpretations
PAYMENT
when the
pay all its
be paid on
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The Pari Passu Dilemma in the Sovereign Debt Context
THE PROSPECTUS (ARGENTINA’S 1994 FAA, CLAUSE 1(C))
Internal Limb
“The Securities [i.e., the bonds] will constitute . . .
direct, unconditional, unsecured and unsubordinated
obligations of the Republic and shall at all times rank
pari passu and without any preference among
themselves. The payment obligations of the Republic
under the Securities shall at all times rank at least
equally with all its other present and future
unsecured
and
unsubordinated
External
Indebtedness (as defined in this Agreement).
External Limb
With a payment element? What does this really mean?
Wood: “rank means ‘rank’. It does not
mean ‘will pay’, nor does it mean that
will give ‘equal treatment to creditors’.
If the clause adopts a variant, such as
‘rank pari passu in priority of payment’
, the result is the same”.
Mitu Gulati and Robert Scott: “legal
professionals still do not agree on its
meaning or purpose and even less on
its origin ... a harmless relic of
historical evolution”
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The Pari Passu Dilemma in the Sovereign Debt Context
ELLIOTT
ELLIOTT
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The Pari Passu Dilemma in the Sovereign Debt Context
NML CAPITAL v. REPUBLIC OF ARGENTINA (08-cv-06978-TPG)
It is DECLARED, ADJUDGED, and
DECREED that the Republic is required ... at
all times to rank its payment obligations
pursuant to NML’s Bonds at least equally
with all the Republic’s other present and
future unsecured and unsubordinated
External Indebtedness.
It is DECLARED, ADJUDGED, and
DECREED that the Republic violates
Paragraph 1(c) of the FAA whenever it
lowers the rank of its payment obligations
… including (and without limitation) by
relegating NML’s bonds to a non-paying
class …
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The Pari Passu Dilemma in the Sovereign Debt Context
Why the District Court said that
there has been a breach of the
clause?
Lock Law
It is DECLARED, ADJUDGED, and DECREED
that the Republic lowered the rank of NML's
bonds in violation of Paragraph 1(c) of the FAA
when it enacted Law 26,017 and Law 26,547.
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The Pari Passu Dilemma in the Sovereign Debt Context
BREACH OF PP CLAUSE: SUBORDINATION
No CACs or exit consents  Argentina run out of options to enhance creditor participation 
creatively use of the contractual terms of the bonds, i.e. most-favored creditor clause  but there
was a drafting failure !
Argentina passed Law 26,017 (Lock law) to reassure participating creditors that the offer was the
only possible choice.
The Lock law provided a basis for considering an alteration in the legal ranking of the existing
unsecured creditors resulting in the involuntary subordination of the holdout creditors.
Argentina opened the window to a breach of the pari passu clause on legal subordination
rather than on a broad or ratable payment interpretation.
The problem here is not the issuance of performing debt as result of the exchange offer 
formally subordinated the holdouts to non-performing status/ i.e. payments do not rank equally
anymore = 2 unsecured obligations ranking differently.
SEC Form 18K (Annual Report): holdouts are a category separate from its regular debt and that
since 2005, it has “not [been] in a legal … position to pay” that category.
Buchheit: ‘you can do pretty much whatever you want in discriminating among creditors (in terms
of who gets paid and who does not) but do not try to justify your behavior by taking steps that
purport to establish a legal basis for discrimination’.
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The Pari Passu Dilemma in the Sovereign Debt Context
THE VIEW FROM THE BENCH
Argentina “lowered the rank” of plaintiff bonds in
two ways:
(1) “when it made payments
currently due under the Exchange Bonds, while
persisting in its refusal to satisfy its payment
obligations currently due under [plaintiffs]
Bonds”; and, (2) “when it enacted [the Lock Law”
and [the Lock Law Suspension]”.
“… in pairing the two sentences of its Pari Passu
Clause, the FAA manifested an intention to
protect bondholders from more than just
formal subordination”  according to the CoA,
the Pari Passu clause protects against: (1) “the
issuance of other superior debt (first sentence)”;
and, (2) “the giving of priority to other
payment obligations (second sentence)”.
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“As we explicitly stated in our last
opinion, we have not held that a
sovereign debtor breaches its
pari passu clause every time it
pays one creditor and not
another, or even every time it
enacts a law disparately affecting
a creditor’s rights. We simply
affirm
the
district
court’s
conclusion
that
Argentina’s
extraordinary behavior was a
violation of the particular pari
passu clause found in the FAA.”
The Pari Passu Dilemma in the Sovereign Debt Context
Second Circuit Court of Appeals, NML Capital, Ltd
v Republic of Argentina, 12-105(L), 23 August
2013.
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The Pari Passu Dilemma in the Sovereign Debt Context
SOME PROCEDURAL NOTES
 Jan 2012  District Court issued a temporary restraining order enjoining Argentina from
altering the payment process (including the use of different firms or other vehicles).
 Feb 2012  District Court issued an injunctive relief  each time that a payment is done
to exchanged bonds the same fraction of the amount due to them shall be paid to
holdouts  justification is equitable relief since Argentina made clear (even by a formal
act) its intention not to pay any money judgment
 Since Argy might refuse to comply with the injunction order (under Rule 65(d)(2))
the parties, their officers, agents, servants employees, attorneys as well as other
persons who are in active concert or participation with them are bound by the
injunctions.
 Plus the injunctions expressly prohibit Argentina’s agents from aiding and abetting
any further violation of the order by the court.
o NB: Art. 4-A of the UCC  pure intermediaries cannot be affected.
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The Pari Passu Dilemma in the Sovereign Debt Context
In the context of a broad or “payment” interpretation a creditor can obtain a court
order directing:
(1) DEBTOR: not to pay other debts of equal rank without making a ratable
payment under the debt benefiting from the clause.
(2) OTHER CREDITOR:
a) not to accept a payment from the debtor unless the pari passu-protected
lender receives a ratable payment
b) if has knowingly received and accepted a non-ratable payment
answerable to the pari passu-protected creditor for a ratable share of
the funds.
(3) A FINANCIAL INTERMEDIARY (e.g. a fiscal agent or a bond clearing
system): to freeze any non-ratable payment received from the debtor and to
turn over to the pari passu-protected creditor its ratable share of the funds.
Buchheit & Pam
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The Pari Passu Dilemma in the Sovereign Debt Context
RESTRUCTURING?
 US citizen bondholders to claim the payment of their credit (which
limited the chances of achieving debt restructuring under the IMF's
umbrella) vs. not allowing the claim because it would prejudice NY as a
financial world centre (Pravin case, Court of Appeals)
 Operational ramifications that impact on the functioning of the
payment systems vs. enforcement of creditors’ rights  least of two
evils = NY will lose !
 Sovereign Immunity
RATABLE PAYMENT?  Temporary Restraining Order (payment method) +
Permanent Injunctions (aiding and abetting)?
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The Pari Passu Dilemma in the Sovereign Debt Context
THE CLAUSE VARIES WITH THE DRAFTER
Italy’s 2015 US dollar bond, issued in 2010 and governed by NY law:
Pari Passu Clause (although NO reference to the terms “pari passu”)
“The debt securities will be the direct, unconditional,
unsecured and general obligations of Italy. They will rank
equally with all of our present and future unsecured and
unsubordinated general borrowing. The full faith and credit
of Italy will be pledged for the due and punctual payment of
the debt securities and for the due and timely performance
of all of our obligations under the debt securities. We will
pay principal and interest on the debt securities out of the
Ministry of Economy and Finance of Italy. We will pay
amounts due on the debt securities equally and ratably
with all general loan obligations of Italy.”
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The Pari Passu Dilemma in the Sovereign Debt Context
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The Pari Passu Dilemma in the Sovereign Debt Context
SDRM
(Pub. Sector)
NGO Activism
Vulture
Repudiation
(Bills/Acts)
Rogue
Debtors
Arg. 2001-05
Ecuador 2008
Greece 2012?
Increased
Vulture
Activity
(mistaken)
Re-emergence
of Odiousness
+
Illegit. Mut
Rogue
Creditors?
Elliott’s
Decision in
Brussels
CACs
+
Exit Consent
(Priv. Sector)
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The Pari Passu Dilemma in the Sovereign Debt Context
PRIORITY?
The EFSF has the same
standing
as
any
other
sovereign claim on the country
(pari passu)
ESM will enjoy preferred
creditor status in a similar
fashion to the IMF, while
accepting preferred creditor
status of IMF over ESM.
IMF
ESM
Other Creditors
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The Pari Passu Dilemma in the Sovereign Debt Context
IMF
ESM
Other Creditors
“As we have observed, this case presents
no claim that payments to the IMF would
violate the FAA. A court addressing such a
claim in the future will have to decide
whether to entertain it or whether to agree
with the appellees that subordination of
“obligations to commercial unsecured
creditors beneath obligations to multilateral
institutions like the IMF would not violate
the Equal Treatment Provision for the
simple reason that commercial creditors
never were nor could be on equal footing
with the multilateral organizations.”
Second Circuit Court of Appeals, NML Capital, Ltd v Republic of
Argentina, 12-105(L), 23 August 2013.
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The Pari Passu Dilemma in the Sovereign Debt Context
THE PARI PASSU CLAUSE IN HISTORICAL PERSPECTIVE
No.
Historical Purpose of the Pari Passu Clause
Market / Judicial Reaction-Solution
1
To prevent the earmarking of revenues of the
government towards a single creditor
Expanded negative pledge clause
2
Against legal measures which have the effect
of preferring one set of creditors against the
others (e.g. enacting a specific norm)
Libra Bank Limited v. Banco Nacional de
Costa Rica S.A. and Allied Bank
International v. Banco Credito Agrícola de
Cartago
3
Against legal measures which discriminate
between creditors creating an involuntary
subordination (e.g. the Philippines and
Spain)
Exhaustive due diligence of the issuer
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The Pari Passu Dilemma in the Sovereign Debt Context
keep it
simple.
2.
litigation
could
1. Post-Argentina’s
3.
Pre-Argentina’s
Olivares-Caminallitigation
(2009) and
==incorrect
Gulatihave
and
been
based
a the
correct
interpretation
and
interpretation
Scott
(2011) on
of
the
clause
pp clause
has little
(Belgium
or no
an
actual in
breach
of the ppcontext
clause in
court)
meaning
the sovereign
 its
ranking or narrow
formeven
 A GREAT
MISSED
boilerplates
are sticky,
more after
the
OPPORTUNITY
CoA
decision.  a new wake of litigation.
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The Pari Passu Dilemma in the Sovereign Debt Context
Any Questions ?
谢谢. Cam rá. Efharisto. Obrigado.
Gracias. Grazie. Thank You.
Merci. Danke. ‫شكرا‬. etc.
[email protected]
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