a new chapter in the pari passu saga - world...

A NEW CHAPTER IN THE PARI PASSU SAGA

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A New Chapter in the

Pari Passu Saga

(clearly not the last one!)

Dr Rodrigo Olivares-Caminal

Washington DC,

December, 2012


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Time constraint, just to ignite the discussion.

Only substantial aspects—no UK/US procedural issues.

Opinions are personal.


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T H E P A R I P A S S U C L A U S E

S t r u c t u r e & I n t e r p r e t a t i o n

Clause Structure Clause Interpretation

1. INTERNAL LIMB: the bonds

rank pari passu with each other

2. EXTERNAL LIMB: the bonds

rank pari passu with other unsecured indebtedness of the issuer

Two Limbs Two Interpretations

1. NARROW or RANKING

INTERPRETATION: obligations rank and will rank pari passu with all other unsecured debt

2. BROAD or PAYMENT

INTERPRETATION: when the debtor is unable to pay all its obligations, they will be paid on

a pro-rata basis

PARI PASSU—STRUCTURE AND INTERPRETATION


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“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).

Internal 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”.

THE PROSPECTUS (ARGENTINA’S 1994 FAA, CLAUSE 1(C))

External Limb


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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 …

NML CAPITAL v. REPUBLIC OF ARGENTINA (08-cv-06978-TPG)


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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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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’.

BREACH OF PP CLAUSE: SUBORDINATION


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1. Argentina reserves the right—in its absolute discretion—to: (a) purchase; (b)

exchange; (c) offer to purchase or exchange; or, (d) enter into a settlement in respect of

any eligible securities that are not exchanged pursuant to the exchange offer. And—to the

extent permitted by applicable law—to purchase or offer to purchase eligible securities in

the open market, in privately negotiated transactions or otherwise.

Provided that:

2. Any such purchase, exchange, offer to purchase or exchange or settlement

will be made in accordance with applicable law.

3. The terms of any such purchases, exchanges, offers or settlements could

differ from the terms of the exchange offer.

Therefore,

4. Holders of the new bonds will be entitled to participate in any voluntary

purchase, exchange, offer to purchase or exchange extended to or agreed with holders

of eligible securities not exchanged pursuant to the exchange offer [NOTE: the word

settlement does not appear in this paragraph].

THE MFC CLAUSE


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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)”.

THE VIEW FROM THE BENCH


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Elliott’s

Decision in Brussels

SDRM

(Pub. Sector) NGO Activism

Vulture

Repudiation (Bills/Acts)

Rogue

Debtors Arg. 2001-05

Ecuador 2008

Greece 2012?

CACs

+ Exit Consent

(Priv. Sector)

Increased

Vulture Activity

(mistaken) Re-emergence of Odiousness

+ Illegit. Mut

Rogue

Creditors?


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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 !

RATABLE PAYMENT?

Temporary Restraining Order (payment method) + Permanent Injunctions

(aiding and abetting)?


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keep it

simple.

1. Pre-Argentina’s litigation = incorrect

interpretation of the pp clause (Belgium

court)

2. Post-Argentina’s litigation = could have

been based on a correct interpretation and

an actual breach of the pp clause in its

ranking or narrow form A GREAT MISSED

OPPORTUNITY a new wake of litigation.

3. Olivares-Caminal (2009) and Gulati and

Scott (2011) the clause has little or no

meaning in the sovereign context

boilerplates are sticky, even more after the

CoA decision.


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Any Questions ?

谢谢. Cam rá. Efharisto. Obrigado.

Gracias. Grazie. Thank You.

Merci. Dankeshen. Etc.

[email protected]


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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.

SOME PROCEDURAL NOTES

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