The Pari Passu Dilemma in the Sovereign Debt Context

Transcription

1 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,

2 Time constraint, just to ignite the discussion. Only substantial aspects no UK/US procedural issues. Opinions are personal. The Pari Passu Dilemma in the Sovereign Debt Context 2

3 PARI PASSU STRUCTURE AND INTERPRETATION 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 Two Limbs Clause Interpretation Two Interpretations 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 PAYMENT INTERPRETATION: when the debtor is unable to pay all its obligations, they will be paid on a pro-rata basis 3

4 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 4

5 ELLIOTT ELLIOTT 5

6 The Pari Passu Dilemma in the Sovereign Debt Context NML CAPITAL v. REPUBLIC OF ARGENTINA (08-cv 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 6

7 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. 7

8 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. TheLocklawprovided a basis for considering an alteration in the legal ranking of the existing unsecured creditors resulting in the involuntary subordination of the holdout creditors. Argentinaopenedthewindowtoabreach 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. 8

9 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). 9

10 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, (L), 23 August

11 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. 11

12 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 12

13 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)? 13

14 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. 14

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16 SDRM (Pub. Sector) NGO Activism Vulture Repudiation (Bills/Acts) Rogue Debtors Arg Ecuador 2008 Greece 2012? Elliott s Decision in Brussels CACs + Exit Consent (Priv. Sector) Increased Vulture Activity (mistaken) Re-emergence of Odiousness + Illegit. Mut Rogue Creditors? 16

17 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 17

18 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, (L), 23 August

19 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 19

20 keep it simple Post-Argentina s Pre-Argentina s Olivares-Caminal litigation (2009) and = = incorrect could Gulatihave and interpretation been Scott based (2011) on of the a the correct clause pp clause interpretation has little (Belgium or no and court) meaning actual in breach the sovereign of the pp context clause in its ranking boilerplates or narrow are sticky, form even A GREAT more after MISSED the OPPORTUNITY CoA decision. a new wake of litigation. 20

21 Any Questions? 谢谢. Cam rá. Efharisto. Obrigado. Gracias. Grazie. Thank You. Merci. Danke..شكرا etc. 21