A New Chapter in the Pari Passu Saga (clearly not the last one!) Dr Rodrigo Olivares-Caminal Washington DC, December, 2012 1
Time constraint, just to ignite the discussion. A NEW CHAPTER IN THE PARI PASSU SAGA Only substantial aspects no UK/US procedural issues. Opinions are personal. 2
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
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. 4
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 5
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. 6
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. 7
THE MFC CLAUSE A NEW CHAPTER IN THE PARI PASSU SAGA 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]. 8
THE VIEW FROM THE BENCH A NEW CHAPTER IN THE PARI PASSU SAGA 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
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SDRM (Pub. Sector) NGO Activism Vulture Repudiation (Bills/Acts) Rogue Debtors Arg. 2001-05 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? 11
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)? 12
1. Pre-Argentina s litigation = A incorrect NEW CHAPTER IN THE PARI PASSU SAGA 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. keep it simple. 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. 13
Any Questions? 谢谢. Cam rá. Efharisto. Obrigado. Gracias. Grazie. Thank You. Merci. Dankeshen. Etc. r.olivares-caminal@qmul.ac.uk 14
SOME PROCEDURAL NOTES A NEW CHAPTER IN THE PARI PASSU SAGA 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. 15