Annex I. Recent History of Pari Passu Clauses in New York Law-Governed Sovereign Debt1
Blackman, J., and Rahul Mukhi, 2010, “The evolution of modern sovereign debt litigation: vultures, alter egos and other legal fauna”, Law and Contemporary Problems, Vol. 73(4), pp. 47-61.
Buchheit, L., Jeremiah S. Pam, 2004, “The pari passu clause in sovereign debt instruments” Emory Law Journal, Vol. 53, pp. 869-922.
Burn, L., 2014, “History – ‘bunk’ or a useful tool for contractual interpretation?’, Capital Markets Law Journal, Vol. 9(3), pp. 272-276.
Cohen, R., 2011, “Sometimes A Cigar Is Just A Cigar”: The Simple Story Of Pari Passu”, Hofstra Law Review, Vol. 40(1) pp. 11-23.
Financial Markets Law Committee, 2005, “Pari Passu clauses: analysis of the role, use and meaning of pari passu clauses in sovereign debt obligations as a matter of English law”, Issue 79.
Gelpern, A., Weidemaier, M., 2013, “Injunctions in Sovereign Debt Litigation”, Yale Journal on Regulation, Vol. 31, pp. 189 – 218.
Hagan, S., 2005, “Designing A Legal Framework To Restructure Sovereign Debt”, Georgetown Journal of International Law, Vol. 36(1), pp. 299 – 402.
Olivares-Caminal, R., 2011, “The pari passu interpretation in the Elliott case: a brilliant strategy but an awful (mid-long term) outcome”, Hofstra Law Review, Vol. 40:39, pp. 39 – 63.
Sandoval, E., 2002, “Sovereign Debt Restructuring: Should We Be Worried About Elliott?” (Harvard Law School, International Finance Seminar).
Weidemaier, M., Scott, R., Gulati, M., 2013, “Origin Myths, Contracts and the Hunt for Pari Passu”, Vol 38(1) Law and Social Inquiry pp. 72 – 105.
Wright, M.L.J., 2014, “Interpreting the pari passu clause in sovereign bond contracts: it is all Hebrew (and Aramaic) to me”, Capital Markets Law Journal, Vol. 9(3), pp. 259 – 265.
See NML Capital, Ltd. v. Republic of Argentina, 699 F.3d 246 (2d Cir. 2012) and NML Capital, Ltd. v. Republic of Argentina, 727 F.3d 230 (2d Cir. 2013).
See Sovereign Debt Restructuring—Recent Developments and Implications for the Fund’s Legal and Policy Framework (the “April 2013 Board Paper”) and The Fund’s Lending Framework and Sovereign Debt—Preliminary Considerations (the “May 2014 Board Paper”).
See The Design and Effectiveness of Collective Action Clauses; Collective Action Clauses in Sovereign Bond Contracts – Encouraging Greater Use; and Collective Action Clauses – Recent Developments and Issues.
The IMF-World Bank Revised Guidelines for Public Debt Management recommend the inclusion of CACs in international sovereign bonds, as defined herein. See Revised Guidelines for Public Debt Management, paragraph 46.
See footnote 4, above.
For purposes of this paper, when a bond is described as being “governed by” the laws of a country, it means that the terms of the bond include a provision that specifically provides that the laws of that country will apply. Whether, in fact, a court will give effect to such a choice of law will depend on the private international law rules of the country where the court is located.
There is no single or complete source for data on outstanding international sovereign bonds and their breakdown as to jurisdiction of issuance. To estimate the total amount of international sovereign bonds outstanding and the amounts outstanding in key jurisdictions, staff has relied on the Bloomberg and Dealogic databases, which may be subject to inaccuracies. In addition to England and New York, other key jurisdictions in which international sovereign bonds are issued include Japan, Germany, and Switzerland.
http://www.icmagroup.org/resources/Sovereign-Debt-Information/. ICMA has around 460 members drawn from both the buy and sell-sides, made up of issuers (including sovereign issuers), primary and secondary market intermediaries, asset managers, investors and capital market infrastructure providers. Its activities include promoting best market practice through the development of standard documentation, which is normally sent to its membership for consultation before publication.
The effective result of these decisions is that the holdout creditors are entitled to receive the full value of the defaulted bonds (purchased on the secondary market at a deep discount) plus past due interest while those who accepted the restructuring settled for a net present value of approximately 27 cents on the dollar.
The pari passu clause in Argentina’s defaulted bonds reads as follows: “The Securities 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).”
See NML Capital, Ltd. v. Republic of Argentina, 699 F.3d at 259.
See NML Capital, Ltd. v. Republic of Argentina, 699 F.3d at n.16; see also NML Capital, Ltd. v. Republic of Argentina, 727 F.3d at 247.
See NML Capital, Ltd. v. Republic of Argentina, No. 08 Civ. 6978, at 4 (S.D.N.Y. filed Dec. 7 2011).
Brief of the Federative Republic of Brazil as Amicus Curiae in Support of Petitioner, Republic of Argentina v. NML Capital, Ltd., 189 L. Ed. 2d 234 (2014) (No. 13-990); Brief for the Republic of France as Amicus Curiae in support of the Republic of Argentina’s Petition for a Writ of Certiorari, Republic of Argentina v. NML Capital, Ltd., 189 L. Ed. 2d 234 (2014) (No. 13-990); Brief of the United Mexican States as Amicus Curiae in Support of Petitions for Writs of Certiorari, Republic of Argentina v. NML Capital, Ltd., 189 L. Ed. 2d 234 (2014) (No. 13-990).
See e.g., Sovereign pari passu clauses: NML Capital 2, Argentina 0, Clifford Chance Briefing Note, June 2014; The pari passu clause and the Argentine case, Global Law Intelligence Unit, Allen & Overy, December 2012; Gelpern, Anna, Sovereign Damage Control, Peterson Institute for International Economics, May 2013; Weidemaier, Mark C., Sovereign Debt After NML v. Argentina, 8 Cap. Mkts. L.J. 123, 125 (2013); Brief of Joseph Stigliz as Amicus Curiae in Support of Petitioner, Republic of Argentina v. NML Capital, Ltd., 189 L. Ed. 2d 234 (2014) (No. 13-990); United Nations Conference on Trade and Development, Argentina’s ’vulture fund’ crisis threatens profound consequences for international financial system (June 25, 2014); Organization for American States, Declaration in Support for the Position of Argentina on its Sovereign Debt Restructuring (July 3, 2014).
Exp-Imp. Bank of the Republic of China v. Grenada, No. 13 Civ 1450, 2013 U.S. Dist. LEXIS 117740, at 11-13 (S.D.N.Y. Aug 19, 2013). As the court ordered a full trial, it did not consider Ex-Im Bank’s request for an injunction.
 EWHC 2331 (English High Court decision, upheld on appeal). The pari passu clause in that case differs from that in Argentina’s defaulted bonds. While it did not follow the two-sentence construction, it included a reference to “priority of payment”, which the claimant sought to rely on, as follows: “…the claims of all other parties under this agreement will rank as general obligations of the People’s Republic of Congo, at least pari passu in right and priority of payment with the claims of all other creditors of the People’s Republic of the Congo”.
The FMLC is an independent body of legal experts that was established by the Bank of England to examine issues of legal uncertainty in financial markets.
See Issue 79 – Pari Passu Clauses: Analysis of the role, use and meaning of the pari passu clauses in sovereign debt obligations as a matter of English law, Financial Markets Law Committee, March 2005.
See Role, Use and Meaning of Pari Passu Clauses in Sovereign Debt Obligations as a Matter of English Law – Memorandum, August 2014 http://www.fmlc.org/uploads/2/6/5/8/26584807/fmlc_memorandum_on_pari_passu_clauses.pdf.
Greece’s euro denominated notes issued in April 2014 include the following pari passu clause: “The Notes rank, and will rank, equally among themselves and with all other unsubordinated and unsecured borrowed money of the Republic; provided, however, that, consistent with similar provisions in the Republic’s other indebtedness, this provision shall not be construed so as to require the Republic to pay all items of its indebtedness ratably as they fall due”. Ecuador’s US dollar notes issued in June 2014 include the following pari passu clause: “The Notes will rank equally in terms of priority with Ecuador’s External Indebtedness (other than Excluded Indebtedness), provided, that, such ranking is in terms of priority only and does not require that Ecuador make ratable payments on the Notes with payments made on its other External Indebtedness.”
Belize’s offering memorandum dated February 2013 includes the following language: “Paragraph 1 (c) of the Terms and Conditions of the New Bonds confirms that the New Bonds shall rank pari passu (equally) among themselves and with all other present and future unsecured and unsubordinated Public Debt (as defined) of Belize. A contractual provision similar, but not identical, to Paragraph 1(c) has been the subject of on-going litigation in U.S. federal courts in a case captioned NML Capital, Ltd. v Republic of Argentina. The plaintiffs in that case have argued that the pari passu provision in the defaulted Argentine bonds they are holding required Argentina, if and when it makes a payment under certain of its other debt instruments, to make a pro rata payment on the bonds held by the plaintiffs. This interpretation of the provision is being contested by the defendant, the Republic of Argentina, and by various other interested parties including the United States Government. To ensure clarity on the point, Belize does not understand Paragraph 1 (c) of the Terms and Conditions of the New Bonds, or any comparable provision in any other debt instrument of Belize, to require Belize to pay all items of its Public Debt on a ratable basis”. The language in Honduras’ March 2013 notes is nearly identical, with the exception of the last paragraph, which reads as follows: “To ensure clarity on the point, Honduras intends to take the position that the pari passu clause in the terms and conditions of the Notes does not obligate it to pay Public External Indebtedness on a ratable basis.” Belize also included a provision in the domestic legislation authorizing its new bonds that expressly confirmed that the pari passu provision did not promise ratable payment of equally-ranked debt.
See footnote 9, above.
The ICMA model pari passu clause reads as follows: “The Notes are the direct, unconditional and unsecured obligations of the Issuer and rank and will rank pari passu, without preference among themselves, with all other unsecured External Indebtedness of the Issuer, from time to time outstanding, provided, however, that the Issuer shall have no obligation to effect equal or rateable payment(s) at any time with respect to any such other External Indebtedness and, in particular, shall have no obligation to pay other External Indebtedness at the same time or as a condition of paying sums due on the Notes and vice versa.”
Bonded debt is typically issued to – or purchased on the secondary market by – a large and diverse group of creditors.
An additional feature of CACs in existing international sovereign bonds is the “majority enforcement” provision, which limits the ability of a minority of creditors to enforce their claims following a default. These provisions typically (i) require the support of at least 25 percent of the outstanding principal of a given series to accelerate their claims after a default (i.e., declaring all principal and accrued interest due and payable immediately) and (ii) enable a simple or qualified majority to “de-accelerate” (i.e., to reverse an acceleration that has already occurred).
For a detailed discussion of collective action clauses, see The Design and Effectiveness of Collective Action Clauses; Collective Action Clauses in Sovereign Bond Contracts – Encouraging Greater Use and Collective Action Clauses – Recent Developments and Issues.
The aggregation mechanism was coupled with a low voting threshold of two-thirds of aggregated outstanding principal of all affected domestic law bonds based on a quorum of 50 percent.
For example, one series of domestic law-governed debt in the amount of EUR 14.5 billion (EUR 9.76 billion of which was tendered in the exchange) was set to mature on March 20, 2012, immediately after the Executive Board approved an arrangement for Greece. It has been reported that a number of investors moved into this issuance, anticipating that these bonds would not be restructured, or would receive a smaller haircut.
Economic and Financial Sub-Committee on EU Sovereign Debt Markets Model Collective Action Clause, November 2011 as supplemented (http://europa.eu/efc/sub_committee/cac/cac_2012/index_en.htm).
See footnote 9 above.
In Russia’s 2000 post-default restructuring, the offer involved two old bonds (maturing in 2015 and 2020, respectively) that were exchanged for the same new instrument (comprised of two Eurobonds representing principal and past due interests respectively); the participation rate was 99 percent.
By analogy, this concept is recognized in bankruptcy law. For example, under U.S. Chapter 11, unsecured creditors are generally considered to be equally ranked and, accordingly, may be offered the same restructuring terms - notwithstanding the fact that they held different instruments before the bankruptcy. This is because all debts are considered due and payable by operation of law as a result of the bankruptcy filing.
Under the ICMA Model Clauses, the voting threshold for the series-by-series procedure is at least 75 percent of the outstanding principal of that series, and the voting thresholds for the two limb procedures are (i) at least 66⅔ percent of the aggregated principal amount of all series affected, and (ii) more than 50 percent of the principal amount of each affected series. See footnote 9.
They also noted that disclosure for bonds governed by domestic law has traditionally been very scant, and that changes to this regime would be needed in order to ensure adequate disclosure and transparency of aggregated CACs.
See ICMA’s August 29, 2014 press release on revised collective action clauses and a new standard pari passu clause to facilitate future sovereign debt restructuring at http://www.icmagroup.org/assets/documents/Media/Press-releases-2014/ICMA1406---ICMA-publishes-revised-collective-action-clauses.pdf. In this press release, ICMA also noted that the revised standard CACs will not apply to syndicated issues of sovereign debt securities that are subject to the mandatory euro area model CAC introduced in January 2013.
The methodology set out ender the Euro CACs provides that the principal amount of a zero-coupon obligation for voting purposes is equal to its present value on the record date for a proposed modification (or its nominal amount if post-default). The present value is calculated using one of the following three discount rates: (i) if the bond was originally issued as a zero-coupon obligation, the applicable discount rate is its yield to maturity at issuance, (ii) if such obligation was stripped from a couponed debt security, the applicable discount rate is the coupon on the underlying debt security, and (iii) if such obligation was stripped from a couponed debt security that cannot be identified due to the fungibility of all of the issuer’s zero coupon obligations maturing on the same date, the applicable discount rate is the weighted average of the coupons on the issuer’s debt securities having the same stated maturity date as the one in question, or if there are no such securities, the coupon interpolated on a linear basis using the weighted average of the coupons on the issuer’s debt securities having the two closest maturity dates to that of the obligation in question.
See definition of “Debt Securities Capable of Aggregation” under the ICMA Model Clauses (see footnote 9 above).
While a comprehensive assessment of the legal enforceability under other major jurisdictions in which international sovereign bonds are issued has not been carried out, in Germany, for example, it is generally acknowledged that an amendment to existing domestic legislation would be required to implement a single limb aggregation voting procedure.
There is no single or complete source for data on outstanding international sovereign bonds and their breakdown as to jurisdiction of issuance. To estimate the total amount of international sovereign bonds outstanding and the amounts outstanding in key jurisdictions, staff has relied on the Bloomberg and Dealogic databases, which may be subject to inaccuracies.
Staff surveyed 21 emerging market economies with international bond outstanding in the amount of approximately $500 billion. Of these bonds, approximately two-thirds are issued under New York law and approximately a third under English law, with those issued under other jurisdictions only a very small percentage. For purposes of the survey, staff relied on data from national sources, as well as Bloomberg and Dealogic databases.
See for example letter from the Centre for Economic and Policy Research (CEPR) calling on the U.S. Congress to mitigate the fallout from the New York Court Decisions debt (July 31, 2014) (http://www.cepr.net/index.php/press-releases/press-releases/economists-call-on-congress-to-mitigate-fallout-from-ruling-on-argentine-debt).
See 28 U.S.C. §§ 1609-1611.
Brief for the United States as Amicus Curiae in Support of Reversal, NML Capital, Ltd. v. Republic of Argentina, 699 F.3d 246 (2d Cir. 2012) (No. 12-105-cv(L)), 2012 WL 1150791.
This Annex focuses on the interpretation of pari passu clauses in sovereign debt agreements governed by New York law. Pari passu clauses are also found in sovereign debt agreements governed by other laws, including English law, which is discussed in more detail in the main paper.
This mainly protects the creditor against involuntary legal subordination, which can occur under the laws of some countries (for example, in Spain and the Philippines, the act of notarizing a debt in a public instrument will render it legally senior to any other debts which have not been so notarized). Legal subordination under U.S. law would not be possible without the lender’s consent.
“External Debt” will be defined in the relevant agreement and generally includes all foreign-currency denominated debt with limited exceptions (e.g. for debt placed locally and certain short term debts such as T-bills).
See footnote 2, above.
Elliott Associates L.P. v Banco de la Nacion, 2000 WL 1449862 (SDNY Sept 29 2000) (amending judgment).
Elliott also sought and obtained ex parte orders freezing any funds held or received in relation to payment on Peru’s Brady bonds by Chase Manhattan Bank (as fiscal agent for the Brady Bonds), the Bank of New York (as cash correspondent for Euroclear), Morgan Guaranty Trust Co (as operator of Euroclear), and the Depository Trust Company. However, these restraining notices were subsequently vacated.
The pari passu clause, which was included in Peru’s guarantee of the commercial bank loans at issue read as follows: “The obligations of [Peru] hereunder do rank and will rank at least pari passu in priority of payment with all other External Indebtedness of [Peru], and interest thereon”.
In an ex parte procedure, the defendant is not notified of the claim against it or heard by the court before the decision is reached.
Declaration in Elliott Associates., L.P. v Banco de la Nacion, 194 F.R.D. 116 (S.D.N.Y. 2000) (No. 96 Civ. 7916 (RWS)). In his Declaration, Lowenfeld stated: “I have no difficulty in understanding what the pari passu clause means: it means what it says – a given debt will rank equally with other debt of the borrower, whether that borrower is an individual, a company, or a sovereign state. A borrower from Tom, Dick and Harry can’t say “I will pay Tom and Dick in full, and if there is anything left over I’ll pay Harry.” If there is not enough money to go around, the borrower faced with a pari passu provision must pay all three of them on the same basis:…if the borrower proposed to pay Tom $20,000 in full satisfaction, Dick $10,000 and Harry nothing, a court could and should issue an injunction at the behest of Harry. The injunction would run in the first instance against the borrower, but I believe (putting jurisdictional considerations aside) to Tom and Dick as well”.
The Brussels court relied on the pari passu clause to award temporary relief until the parties could be heard on the merits of Elliott’s application to enforce a money judgment that had been awarded on separate grounds (i.e. non-payment under the New York law-governed bonds). Neither the New York courts nor Lowenfeld had been called upon to interpret the pari passu clause in the New York litigation, nor to determine whether it had been breached.
LNC Invs. LLC v Republic of Nicaragua & Euroclear S.A, No. 2003/KR/334 (Court of Appeals of Brussels, 9th Chamber, Mar. 19 2004). In Belgium, the settlement finality law was amended in 2004 to expressly protect Euroclear and other Belgian or foreign credit institutions acting as cash correspondents from any injunction that could attach or otherwise block a cash settlement account or any cash transfer to be credited to such an account (Article 9 of the Belgian Act of April 28, 1999 implementing the EU Settlement Finality Directive, as amended by Article 15 of the Law of November 19, 2004 and subsequent legislation). Likewise, Luxembourgian law prohibits the enforcement of an injunction against funds passing through Clearstream. Article 15 of the Luxembourg Securities Act states that “neither an attachment of, nor an enforcement against, nor a conservatory measure with respect to accounts to which securities accounts in the securities settlement system are booked are permitted.”
Red Mountain Finance v Democratic Republic of Congo, Case No. CV 00-0164, United States District Court – Central District of California, Los Angeles Division. 2001.
Statement of Interest of the United States at 11, Macrotecnic Int’l Corp. v. Republic of Argentina, No. 2002 Civ. 5932 (TPG). (S.D.N.Y. Jan. 12, 2004), 2004 WL 5475206.
See NML Capital, Ltd. v Republic of Argentina (S.D.N.Y. Dec. 7 2011), at paragraph 4.
See NML Capital, Ltd. v Republic of Argentina (S.D.N.Y. Dec. 7 2011), at paragraphs 5 and 6.
See NML Capital, Ltd. v. Republic of Argentina, 699 F.3d 246, 264 n. 16 (2d Cir. 2012).
In the common law tradition (for example, in the U.S. and England), courts may grant “equitable remedies” where legal remedies are not adequate to address the harm suffered by the plaintiff. Injunctive relief is an equitable remedy that requires a party to take or refrain from taking a specified action. Specific performance is a form of injunctive relief that requires the party to take the specific action required under the relevant contractual provision that has been breached.
In justifying the exercise of its equitable powers to grant injunctive relief, the District Court relied upon Argentina’s persistent failure to make payments to the defaulted bonds, noting for example its “unprecedented, systematic scheme of making payments on other external indebtedness, after repudiating its payment obligations to the Plaintiffs”. More generally, the District Court reasoned that the injunctions served the public interest of enforcing contracts and upholding the rule of law where sovereign creditors have “no recourse to bankruptcy regimes to protect their interest and must rely upon courts to enforce contractual promises”. See NML Capital, Ltd. v. Republic of Argentina, No. 08 Civ. 06978, Dkt. No. 371 (Feb. 23, 2012) (order granting injunctions).