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To Rank Pari Passu Or Not to Rank : That Is the Question in Sovereign Bonds After the Latest Episode of the Argentine Saga

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To Rank Pari Passu Or Not to Rank : That Is the Question in Sovereign Bonds After the Latest Episode of the Argentine Saga Law and Business Review of the Americas Volume 15 Number 4 Article 3 2009 To Rank Pari Passu or Not to Rank : That Is the Question in Sovereign Bonds after the Latest Episode of the Argentine Saga Rodrigo Olivares-Caminal Follow this and additional works at: https://scholar.smu.edu/lbra Recommended Citation Rodrigo Olivares-Caminal, To Rank Pari Passu or Not to Rank : That Is the Question in Sovereign Bonds after the Latest Episode of the Argentine Saga, 15 LAW & BUS. REV. AM. 745 (2009) https://scholar.smu.edu/lbra/vol15/iss4/3 This Article is brought to you for free and open access by the Law Journals at SMU Scholar. It has been accepted for inclusion in Law and Business Review of the Americas by an authorized administrator of SMU Scholar. For more information, please visit http://digitalrepository.smu.edu. To RANK PARI PASSU OR NOT TO RANK PARI PASSU. THAT IS THE QUESTION IN SOVEREIGN BONDS AFTER THE LATEST EPISODE OF THE ARGENTINE SAGA Dr. Rodrigo Olivares-Caminal "Justice is the crowning glory of the virtues." CICERO (106-43 BC) "And maybe people who might consider lending money to the Repub- lic of Argentina in the future might realize what difficulties they're go- ing to run into if they are naive enough to rely on what the Republic offers." HON. THOMAS P. GRIESA 1 I. INTRODUCTION T can be said that the pari passu clause mistakenly migrated from secured private lending to unsecured sovereign lending.2 Once rooted in unsecured sovereign lending instruments, it faced certain provisions similar to those in Spain or the Philippines, which allowed a creditor to better position itself vis-d-vis other creditors, 3 and become a 1.Hon. Thomas P. Griesa, New York District Judge, on a hearing on January 12, 2006 in EM Ltd. v. Republic of Argentina, 03 CV 2S07 (TPG) (unreported hear- ing); NML Capital Ltd. v. Republic of Argentina, 03 CV 8845 (TPG) (unreported hearing) & 05 CV 2434 (TPG). 2. See Lee Buchheit & Jeremiah Pam, The Pari Passu Clause in Sovereign Debt In- struments, 53 EMORY L.J. 913 (2004). 3. Articles 913(4) of the Spanish Commercial Code and 1924(3)(a) of the Spanish Civil Code refer to the preference of creditors whose credit is instrumented by means of a public deed (notarized by a Notary Public). As noted by Wood, these types of credits have a preference over those-although of the same type-not instrumented in a public deed. See Philip Wood, International Loans, Bonds and Securities Regulation: Law and Practice of International Finance, 41 (Sweet & Maxwell 1995). The Spanish Insolvency Law 22/2003 of July 9, 2003 amended section 1924 of the Spanish Civil Code. Although under section 91of the new insolvency law a whole new ranking of preferences, not including credits instrumented through public deeds, is included-subsection (3)(a) of section 1924 of the Spanish Civil Code has not been amended. Therefore, in the event of sovereign issuances-not subject to insolvency laws-the un-amended section 1924(3)(a) of the Civil Code still applies. The Philippines-strongly influenced by the Spanish Civil Code-have a norm similar to the ones of Spain. Article 2244(14) of the Philippines Civil Code grants priority to those credits that appear in a public instrument or a final judgment. These two cases are the main reason of the emergence of the pari passu clause in 746 LAW AND BUSINESS REVIEW OF THE AMERICAS [Vol. 15 'must have' provision in this type of debt instrument. Then, pari passu clauses stayed in unsecured debt instruments due to the fear of the earmarking revenues, or the risk of the sovereign, preferring a group of creditors over another.4 These two fears were tackled by an expanded negative pledge clause and the Libra Bank Limited v. Banco Nacional de Costa Rica S.A. 5 and Allied Bank Internationalv. Banco Credito Agricola de Cartago6 cases. Therefore, if a proper due diligence was conducted; there was no need to have a pari passu clause unless there was an excep- tional circumstance, like the ones of Spain or the Philippines. Unfortu- nately, a misguided interpretation of the pari passu clause in the Elliot Associates LP v. Banco de la Naci6n y Repatblica del Perli case 7 opened the door to litigation on incorrect grounds, which mainly focused on pay- ment interpretation or broad interpretation of the pari passu clause. 8 It was an 'aberration', but one that caused furor.9 In Elliot, there was no breach of the pari passu clause, but rather a wrong understanding of its meaning. In the case of Argentina, the whole story could be different since it can be correctly interpreted as a breach of the paripassu clause in its ranking or narrow form. This article will focus on the recent Argentine sovereign debt restructuring exercise that might re-ignite litigation based on the paripassu clause. It is important to stress the difference between the two scenarios, i.e. litigation pre and post Ar- gentina's sovereign debt exchange offer. Pre-Argentina's litigation was based on an incorrect interpretation of the pari passu clause made by a Belgium court. Post-Argentina's potential litigation could be based on an sovereign debt bond instruments. Buchheit and Pam also consider Argentina a country that forced the inclusion of the pari passu clause since 1972, when they re- enacted a practice dating back to 1862 where foreign creditors were subordinated to local creditors in the bankruptcy of an Argentine debtor. See Buchheit, supra, note 2 (quoting EMILIO J. CARDENAS, INTERNATIONAL LENDING: SUBORDINA- TION OF FOREIGN CLAIMS UNDER ARGENTINE BANKRUPTCY LAW, IN DEFAULT AND RESCHEDULING 63 (David Suratgar eds., 1984). 4. See WILLIAM TUDOR JOHN, SOVEREIGN RISK AND IMMUNITY UNDER ENGLISH LAW AND PRACTICE IN INTERNATIONAL FINANCIAL LAW 95-96 (Robert S. Rendell ed., 2nd ed. 1983). 5. See Libra Bank Ltd. v. Banco Nacional de Costa Rica S.A., 570 F. Supp. 870 (S.D.N.Y. 1983). 6. Allied Bank Int'l v. Banco Credito Agricola de Cartago, 566 F. Supp. 1440 (S.D.N.Y. 1983), 757 F. 2d 516 (2d Cir.), 473 US 934 (1985). 7. Elliott Assoc. v. Republic of Peru, 948 F. Supp 1203 (S.D.N.Y 1996); Elliott Assoc. v. Republic of Peru, 961 F. Supp 83 (S.D.N.Y 1997); Elliott Assoc. v. Republic of Peru, 12 F. Supp 2d 328 (S.D.N.Y 1998); Elliott Assoc. v. Republic of Peru, 194 F.3d 363 (2d Cir. 1999); Elliott Assoc. v. Republic of Peru, 194 F.D.R. 116 (S.D.N.Y. 2000); see also Elliot Assocs, L.P., General Docket No. 2000/QR/92 (Court of Appeals of Brussels, 8th Chamber, Sept. 26, 2000), (not reported, on file with the author). 8. See Buchheit, supra note 2; Philip Wood, Pari Passu Clauses-What Do They Mean?, 18 Butterworths J. of Int'l Banking & Fin. L. 10 (2003); Pari Passu Clauses: Analysis of the Role, Use and Meaning of Pari Passu Clauses in Sovereign Debt Obligations as a Matter of English Law (Fin. Markets Law Comm't Issue 79, 2005), available at www.fmlc.org [hereinafter Fin. Market Law Comm't Issue 79]. 9. See Rodrigo Olivares-Caminal, Understanding the Pari Passu Clause in Sovereign Debt Instruments: A Complex Quest, INT'L LAW. (forthcoming Fall 2009). 2009] TO RANK PARI PASSU OR NOT actual breach of the pari passu clause. If this is the case, if there was an actual breach of the pari passu clause, a new wake of litigation can be triggered. This article is the second part of a study on the pari passu clause in sovereign debt instruments. Part I was published by The Inter- national Lawyer in the Fall Issue 2009, under the title Understanding the Pari Passu Clause in Sovereign Debt Instruments. A Complex Quest.10 II. ARGENTINA: A NEW CHAPTER IN THE PARI PASSU SAGA? On December 23, 2001, in an ill-famed assembly, the Argentine Con- gress gave the President of the nation a standing ovation when he an- nounced a moratorium on the Argentine sovereign debt. The message given to the international investors who had decided to invest in Argen- tine debt securities, however, was far from respectful to the rule of law. A 38.4 percent of the defaulted debt was held by individuals and corpora- tions domiciled in Argentina, while the rest was scattered throughout the world." To overcome the default status, Presidential Decree 1735/0412 ordered the restructuring of two Argentine securities, first, debt instrumented in the form of bonds, and second, payment of which had been deferred under the provisions of Article 59 of Argentine Law No. 25,827.13 The restructuring was carried out through a domestic and international ex- change of sovereign debt bonds for new securities. The domestic ex- change offer comprised three phases: 1) local debt,14 2) debt of political subdivisions, and 3) and the international exchange offer. On January 13, 2005,-after thirty-six months in default-Argentina released, by means of Resolution 20/05 (issued by the Ministry of Econ- omy), the final offering prospectus and supplement, including the terms 10. It is recommended that the two parts should be read as a whole, they each can be accessed through Westlaw and Lexis Nexis. 11. See Dr. Guillermo Nielsen, Speech of Secretary of Finance: Argentina's Restruc- turing Guidelines (Sept. 22 2003), available at http://www.argentinedebtinfo.gov.ar/ ingpresen.htm. 12. Presidential Decree 1725/04 (Dec. 9, 2004). A Spanish version is available at http:// www.infoleg.gov.ar/infoleglnternet/anexos/100000-104999/101861/norma.htm.
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