Author: Mark Weidemaier

  • Updated: The procedure of litigating pari passu?

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    Mark Weidemaier

    Lots of activity in the pari passu litigation: The lawyers for the exchange bondholders have been working overtime, filing an emergency motion to stay Judge Griesa's injunction (just granted here!) and asking the Second Circuit to let them intervene in the appeal. And there has been some great analysis of the injunction and its implications for exchange bondholders (by Joseph Cotterill at FT Alphaville), discussion of the consequences for future restructurings (by Felix Salmon), and consideration of Argentina's suggestion that it might be willing to re-open the exchange offer for holdouts (by Vladimir Werning).

    In this post, I want to explore the pari passu litigation from a different angle – one that focuses on a question of procedure raised by the Second Circuit's interpretation of the clause. Here's the question: Let's assume that the pari passu clause entitles creditor A to receive a ratable share of any payment made to creditors with whom creditor A ranks equally: creditors B, C, D, etc. Creditor A sues borrower to enforce this right. Who else should participate in the lawsuit? And can the lawsuit really be structured in a way that will be fair to everyone affected by it? (The exchange bondholders raised these questions in their brief, but the district judge didn't address them.)

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  • NML v. Argentina: No love for exchange bondholders

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    Mark Weidemaier

    Anna Gelpern has already posted on the pari passu wipeout of Argentina. As she noted, NML got pretty much everything it wanted. By contrast, the exchange bondholders got no love whatsoever. The district judge dismissed their argument that it was unfair for NML to get 100 cents on the dollar when they had received only 30. In essence, the judge replied that exchange bondholders, unlike NML, lacked the stomach for a decade of litigation and so shouldn't complain. This may be true, but it seems puzzlingly disconnected from the realities of most sovereign restructurings. Sure, successful holdouts tend to be specialized investors with long time horizons and a fair appetite for risk. (There are of course other holdouts who don't meet this description.) But in general, holdouts recover 100 cents on the dollar only because other creditors agree to take less. If everyone had the stomach for a decade of litigation, it's likely that no one would recover in full. 

    Another interesting thing about the district judge's opinion is that it doesn't really engage with any of the more substantive legal arguments made by the exchange bondholders. This is in part due, I'm sure, to the judge's desire to rule quickly, and also to the limited scope of issues on remand. So we'll see, I guess, whether their arguments get taken any more serioulsy by the Second Circuit. As Anna says, it's getting increasingly hard to see the Second Circuit making major changes at this point.

  • Allied Bank revisited?

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    Mark Weidemaier

    Last Friday was the filing deadline set by (a rather irked) Judge Griesa for Argentina and interested third parties in that country's long-running battle with NML and other restructuring holdouts. NML's reply brief is due today, but it has already made clear that it wants to be paid in full (roughly $1.4 billion) and that it expects the district court's injunction to bind a lot of third parties, including the trustee for the exchange bondholders. The genius of NML's strategy is that it has found a way to enforce its claims without having to find and seize Argentine assets. (Not that it's afraid to seize an asset or two.) If the strategy works and can be used in other cases, it will have major policy implications.

    Readers familiar with the sovereign debt markets may remember the Allied Bank litigation – a trilogy of opinions that launched the modern era of holdout litigation. The parallels between the Allied Bank case and this one are striking, right down to the identity of the district judge.

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  • You’ve sunk my battleship! And seized my carrier…

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    Mark Weidemaier

    There is a widely-held view that sovereign bonds don't contain the optimal terms but are slow to incorporate better ones. Right or wrong, that view has prompted many government-sponsored initiatives to reform bond contracts, such as the current plan to mandate the use of standardized collective action clauses in all euro area government bonds. These reform initiatives often fail, and the view persists that sovereign bond contracts could use some improvement.

    Why do I mention this? My last post discussed how the sovereign immunity waiver in its bonds got Argentina into trouble, allowing jilted bondholders to convince a court in Ghana to help them seize an Argentine navy ship. Perhaps this was consistent with what Argentina agreed to in the bond, but the country predictably objected when the seizure occurred. The ensuing diplomatic kerfuffle highlights why enforcing jurisdictions (like Ghana, in this case) might be better off forbidding their courts to help private creditors seize a foreign country's military assets.

    Below the jump, you'll find two figures showing how sovereign bonds have addressed the subject of sovereign immunity over the past two decades. As you'll see, Argentina is no outlier; plenty of bonds include waivers that are just as broadly-written.

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  • “A rifle doesn’t scare me. But we expected the Argentines to act professionally…”

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    Mark Weidemaier

    In my last post, I said that the US Court of Appeals for the Second Circuit had interpreted the pari passu clause in Argentina's bonds as a promise to forego a century's worth of restructuring practices. The district judge still needs to clarify the injunction enforcing that promise. While we wait for that very large shoe to drop, I want to talk about the other major enforcement ruckus involving Argentina and … NML Capital. This one already has people reaching for their weapons.

    The Libertad, an Argentine naval vessel, remains in port in Ghana after a court there ordered its seizure and potential sale to satisfy a judgment held by NML Capital. Military property is typically immune from this kind of thing, but the court held that Argentina had waived its immunity in the bond. The case is odd, for reasons I'll explain here. But this post also lays some groundwork for future posts, which will share some evidence about general market practices with respect to immunity waivers.

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  • Pesky holdouts, old-timey edition. (Or, more on why Argentina matters.)

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    Mark Weidemaier

    "[T]he principal beneficiaries of the litigation were an unscrupulous body of commercial pirates, who had purchased … bonds at a mere nominal price…"

    When would you guess the litigation referenced in this quote took place? The sentiment sounds like something an Argentine finance official might have expressed in the last week or so. But the quote (p. 449) refers to buyers of distressed Bolivian bonds in the 1870s. Like modern holdouts, these old-timey "commercial pirates" recovered an amount disproportionate to their investment, and it didn't win them any friends.

    In this post, I want to discuss the historic treatment  of holdouts in sovereign debt restructurings. In a (just posted) paper, Mitu Gulati and I review terms used in both sovereign bonds and sovereign debt restructuring proposals over the course of the 20th century. We're primarily interested in collective action clauses-which, as many readers know, are clauses that allow a majority of bondholders to approve a restructuring in a way that will bind dissenters. Indirectly, however, these historic practices also shed light on the pari passu clause at the center of the NML vs. Argentina litigation.

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  • Argentina’s (not so) unusual pari passu clause

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    Mark Weidemaier

    Thanks very much to Credit Slips for inviting me to guest blog. I know that many readers of this blog have been following the pari passu saga unfolding in the Second Circuit. Posts by Anna Gelpern here, and by Felix Salmon and others elsewhere, have explored some of the implications. I want to add some context to show why the Second Circuit's recent decision strikes many as a very big deal. In this post, I'll focus on whether Argentina's pari passu clause was somehow unique, so that the court's decision has only minor implications for other countries. (The short answer: It wasn't unique.)

    As contracts, sovereign bonds are fascinating. They are very long, it's not clear that anyone reads them, and it is tempting to assume (wrongly) that they all say the same thing. But in fact, bonds vary in lots of seemingly minor ways. The problem is that it can be hard to tell whether the variance is accidental or is a deliberate effort to modify the standard template. (I'll say more on this in a future post discussing another snippet of contract language that got Argentina into trouble: its sovereign immunity waiver.) Argentina's bonds, however, included a fairly significant addition to the standard pari passu clause.

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