Restructuring a Sovereign Bond Pari Passu Work-Around: Can Holdout Creditors Ever Have Equal Treatment?

Abstract

The rise of vulture fund investing in sovereign bonds has created additional hurdles to successful restructuring in an already fragile ad hoc process. Recent litigation in NML Capital, Ltd. v. Argentina has proven courts’ willingness to utilize powers of equity to enforce a ratable payment interpretation of the pari passu clause — the equal treatment provision commonly found in sovereign bond contracts — creating much uncertainty on how the ruling will affect future restructuring efforts. By looking to the tension in interpretations of the pari passu clause, discrepancies in remedial relief awarded, and international institutions’ proposed solutions, this Note analyzes the role of the pari passu clause as a tool for holdout creditors to disrupt restructurings. This Note argues for a contractual solution targeted at preventing vulture fund investors from access to pari passu injunctive relief coupled with creative restructuring strategies for outstanding bonds awaiting maturity. This resolution seeks to retain some protection for traditional holdout creditors while disincentivizing investments made with intent to derail restructurings from the start.Unlike debtors in the domestic bankruptcy system, sovereigns have no overarching mechanism to facilitate a successful restructuring when their debt burden becomes unsustainable. Using the pari passu clause as a means to enjoin payment to restructured bondholders leaves sovereign debtors with little recourse but to cede to the demands of holdout creditors and can have a devastating long-term impact on the sovereign’s capacity to rebuild debt sustainability. On the other hand, removing pari passu injunctive relief strips holdout creditors of a valuable enforcement mechanism and can leave sovereigns unrestrained. This Note balances these concerns by advocating for a solution that diminishes vulture creditor leverage that can obstruct a restructuring, while otherwise preserving creditor rights against unfair or coercive exchange terms.