Restructuring Italy’s New York law bonds

Abstract

It has been begrudgingly presumed that Italy's bonds governed by New York law will remain untouched during an Italian debt restructuring as a result of an expectation that holdout creditors will successfully challenge any such restructuring attempt. However, this presumption was based on the flawed belief, based in a discrepancy between the language contained in the bond prospectus and the underlying indenture, that the bonds contain creditor-friendly pari passu language. As the controlling legal instrument – the indenture – instead uses the version of the pari passu clause that is much less creditor-friendly, Italy will be able to restructure the bonds with a dramatically reduced threat of holdout creditor litigation based on that clause. However, this discrepancy between the prospectus and the indenture makes Italy vulnerable to securities fraud claims by its creditors. Additionally, the presence of a similar variation in the pari passu clause in some of Venezuela’s bonds lends concern about the pervasiveness of the problem for sovereign debt issuances.