Argentina's dispute with
its creditors is ongoing since its insolvency in 2001. It has been in
the press recently because a US court has sentenced the country to
pay its former creditors.
The basic facts are
simple: Argentina had issued bonds. Following its insolvency in 2001,
it agreed with most of its creditors to restructure these bonds and
to replace them with new issues. The debtors who did not agree on the
restructuring now claim payment of their bonds. The main argument is
that they were promised by Argentina to be treated as any other
bondholder (“pari passu”). Argentina would violate this
promise if they now pay exclusively the holders of the new bonds.
In addition, plaintiffs
argue that it is not inequitable to grant them 100 % of their initial
claims, thereby not applying the haircuts accepted by other
bondholders: “Those parties made a business judgment to accept
assurances of prompt payment rather than being forced to litigate
against the Republic around the world, as the plaintiffs have been
forced to do at tremendous expense.”
A typical pari passu
clause reads like this: “Each Obligor shall ensure that at all
times any unsecured and unsubordinated claims of the Counterparty
against it under the Finance Documents rank at least pari passu with
the claims of all its other unsecured and unsubordinated creditors
except those creditors whose claims are mandatorily preferred by laws
of general application to companies.”
You find such clause in
almost any finance contract. In most jurisdictions, however, this
would not be necessary: The law usually provides for a mandatory
ranking of creditors. Only if you want to modify such ranking
regarding participants in the a specific financing, this clause
becomes actually relevant.
In orders dated December
7, 2011, February 23, 2012, and November 21, 2012, a US Court has
approved the plaintiffs' argumentation. The court says that Argentina
is bound by its contracts, as any other private person would be bound
when it enters into a commercial transaction. In addition, the court
specifies the pari passu obligation, saying that, when
Argentina pays its new debtholders, it must pay the same fraction to
the old debtholders. To give an example, if Argentina pays 5 % of the
notional amount to its new creditors, it must also pay 5 % of the
notional amount to its old creditors. The court calls this a “Ratable
Payment”.
In the November 21, 2012
order, we can read: “It is obvious that a pari passu clause does
not require that the debts in question be in the same amount or of
the same nature. What is required is that the obligations under the
various debts are complied with to the same extent, rather than
having the obligations on the one debt honored and the obligations on
the other debt repudiated, as has occurred in the present case. […]
It is hardly an injustice to have legal rulings which, at long
last, mean that Argentina must pay the debts which it owes. After ten
years of litigation this is a just result.”
What
does Argentina respond to such argumentation? I haven't found very
much when reading the case documents, besides some striking quotes:
“We are never going
to pay the “vulture funds. That's not going to change because of
rulings. Those who think otherwise have not understood anything.”
(Robert A. Cohen – Minister of Economy of Argentina)
“Argentina will not
reward loan sharks who bought defaulted bonds.” (Hernan
Lorenzino – Minister of Economy of Argentina)
When I decided to read
the case documents, I intended to learn more about pari passu
and its application in bond indentures. From this perspective, my
reading was rather disappointing.
You can find the full set
of case documents here.
