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NML v Argentina and the Ratable Payment Interpretation of the Pari Passu Clause

Written by  Romain Zamour

In 2001, Argentina defaulted on more than ninety-five billion dollars in external debt.  At the time, this constituted the largest sovereign default in history.  Argentina initiated two restructurings in 2005 and 2010, allowing holders of defaulted bonds to exchange their bonds for new debt at a rate of twenty-five to twenty-nine cents on the dollar, thus restructuring more than ninety-one percent of the foreign debt on which it had defaulted in 2001.  Hedge funds specializing in trading distressed sovereign debt, such as Elliott Associates, purchased large amounts of Argentinian debt at a significant discount on the secondary market, and “held out”—they refused to join the restructurings and sought full collection of their debt.

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In February 2012, Judge Griesa of the District Court for the Southern District of New York issued orders enjoining Argentina from making payments on its restructured 2005 and 2010 debt without making ratable payments  to NML Capital, a distressed-debt hedge fund affiliated with Elliott Associates.  In October 2012, a unanimous panel of the Second Circuit substantially affirmed the orders.  Argentina was not to make full payment on its restructured debt without also making full payment to the holdout plaintiffs.

According to commentators, Judge Griesa’s orders constituted an attempt at reviving an infamous and supposedly long-dead doctrine: the “ratable payment”  interpretation of the pari passu clause.  Pari passu is a latin phrase meaning “by equal step,”  or “[p]roportionally; at an equal pace; without preference.”  The “ratable payment” interpretation consists in reading the pari passu clause as requiring ratable payment of all creditors.  When the Second Circuit affirmed Judge Griesa’s orders, many commentators announced the end of sovereign debt restructuring as we know it.  Central to any sovereign debt restructuring is resumption of payment to restructured bondholders only, and the ratable payment interpretation of the pari passu clause makes this selective resumption of payment impossible. The decision, therefore, would seem to doom consensual sovereign debt restructuring.