Pari Passu Undone: Game-Changing Decisions for Sovereigns in Distress

In ‘Pari Passu Undone: Game-Changing Decisions for Sovereigns in Distress’, which appears in Issue No. 3 of the ‘Cleary Gottlieb Emerging Markets Restructuring Journal’, published by Cleary Gottlieb Steen & Hamilton LLP,[1] we examine a recent decision in White Hawthorne, LLC v. Republic of Argentina, No. 16 Civ. 1042 (TPG), 2016 WL 7441699 (S.D.N.Y. Dec. 22, 2016), regarding the hotly litigated pari passu clause. 

Following an economic catastrophe in the early 2000s, the Republic of Argentina successfully restructured the vast majority of its more than $80 billion of debt, exchanging new bonds for those on which the crisis had forced default.  In February 2012, Judge Thomas P. Griesa of the Southern District of New York, based on a boilerplate provision in the defaulted bonds known as the pari passu clause, enjoined Argentina from servicing its restructured debt without simultaneously making ratable payments to holdout creditors who had refused to participate in the exchange. This interpretation was unprecedented and, given the pari passu clause’s ubiquity in sovereign debt instruments, threatened to reverberate far beyond the specific facts of Argentina’s case.  For nearly five years, anxious sovereigns and market participants were left to ponder the scope of these rulings.  Most basically, would a sovereign debtor’s decision to pay some but not all of its creditors, taken alone, violate the pari passu clause? 

Judge Griesa has now answered this crucial question.  Following Argentina’s announcement, in February 2016, of a global proposal to settle its defaulted debt, a group of hedge funds brought suit, arguing in part that Argentina’s settlement with other creditors violated the pari passu clause.  In White Hawthorne, Judge Griesa disagreed.  The Court’s opinion confirmed that, absent aggravating circumstances—Judge Griesa mentioned specifically the ‘incendiary statements’ and ‘harmful legislation’ of Argentina’s former government—a sovereign debtor may pay some of its creditors and not others without running afoul of the pari passu clause. The decision does much to clarify the limits of the pari passu clause and deals a serious blow to creditors who would interpret the clause broadly to undermine future sovereign restructuring efforts. 

The full article is available here.

This post comes to us from Cleary Gottlieb. It has been co-authored by James Michael Blakemore and Michael Lockman.