The first step in assessing the potential legal threat posed by holdout creditors is to read the underlying debt instruments to see what defenses the documents might provide to a sovereign defendant in a firefight. The Republic of Cyprus Euro MTN documentation (June 17, 2011), for example, offers a good illustration. Condition 7(c) of the Terms and Conditions of the Cypriot Notes provides:
All payments are subject in all cases to any applicable fiscal or other laws, regulations and directives, but without prejudice to the provisions of [the tax gross-up clause].
Does this include Cypriot laws, regulations and directives? Nota bene that the provision does not say “laws, regulations and directives in the place of payment”.5 Read literally, therefore, it makes all payments subject in all cases to any Cypriot laws, regulations and directives. Our research suggests that in approximately three-quarters of the other sovereign bonds that contain this provision, the crucial words “in the place of payment” modify the phrase “laws, regulations and directives”.6 The absence of this qualifying phrase in Cypriot bonds is thus both noticeable and arguably significant.
Sticking with the Cypriot MTNs for a moment, Condition 19(e) of the Notes states that:
“The waivers [of sovereign immunity for Republic property] and consents [to enforcement proceedings in foreign courts, including enforcement against Republic assets] …do not apply to the Republic’s title or possession of property … necessary for the proper functioning of the Republic as a sovereign state.”
This is a very unusual way to phrase a carveout from the waiver of immunity for sovereign property devoted to a public purpose. It is hard to imagine that an issuer benefiting from such a carveout would not, in a litigation scenario, argue that all of its property held abroad was necessary for the proper functioning of the sovereign state and therefore immune from seizure by a disgruntled creditor.
While a close textual analysis of the sovereign’s bond documentation may yield some potential litigation defenses, such defenses are obviously useful only in an enforcement proceeding commenced by a holdout creditor. The whole point of the exercise is to persuade creditors in advance not to stay out of the restructuring and litigate. A more generally applicable legal tool may be required for this purpose.
aus:
The Problem of Holdout Creditors in Eurozone Sovereign Debt Restructurings
Lee C. Buchheit G. Mitu Gulati Ignacio Tirado
The architects of every Eurozone sovereign bailout program (Cyprus is the one in the oven at the moment) must make a crucial threshold decision: what to do with the sovereign’s debt maturing during the program period. Mercifully, there are only two options -- pay it or restructure it.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2205704
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