Ah, spring: a season of renewal. The scent of flowers carried on a gentle breeze.
And the international financial community can go back to arguing all over again about whether a promise which Argentina made in a bond issued twenty years ago – to treat creditors equally – will end up making sovereign debt restructuring harder to achieve.
That’s after the promise was converted into a remedy of ratable payment for holdouts. They usually take a huge risk enforcing debt against sovereigns. But with pari passu litigation, they may have a chance to widen the field to third parties, such as bondholders who wrote down debt in return for what they thought was the certainty of getting paid. Oops. Assuming the holdout victory is worth it. Anyway, for a brief summary, see the last few 51 posts on this saga.
For now, we’re more interested in news that Brazil and Mexico are going to fileamicus curiae briefs in Argentina’s favour to the US Supreme Court later on Monday.
For things to remain the same, everything must change
On the one hand, adding a few more sovereigns to the argument shouldn’t really add much. Argentina’s basic legal position feels a bit like it’s stuck on replay. For example, another likely amicus on Monday, France, already filed a bombastic intervention last year during Argentina’s first run at the Supreme Court (it foundered on a technicality).
The US meanwhile won’t file, but might do if the court asks it to later on. That’s the other thing here. The Supreme Court will take two more months at the earliest to review the briefs it gets. Even if the judges do take on the appeal, time will trundle onward to October, when actual argument can start. In about that period of time, the Argentine government can do all sorts of things that it once swore black and bluenever to do. We know that because in the last few months, the peso has been devalued, which was one of those things.
Even before then Argentina had begun talking to creditors on whom it has defaulted. That’s continued, up to the Paris Club level, though not yet to Paul Singer’s door. Give it another peso crisis though, where Argentina needs to borrow internationally to get dollars, and Argentina might even talk to the holdouts. Pari passu be damned.
But what, actually, has changed?
Still, Brazil and Mexico. Those are two Latin American sovereigns who have been known to issue bonds under New York law themselves.
In that case, if the weaponisation of pari passu has moved these two enough to file as amici for Argentina, then they or other New York law sovereigns should probably also have made sure to revise pari passu clauses in their bonds. Right? After all, the contractual language that doomed Argentina is not unique to it.
And yet…
Click the table to enlarge. It was compiled from a database of 165 sovereign bonds by Keegan Drake and Melissa Morgan, students about to graduate from Duke law school.
The database which they built goes back to July 2011. It therefore reflects about the time that bond-issuing governments and their lawyers have had to react to the pari passu case garnering serious legal momentum in the New York sovereign debt market, first at the District Court, then at the Second Circuit Court of Appeals.
Or rather, time not to react. These findings slightly corroborate a hunch we had near the start of the saga.
Either because the provisions are usually inert boilerplate spat out by a lawyer’s computer, or because issuers didn’t fancy the extra couple of basis points they might have to pay to introduce innovation to the market, or perhaps because those concerned do not see sufficient risk to a hypothetical restructuring one day — the core provision for pari passu in bonds would not undergo rewording.
But the table does show something changed in bond contracts, such that sovereigns at least recognised that Argentina’s litigation might affect them and their creditors. The lawyers of some began to put in risk factors referring to the Argentine case. Others went further and advanced the issuer’s “understanding” of what pari passu means in their bonds: i.e. it was not ratable payment, however else a court might one day interpret it.
Change at the margins
It’s interesting to note that relatively established sovereign issuers opted for risk factors. In fact, Mexico was first to include a pari passu risk factor when reopening a 2044 bond in January 2013. Colombia for example followed soon afterward.
Meanwhile, sovereigns issuing for the first time (Honduras) or in special situations (Belize) appear to have plumped for stating how they understood their own clauses’ meaning. Maybe there was less inertia as new issuers, or a need to shut down a potential holdout threat (Belize was restructuring its debt).
It might seem like a cop-out to file an “understanding” without changing the actual pari passu language, but maybe not from the perspective of how contract is litigated. Contracts are built on the idea that they are the meeting of two minds — debtor and creditor, here. A court should usually take into serious account what one counterparty thought of obligations between the two, if there is evidence of that in the original contract.
So there is some scope for legal ingenuity after all. Which is why it’s also interesting to note Drake and Morgan’s breakdown of which law firms were at work in these two innovations:
Risk Factors:
Arnold & Porter = 7
Cleary Gottlieb = 2
Shearman & Sterling = 1
Arnold & Porter = 7
Cleary Gottlieb = 2
Shearman & Sterling = 1
Understanding:
Arnold & Porter = 3
Cleary = 2
Arnold & Porter = 3
Cleary = 2
Notice any relationship to who represents Argentina?
There’s one last, rather striking finding here about when genuine pari passu clauses did change, however. According to Drake and Morgan:
Perhaps surprisingly, every change to the pari passu language came in bonds governed by English law, and of these, the lion’s share came when a country switched legal counsel and (presumably) boilerplate.
This is surprising: English law is far away from the Argentine squall in New York law sovereign debt. It perhaps isn’t surprising though, given how change was carried out. Boilerplate! Change wasn’t exactly purposive.
Even potentially important alterations — such as adding an “except for mandatory provisions of law” caveat to a promise of equal treatment — can vary by English law firm. This is to be noted in that first, these quirks of wording can become quite powerful sticks for either debtor or creditor to beat the other with, as in Argentina’s pain at the hands of holdouts. Think how “mandatory provisions” could effectively be used to remove foreign-law protection from bondholders, for example. We did the other day, with Ukraine’s debt.
Second, this just brings home how powerful lawyerly inertia can be for what sovereign debt looks like.
Somehow we doubt we’ll be seeing that point made in any of Monday’s amicus briefs…
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