Default
The NML Capital litigation and pari passu, told from the restructuring side.
Summary
Makoff, a former sovereign debt banker and adviser, wrote a detailed history of Argentina's 2001 default and the fifteen years of litigation and negotiation that followed.
The legal narrative is the substance and it matters well beyond Argentina. After the 2005 and 2010 exchanges, in which most bondholders accepted large losses, a group of holdout creditors led by Elliott Management refused and litigated. Judge Thomas Griesa in the Southern District of New York interpreted the pari passu clause in the original bonds, which requires the issuer to treat obligations equally, to mean that Argentina could not pay the exchange bondholders while refusing to pay the holdouts. He then issued injunctions enforcing this against the payment system, which meant that any intermediary processing a payment to exchange bondholders would be in contempt.
This was the decisive innovation. Sovereign immunity had historically made judgments against sovereigns difficult to enforce, since there are few attachable assets. The injunction did not attach assets; it prevented the sovereign from paying anyone else, which gave the holdouts leverage no previous creditor had held. Argentina defaulted again in 2014 rather than comply, and settled in 2016 after a change of government, paying the holdouts a very large return on their purchase prices.
Makoff covers the consequences for sovereign debt markets, including the redrafting of pari passu clauses and the strengthening of collective action clauses to prevent a repeat.
The book is detailed and technical, written by someone who worked in the market. It is more sympathetic to the orderly restructuring position than to either the holdouts or the Argentine governments. It is the fullest account of a legal development that changed sovereign debt contracting permanently.
Key takeaways 7
- Holdout creditors who refuse a restructuring can be paid in full if they obtain leverage the other creditors lack.
- The pari passu clause was interpreted to prevent Argentina from paying exchange bondholders while refusing the holdouts.
- Injunctions against the payment system rather than attachment of assets gave holdouts leverage sovereign immunity had previously prevented.
- Argentina defaulted again in 2014 rather than comply with the ruling, which shows the leverage worked in both directions.
- The eventual 2016 settlement paid holdouts a very large return on the prices at which they had bought the debt.
- Pari passu clauses were redrafted and collective action clauses strengthened across the market to prevent a repeat.
- A single court's interpretation of a boilerplate contract clause changed sovereign debt contracting worldwide.
Who should read it
Sovereign debt investors, lawyers and policymakers who need the full record of how holdout litigation changed restructuring economics.
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Where it sits in the reference 2
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