To Rank Pari Passu or Not to Rank Pari Passu: That is the Question in Sovereign Bonds
50 Pages Posted: 29 Oct 2008
Date Written: October 29, 2008
It can be said that the pari passu clause mistakenly migrated from secured private lending to unsecured sovereign lending. Once rooted in unsecured sovereign lending instruments it faced certain provisions like the ones in Spain or the Philippines that can allow a creditor to create a preference positioning itself in a better position vis-a-vis other creditors, and become a 'must have' provision in this type of debt instruments. Then, pari passu clauses stayed in unsecured debt instruments due to the fear of the earmarking revenues or the risk of the sovereign preferring a group of creditors over another. These two fears were tackled by an expanded negative pledge clause and the Libra and Allied Bank cases. Therefore, if a proper due diligence was conducted there was no need to have a pari passu clause unless in exceptional circumstances alike the ones of Spain or the Philippines. Unfortunately, a misguided interpretation of the pari passu clause in the Elliot case opened the door to litigation on incorrect grounds (payment interpretation or broad interpretation of the pari passu clause). It was an 'aberration', but one that caused furore. The problem was that in Elliot there was no breach of the pari passu clause, just a wrong understanding of its meaning. In the case of Argentina the whole story could be different since it can be correctly interpreted as a breach of the pari passu clause in its ranking or narrow form. The importance of this article lies precisely in explaining the different interpretations of the pari passu clause in sovereign debt instruments in context to provide a clear understanding of the issue for the sake of the international capital markets.
Keywords: Sovereign Debt, Pari Passu Clause, Debt Restructuring, Exchange Offer, Capital Markets
JEL Classification: K22, K33
Suggested Citation: Suggested Citation