A Vulture's Gamble: High-Stakes Interpretation of Sovereign Debt Contracts in NML Capital, Ltd. v. Republic of Argentina

Abstract

The Second Circuit’s decision in NML Capital, Ltd. v. Republic of Argentina may have created a significant problem for any country that faces a need to restructure its outstanding debt, including countries in the Eurozone presently in crisis. By interpreting the pari passu clause of Argentina’s defaulted debt contracts broadly, the court has tipped the balance of power toward creditors in restructuring negotiations, increasing the risk presented by holdout creditors. Thus, a case which involved the interpretation of a somewhat obscure boilerplate term found in most sovereign debt contracts will likely assume central importance in creating future sovereign debt restructuring plans. This paper argues that countries that foresee a need to restructure their debt should act quickly and proactively to ensure that the Second Circuit’s interpretation of Argentina’s pari passu clause will not unduly interfere with their ability to restructure should it become necessary.

Keywords: NML, Argentina, sovereign debt, pari passu, restructuring, vulture fund