Vol 10 (2013) - Issue 6

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Is a Public Debt a Public Curse?

The pari passu clause is a standard clause in public or private international unsecured debt obligations (syndicated loan agreements and bond issuances). The short Latin phrase 'pari passu' literally means 'with equal step', from pari, ablative of par, 'equal' and passu, ablative of passus, 'step'. That is to say, pari passu refers to things that are in same situation, things that rank equally. This notwithstanding, the pari passu clause, as brilliantly noted by Buchheit, 'is short, obscure and sports a bit of Latin; all characteristics that lawyers find endearing'.

From a close reading of a pari passu clause, it can be argued that it has two elements: (1) an internal element, i.e. that the bonds will rank pari passu with each other; and (2) an external element, i.e. that the bonds will rank pari passu with other unsecured (present or future) indebtedness of the issuer.

Sometimes the term ‘payment’ is included in the clause, which adds nothing since we are talking about debt obligations – which cannot be anything other than a payment obligation. As Wood noted, adding 'payment' means nothing, while rank means rank. It does not mean 'will pay', nor does it mean 'will give equal treatment to creditors'. 'If a clause adopts a variant such as rank pari passu in priority of payment, then the result should be the same.'

An opinion was given that '[t]here is no special virtue in the words "pari passu", "equally" would have the same effect or any other words showing that the [debt obligations] were intended to stand on the same level footing without preference or priority among themselves …'. However, more recently, the pari passu clause has been described as a harmless relic of historical evolution.

The reason why the pari passu clause returned to the limelight is a lawsuit that is currently taking place in New York against Argentina (NML Ltd. v Republic of Argentina) on the interpretation of the pari passu clause as result of payments being done to those bondholders that accepted the exchange offer in detriment of those that did not (holdouts).

In the Argentine restructuring case, the bonds that were restructured did not include collective action clauses (CACs). Argentina was unable to use exit consents because, in one of the bond series, bondholders managed to get a blocking holding curtailing any possible amendments to the non-payment terms. Therefore, Argentina had to resort to the Most-Favoured Creditor Clause (MFCC) usually linked to another clause known as the Rights Upon Future Offers (RUFO) clause, to entice participation in the exchange offer. After a gaffe in the drafting of the MFCC (forgetting to include the word 'settlement'), the Argentine government then passed the Lock Law to persuade bondholders who were in the process of tendering their original or old bonds that Argentina would not settle with holdouts.