238 posts categorized "Sovereign Debt"

Venezuela Is Like ... (Part II)

posted by Anna Gelpern

Last time on Super-Sad Updates, I speculated (i) that the Venezuelan people could be in for more suffering and bondholders for more coupon payments (see Romania), (ii) that Venezuela’s complex debt stock was prone to shell games and inter-creditor conflicts, which could delay a workout (see Puerto Rico), and (iii) that a bet on PDVSA bonds over sovereign bonds today required too many assumptions to hold my shrinking attention span (but see Turkmenistan … or not). Now I try to imagine what might happen if the government did decide to restructure. It brings back memories of …

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Venezuela Is Like ... (Part I)

posted by Anna Gelpern

Market and civil society observers have taken Venezuelan debt restructuring as a certainty for more than two years, putting it in contention for the world’s slowest train wreck and quite possibly the messiest. Designs abound, but even after last weekend’s vote followed by new U.S. sanctions, too many variables remain too far up in the air to start laying the yellow brick pavers quite yet.

Depending on where you sit and how long you stare, Venezuela can present as some, none, or all of many past sovereign debt crises. The tour that starts below with broad-brush analogies is not exhaustive, but still plenty depressing.

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Puerto Rico Bankruptcy: More on Audio

posted by Melissa Jacoby

Standing Order 8As my last post mentioned, release of hearing audio recordings does not appear to be standard practice in the District of Puerto Rico district court. But that isn't for lack of authority within that court. Standing Order 8, adopted in 2011, expressed with some pride that the District of Puerto Rico would be the "first in the entire Nation" after the pilot program (discussed in prior post) to make audio files available through PACER. The order makes clear that the recording is not the official record, preserving the role of court reporters. The use of the technology is left to the discretion of the presiding judge. The court's website indicates this order remains in effect.

Ideally recordings of the Puerto Rico hearings would be released for free on the court's website. But even if posted only on PACER for a flat fee, opting into this practice would increase accessibility. 

Puerto Rico Bankruptcy: Audio Recordings?

posted by Melissa Jacoby

As noted as an update in the prior post, May 17 is the first hearing in Puerto Rico's PROMESA restructuring cases (which also have new case numbers). However much interest these cases hold for the professional bankruptcy world, they are of critical importance to Puerto Rico residents. The idea of a government unit being bankrupt is frightening, with the anxiety heightened when the extent to which one's elected officials remain in charge is unclear. Sensitive to the number of stakeholders and high public interest, the courthouse has overflow space reserved for the first hearing. But even a capacious courthouse imposes natural limits on the in-person population.

If the court released audio recordings of hearings for free on its website, as happened in the Detroit bankruptcy, that would provide a window into the federal court process that could help build trust and legitimacy. Ordering and using hearing transcripts is critical to many parties and their lawyers, but that process is not a feasible form of education and access for others. In addition to being prohibitively expensive for residents to acquire, especially on an expedited basis, written transcripts provide insufficient contextual cues for those less familiar with federal courts and lawyers.

Releasing digital recordings does not appear to be standard practice in the District of Puerto Rico. Might this be an opportune moment for an experiment, or at least an exception?*

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Puerto Rico Bankruptcy: Week One

posted by Melissa Jacoby

[May 10 update: a hearing has now been scheduled for May 17] 

It is nearing the one-week anniversary of the biggest government bankruptcy in U.S. history: the Commonwealth of Puerto Rico.

  1. The debtor(s) and cases: So far, Puerto Rico's Oversight Board has filed the equivalent of a bankruptcy petition for the Commonwealth (17-1578) and COFINA (17-1599). Bond insurers have filed the equivalent of an adversary proceeding (17-1584). The Oversight Board has retained Prime Clerk, so dockets will be available to those who don't have access to PACER, Bloomberg Law, etc. In Detroit's bankruptcy, digital recordings of nearly all hearings were posted for the public, usually within 24 hours; I hope the same will be true for Puerto Rico, but so far I have not seen an indication either way on the District of Puerto Rico's PROMESA web page.
  2. Presiding judge: PROMESA greatly restricted Chief Justice Roberts' choice of presiding judge by excluding bankruptcy judges. Thus, it is especially a relief that a wonderful district judge with bankruptcy court experience has accepted Chief Justice Roberts' request to preside. Judge Swain will sit by designation in the District of Puerto Rico
  3. Venue: The Oversight Board filed in the District of Puerto Rico, rather than New York, which was also a venue option. Filing in San Juan makes hearings accessible for more residents (creditors or not) who are deeply affected by the Commonwealth's financial situation. Curiously, a New York Times story attributes to the Oversight Board's outside counsel the proposition that the presiding judge "has the option of holding proceedings" in Manhattan as well as in San Juan. I don't read the Judicial Code and Federal Rules of Bankruptcy Procedure, particularly 5001, to be so flexible (PROMESA makes the Federal Rules of Bankruptcy Procedure applicable to these actions). Absent venue transfer or an emergency, it is reasonable to expect hearings to take place in Puerto Rico.
  4. Eligibility: PROMESA did not adopt the municipal bankruptcy eligibility test wholesale, although it incorporated parts. It sounds like some creditors may challenge eligibility and/or whether the Oversight Board satisfied the restructuring duties set forth in PROMESA. It is hard to imagine these cases getting dismissed on such grounds, but we will get a better sense from the parties' pleadings when and if they are filed.
  5. What else is formally pending: The docket does not yet reflect the magnitude of the case to come. As in municipal bankruptcy, Puerto Rico's filings created no bankruptcy estate and the debtors do not need federal court approval for decisions and expenditures to the same extent as, say, chapter 11 debtors. Thus far, the court docket is populated primarily by requests for notice and pro hac vice admission by lawyers. Also pending is a motion for the appointment of a retiree committee. Retiree committees have been common in municipal bankruptcies, but there remains the question of who will pay the committee's expenses in this case. Another twist is that the motion asks the court to restrict the member appointment discretion of the United States Trustee, requiring that the committee be constituted from a preexisting ad hoc committee. Yet another indication, perhaps, that this case will be a challenge from top to bottom.

Puerto Rico: Just Another Deadline or the Big One?

posted by Anna Gelpern

Midnight came and went with no news of a debt deal in Puerto Rico, and no extension of a stay on creditor enforcement under PROMESA. It sure looks like we are careening into an actual sovereign-ish bankruptcy-ish filing under Title III of the law.

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Judge Selection in Municipal Bankruptcy and PROMESA

posted by Melissa Jacoby

In light of the timeline on the Puerto Rico debt situation, I have just posted on SSRN a contribution to the ABLJ/ABA symposium last fall. The paper examines PROMESA's judicial selection requirements applicable to a Puerto Rico Title III filing (the equivalent of a bankruptcy), and puts them in the context of municipal bankruptcy history.  This paper can be downloaded here.

More Thoughts on Ukraine

posted by Mark Weidemaier

Having had a few days to digest the ruling awarding summary judgment to the trustee (suing at the direction of the Russian government), I wanted to elaborate on my earlier thoughts about the court's reasoning. As Anna points out, the ruling may be appealed, and in any event the dispute will not be settled for some time. But the recent ruling may be the most significant to come out of the case, so it's worth talking about in a bit more detail. I have already described the defenses Ukraine raised in response to the lawsuit, so I'll skip those details here. In brief, however, Ukraine argued that the loan was made under duress, that the government lacked capacity to enter it, and that the loan included implied terms equivalent to the doctrines of prevention or impracticability--i.e., that Russia implicitly promised not to seek repayment if its own conduct (annexation of Crimea and military intervention in the east) made it difficult or impossible to repay.

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Ukraine's Loss: A Skid, Not a Crash

posted by Anna Gelpern

Mark posted a lucid analysis of Ukraine's loss to Russia in London yesterday (full 107-pp opinion here). The case will surely be appealed, and will drag on for a while, alongside the many other legal, political and military disputes between Russia and Ukraine. It will settle, if ever, as part of a grand-ish bargain between the two countries. For now, neither has any reason to fold, so I am not holding my breath for quick resolution.

While we wait, I wanted to think about what this ruling might mean for sovereign debt workouts, and for Ukraine's recently-restructured bonds.

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Ukraine's Defenses to Russian Bond Claims Rejected

posted by Mark Weidemaier

The judge hearing Russia's lawsuit to enforce its $3 billion loan to Ukraine issued an opinion today, rejecting Ukraine's defenses to the lawsuit. Bloomberg and the Financial Times both have coverage of the decision. We've discussed the loan quite a bit here on Credit Slips, and also Ukraine's defenses to enforcement (e.g., here, and here, and here). The lawsuit is fascinating, in part because Ukraine's defenses ask the judge to use traditional contract law doctrines to police what is clearly an international dispute between sovereigns who have been engaged in armed conflict. As I have explained in more detail elsewhere, Ukraine's contract-law arguments were actually quite plausible, though by no means a sure thing. Among others, the defenses included duress (always a bit of a stretch, in my view), lack of capacity, and what would typically be called prevention and impracticability under U.S. law (characterized as implied terms of the contract by Ukraine).

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Inter-Creditor Duties in Sovereign Debt

posted by Mark Weidemaier

This is a joint post by Mitu Gulati and Mark Weidemaier

As we discussed in a couple of earlier posts, we have been thinking recently about the use of exit consents to restructure sovereign debt, especially in the context of Venezuela and PDVSA, the state oil company. Though focused on corporate workouts, Bill Bratton and Adam Levitin's new paper, The New Bond Workouts, raises questions that also matter in the sovereign context. Bratton and Levitin give a detailed account of the Second Circuit's Marblegate opinion, a 2-1 decision that seems to authorize very aggressive use of the exit consent technique. (Creditors were essentially given a choice between accepting the restructuring plan or being left with claims against an entity that was nothing more than an empty shell.) Bratton and Levitin generally approve of the Second Circuit's decision, but also suggest that courts should revive the doctrine of intercreditor good faith to police against coercive workouts of bond debt.

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Scotexit and Allocating the UK's Debt

posted by Mark Weidemaier

This is a joint post by Mitu Gulati and Mark Weidemaier.

Scotland voted 62% in favor of remaining in the EU in last June's Brexit vote. Now, with nationalism on the rise in Britain, Scotland has begun to rethink the decision to stay in the UK. Fears of a so-called "hard exit," in which Britain foregoes easy access to the common market, have Scottish leaders like Nicola Sturgeon demanding another referendum on Scottish independence. Which has us wondering: What happens to the (rather large) pile of UK debt if one of its members decides to exit?

It seems like voters in Scotland ought to care about the answer, if given another chance to vote on UK membership. More broadly, one would think voters would want some idea how the UK's assets and liabilities would be divvied up. Things like the public debt, the crown jewels, pension obligations to veterans, the nuclear arsenal, Balmoral castle, and so on. The UK has a lot of stuff. How should it be divided?

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Bankruptcy and Non-Bankruptcy Options for PDVSA

posted by Mark Weidemaier

This is a joint post by Mark Weidemaier and  Mitu Gulati.

We have talked before about the possibility that Venezuelan state-owned oil company PDVSA will need to restructure. With oil prices still low, the early-2017 gloom about the company's economic prospects hasn't lifted. True, the company and its sovereign owner have managed to stave off default for a while now; perhaps this can continue. But restructuring is a real possibility. In our international debt finance class this year, we have been asking students to think about how a restructuring might work.  

For PDVSA the options basically come down to bankruptcy and the use of exit consents. We talked about the latter option--basically a voluntary exchange offer in which participating bondholders also vote to eliminate contractual protections in the old bonds, making them less attractive to hold--in an earlier post. For many corporations, bankruptcy would be the preferred option, if only to benefit from the automatic stay of creditor collection efforts. But PDVSA's bankruptcy options are limited. It is a Venezuelan company, and Venezuelan bankruptcy law is not ideal for debtors seeking to restructure. Plus, in order to be worth anything, a Venezuelan bankruptcy proceeding would need to be recognized in the United States, likely under Chapter 15 of the Bankruptcy Code. It isn't clear that a Venezuelan proceeding would merit such recognition. Nor is it clear that PDVSA meets eligibility requirements under US bankruptcy law. Still, bankruptcy offers the only mechanism for imposing restructuring terms on dissenting creditors, and that is what PDVSA most needs (with regard to its bond debt, anyway).

Euro-Area Redenomination Risk and the Gold Clause Cases

posted by Mark Weidemaier

This is a joint post by Mitu Gulati and Mark Weidemaier.

Odds seem to be against a Marine Le Pen victory in the French presidential election, though a victory by Emmanuel Macron is hardly assured. And there continues to be chatter about redenomination risk in Europe, to the point that, according to a recent Deutsche Bank estimate, even short-term German bonds were factoring in a 5% risk of redenomination. Last week, in our class on international debt finance, we discussed the so-called Gold Clause cases from the 1930s. Though ancient history in some respects, the cases offer important lessons for some of the debates regarding redenomination risk. First, though, some background.

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Brooklyn Law School Conference on Public Debt

posted by Melissa Jacoby

AboutthesymposiumOn March 1, 2016, Credit Slips commenced a virtual symposium on Puerto Rico's financial crisis. Where do things stand today, a year later? And what governance lessons can be learned from municipal bankruptcy cases like Detroit for the public debt problems of tomorrow? Thanks to a fortuitously timed conference at Brooklyn Law School, a subset of Slipsters will be considering these very questions on Friday March 3, 2017. Check out the agenda and join us in Brooklyn - register here today.

Marblegate and the Use of Exit Consents to Restructure (Venezuelan) Sovereign Debt

posted by Mark Weidemaier

This is a joint post by Mark Weidemaier and Mitu Gulati.

About a decade and a half ago, exit consents were a big deal in sovereign debt restructuring. At the time, sovereign bonds governed by New York law required unanimous bondholder approval before any modification to the payment terms of the bonds. The result was that creditors could easily hold out from a restructuring. Needing to mitigate the holdout problem in Ecuador in 2000, sovereign debt guru Lee Buchheit borrowed a technique from corporate bond restructuring practice in the United States. There, the Trust Indenture Act forbids out-of-court bond exchanges that modify "the right of any holder ... to receive payment ... or to institute suit" without the consent of each affected bondholder. To oversimplify, Buchheit leveraged the fact that other terms of the bonds could be amended with a lesser vote, often a simple majority or 66.67% of the bonds. This meant that potential holdouts risked having key protections stripped from their bonds in a restructuring that won the approval of a majority of bondholders.

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Stripping PDVSA's Assets

posted by Mark Weidemaier

This is a joint post by Mark Weidemaier and Mitu Gulati

In a previous post, we talked about how ordinary corporate-law principles, and especially the rules concerning piercing the corporate veil, might play an important role in any debt restructuring conducted by Venezuela or PDVSA, the state oil company. As an example, we cited the fact that PDVSA doesn't own the oil reserves it exploits and the possibility that Venezuela might transfer the right to exploit these reserves to a new entity. Readers who have been following the Venezuelan crisis will recognize that we were not-too-subtly referring to a proposal floated back in October 2016 by Ricardo Hausmann and Mark Walker, writing on Project Syndicate. (Registration required.) In a nutshell, their proposal with regard to PDVSA is that Venezuela can induce PDVSA creditors to participate in a restructuring--conducted either in bankruptcy or through the use of exit consents--by withdrawing or modifying PDVSA's right to exploit hydrocarbon reserves. Essentially, that is, Venezuela can strip the company of its primary productive asset.

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Veil Piercing When a Sovereign Owns the Shares; Venezuela Edition

posted by Mark Weidemaier

This is a joint post by Mark Weidemaier and Mitu Gulati.

At least in the short term, the odds of Venezuela continuing to service its mountain of external debt are looking slightly better, though long-term prospects remain bleak. State-owned oil company PDVSA may be even worse off. A default or restructuring by one or both borrowers will raise issues that are typically peripheral in a sovereign debt crisis. If Argentina's pari passu saga tested the willingness of courts to approve novel injunctions, Venezuela's debt crisis will test the willingness of courts to disregard the legal fiction that corporations are separate legal "persons." That fiction means that a corporation's shareholders are not liable for corporate debts (or vice versa), unless a creditor can "pierce the corporate veil"--i.e., prove the shareholder abused the corporate form to engage in "fraud or inequitable conduct."

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Paul Blustein's Laid Low, and Some Musings on the Next Crisis

posted by Mark Weidemaier

(This is a joint post by Mark Weidemaier and Mitu Gulati)

We jointly teach a class on international debt, focusing on what happens when sovereign governments and the entities they control go bust. We love this class, because we work with our students to design a restructuring plan for a country in financial distress, and our students often come up with terrific ideas. This semester, we're focusing on Venezuela, which would involve an enormously complicated restructuring. One reason is that Venezuela has not exactly cozied up to the IMF, which typically plays a key role in a restructuring. To get a sense of the IMF's role and limitations, we asked our students to read Laid Low, Paul Blustein's new book about how the IMF played a part in managing (and mismanaging) the Greek debt crisis. Blustein is a terrific story-teller, with rare access to key players at the IMF and elsewhere. Although we followed the European debt crisis closely, much of what's in Laid Low was new to us.

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Pari Passu Nevermind

posted by Mark Weidemaier

One last (I hope) gift from the pari passu litigation against Argentina: this opinion ruling that Argentina does not breach its pari passu obligations by paying holdouts like NML (who recently settled claims against the country) or by paying bondholders who had previously participated in its 2005 and 2010 exchange offers. The result was basically a given. The judge was hardly going to lift the injunction only to reinstate it when the next holdout came along. The interesting question was how the judge would distinguish bondholders who refused Argentina's latest settlement offer from bondholders who had refused prior offers.

There was an obvious and sensible answer. Because holdouts already have claims for money damages, the meaning of the pari passu clause isn't all that important unless violation produces a different remedy, such as an injunction. But an injunction is appropriate only when the benefits to the plaintiff exceed the costs to the defendant and third parties. Now that Argentina has made a reasonable settlement offer (in the court's judgment) and obtained the assent of the vast majority of bondholders, an injunction might do more harm than good. Thus, in the opinion linked above, the court holds that, whatever the meaning of the pari passu clause, an injunction would be inappropriate because "significantly changed circumstances have rendered the pari passu injunctions 'inequitable and detrimental to the public interest'" (p. 9). So far, so good. But the opinion doesn't stop there. Instead, the court's primary ruling is that the selective payments Argentina is currently making do not violate the pari passu clause at all.

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Venezuela

posted by Stephen Lubben

John Dizard has a useful, and clearly written, piece on the lay of the land in this morning's FT. What puzzles me is why PDVSA, the national oil company,  has not done a UK scheme of arrangement or a US prepack to exchange the bonds, instead of messing around with an exchange offer. But the entire situation is rather opaque.

Disarming Holdouts in Sovereign Debt Restructurings

posted by Mark Weidemaier

The pari passu litigation against Argentina—discussed extensively here on Credit Slips, on FT Alphaville, and elsewhere—caused many people to worry that future government debt restructurings would become more difficult. Some have their eye on Venezuela as the next to default, though the country and its troubled state-owned oil producer PDVSA stubbornly continue to pay external creditors despite dire economic and humanitarian circumstances. Wherever the next crisis occurs, there will be interest in devising ways to avoid the fate that befell Argentina.

A quick re-cap: federal courts in New York (i) interpreted the pari passu clause in Argentina’s contracts to forbid the country to keep current on its restructured debt unless it also paid holdout creditors in full and (ii) implemented this ruling through an injunction preventing financial and other intermediaries from helping Argentina continue making payments. Some worry that this remedy, if widely applied, could make it impossible to restructure.

So…what to do? Here’s a new proposal from Lee Buchheit (Cleary Gottlieb) and Mitu Gulati (Duke). It’s cute. And it has a clever name: the Cryonic Solution.

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Further Thoughts on Puerto Rico v. Franklin California Tax-Free Trust

posted by Stephen Lubben

The opinion is a good reminder that oral argument impressions don't always carry over to the final written product. In short, both the majority and dissent approach this as a simple matter of statutory construction, and in that regard the majority opinion is simply a more clearly articulated version of the First Circuit's opinion.

Neither the majority or dissent address the 10th Amendment implications of saying that states have to use chapter 9 if they want to reorganize their municipalities. After this opinion, there is no other option. This might suggest that the 10th Amendment concerns that once hovered around chapter 9 are effectively gone.

I find the majority's approach to the placement of the 1946 addendum to section 903 unconvincing, but of course I've already written that I saw section 903 as only coming into force when a state accepts the chapter 9 "bargain."

Is there any other provision of the Code in one of the operative chapters (7 and onward) that applies even when there is no eligible debtor? Here we have Justice Thomas telling us that part of section 903 applies to Puerto Rico right now, while the opening paragraph of the section is apparently hanging around "just in case."  

The end result is that Puerto Rico now faces the unattractive choice of attempting an Argentina/Greece style workout (with likely lesser sovereign immunity than either of those debtors had) or swallowing PROMESA, along with its oversight board.

The composition of the former is an issue that Puerto Ricans might understandably worry about, especially since the board, and not the Commonwealth, has final say on what a reorganization plan looks like. Indeed, it is not so much a matter of "final say," as whether the oversight board will listen to Puerto Rico at all. There is no formal requirement in PROMESA that they do so. Nonetheless, given the alternatives, Puerto Rico might decide it has to hold its nose and take PROMESA.

The only thing we know for sure is that Puerto Rico is headed for a default on July 1. One branch of the decision tree has been taken away.

Ukraine's Defense: Russian Suit Part of a "Broader Strategy of Aggression"

posted by Mark Weidemaier

It has taken several months, but the Russian Particulars of Claim and Ukraine's Defence (akin to complaint and answer in U.S. civil procedure) have now been filed. Distilled to its essence, Ukraine's response, as the Financial Times notes, is that "if you wanted your money back you should not have invaded our country." Or as Ukraine's lawyers put it in the Defence: "The [Russian] claim forms part of a broader strategy of unlawful and illegitimate economic, political and military aggression ... aimed at frustrating the will of the Ukrainian people to participate in the process of European integration." 

Russia's version of events is straightforward and looks like any other debt case: Russia lent the money, Ukraine committed a breach of contract by not repaying. Ukraine, by contrast, will have a harder time translating its defenses into the dry language of legal doctrine. But it can be done. As I have written here at Credit Slips, and in more detail elsewhere, contract law provides Ukraine with a number of potentially viable arguments. Now that we know the arguments asserted by Ukraine, here are some preliminary thoughts.

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PROMESA and the Recovery Act

posted by Stephen Lubben

It has become something like conventional wisdom that the pending SCOTUS case involving the Recovery Act is no longer relevant. After all, the giant interest payment due July 1 is largely attributable to GO bonds, and the Commonwealth itself is not even subject to the Recovery Act. And the pending PROMESA bill would expressly override the Recovery Act.

Taking the last point first, we should not assume that PROMESA will be enacted before the Supreme Court rules. Indeed, there are many political reasons why Congress – the Senate in particular – might want to wait until the Supreme Court acts before advancing PROMESA. 

Moreover, what the Supreme Court says with regard to the Recovery Act matters. For example, what if they rule that the 1984 addition of section 101's definition of "State" was impermissible, in the way that it treated the Commonwealth? That might render the Recovery Act subject to section 903 preemption, while at the same time allowing Puerto Rico the ability to authorize its municipal entities to file under chapter 9.

That could possibly force some rethinking of PROMESA, although I think we will still see some legislation. The details might change, however, if SCOTUS effectively amends the current Bankruptcy Code.

On the other hand, if the Recovery Act is upheld, what would stop Puerto Rico from expanding it to cover much more of the overall capital structure at issue? And the Recovery Act might serve as a model for a statue that could apply to the Commonwealth itself.

That, of course, might provide further incentives to pass PROMESA.  Quickly.

In short, the Recovery Act is still important, just not in its present form. The current Recovery Act is too narrow to solve very much of the Commonwealth's problems. But what the Supreme Court has to say with regard to the Recovery Act might be very important.

To mention one final point in this regard, what if SCOTUS says that the Commonwealth is unlike other territories? PROMESA purports to be grounded in Congress' power over territories under Article IV, section 3 ...

PROMESA Observations

posted by Stephen Lubben

After taking a look at titles III and VI of the new draft, some quick observations:

  • After some waffling between drafts, it is now clear that title III cases will be heard by district court judges. The judge for a case involving a territory (as opposed to a sub-entity) will be chosen by the Chief Justice. Venue will either be in the territory, or in another place where the oversight board has an office. As I've previously noted, that clearly opens up the possibility of New York.
  • One draft of the bill had incorporated sections 327 et al. regarding professional retention and compensation. I noted that was inconsistent with chapter 9, and incorporation of those sections disappeared in the next draft. Now the new draft has its own professional compensation provision in proposed section 316 (see also section 317).
  • Title VI continues to be a provision that is rather obviously stapled onto the larger bill:  see, for example, section 601, which redefines "Oversight Board" as "Administrative Supervisor" for purposes of Title VI alone.  I have a suggestion:  there is a "find and replace" function in Word ...
  • I continue to worry that title VI's process for splitting bondholders up into various "pools" is a morass waiting to happen, especially given the possibility of competing workout proposals under title VI.
  • That said, much of the "gating" features of the previous versions of title VI are now gone (i.e., it seems it would now be possible to go directly to title III, subject to the oversight board's 5 out of 7 vote).
  • The composition of the oversight board gets more convoluted with each iteration of the bill.

Overall, although the bill is not necessarily "ideal" or "optimal," it seems to at least be making forward progress.  Of course, the Senate has not weighed in at all on this ... at least not publicly. And we should probably expect that even when enacted the bill is apt to be hit with a Recovery Act style Constitutional challenge.

PROMESA Amusement

posted by Stephen Lubben

I'm still working through the new draft of the PROMESA bill, which readers will recall provides new restructuring options for US territories (including Puerto Rico, of course). But I have to say I got a chuckle out of proposed section 303(3), which provides:

unlawful executive orders that alter, amend, or modify rights of holders of any debt of the territory or territorial instrumentality, or that divert funds from one territorial instrumentality to another or to the territory, shall be preempted by this Act.

If the orders are unlawful, do we really need a federal statute to preempt them?

Puerto Rico: Legislative Update

posted by Stephen Lubben

It appears that the House legislation has bogged down.  Two or three issues keep coming up, none of which make a whole lot of sense:

First, "bailouts."  I'm not sure if people making this argument actually believe it or are just using a convenient, politically toxic buzzword. But the claim that extending chapter 9 to include some or all of Puerto Rico constitutes a "bailout" can't really be taken seriously. A bailout involves (a) the use of taxpayer money to (b) help investors avoid realizing risks they voluntarily agreed to take.

Neither is applicable here. Instead, this is the basic insolvency process doing its thing. Namely, losses will be allocated pro rata if bankruptcy applies.  But no taxpayer money is involved, and in no case are investors being saved from their own poor investment choices.

Second, expanding chapter 9 does not raise takings or other scary "retroactivity" problems. If it did, then Congress could never have enacted chapter 9 in the first place. After all, there was no chapter 9 until there was a chapter 9.

More generally, it is quite clear that unsecured bondholders do not have a valid takings claim (under the Fifth Amendment) as a result of the enactment of a new bankruptcy law, in any context. For example, if a secured creditor is owed $1,000 and has a lien on a house worth $400, a new bankruptcy law that discharges the $600 unsecured portion of the claim raises no constitutional issues. That's Congress' power under the Bankruptcy Clause in action. A law that resulted in the creditor obtaining substantially less than $400 on the secured portion might raise a constitutional question, because the secured portion of a claim is "property" for these purposes. But that still does not prevent the rescheduling of secured debt, just the complete elimination of it.

And finally, no, no, no this does not open the door to Illinois filing for chapter 9. Illinois is a state, with full 11th Amendment and 10th Amendment powers. Puerto Rico is a territory of uncertain legal status. Apples ≠ Oranges.

 

Puerto Rico Restructuring Options That Don't Rely on Congress

posted by Mark Weidemaier

The revised draft PROMESA bill (available here) is now under debate in Congress. The bill appears to respond to some early criticisms, although its length and complexity obscures answers to some important questions. Under the circumstances, it seems sensible for the Commonwealth to consider all of its options, including those that do not require Congressional action. These include, as Mitu Gulati and I write in the Financial Times (here, subscription required), changing Puerto Rico's own law in ways that might facilitate a restructuring. 

We asked law students in a class we taught jointly at the University of North Carolina and Duke to consider ways the Commonwealth could restructure without Congressional authorization. Working in groups, they came up with some answers that are both creative and plausible. That doesn't necessarily mean easy or agreeable from the perspective of Commonwealth politicians. Some proposals envision amending Puerto Rico's constitution, while others rely on provisions of Puerto Rico law that authorize collectively binding debt modifications but that haven't been previously applied in this context. The important point, however, is that Puerto Rico may have a wider range of options than many think. The attractiveness of these options is relative. If Congress cannot provide an effective restructuring mechanism that respects the Commonwealth's right to democratic governance, other lawful options will begin to seem more attractive. Two of the student groups have made their work available on-line; their short papers can be found at the links above.

Puerto Rico: PROMESA draft bill, title III revised

posted by Stephen Lubben

I again offer some initial thoughts on the revised draft bill, now subject to much debate in Congress:

  • The bill now clearly provides for reference of cases from the district court to the bankruptcy court
  • There is no longer a requirement that the oversight board have an office in D.C. But the board can have offices outside of the territory it is overseeing. As Jacoby has previously noted, this opens up the possibility that cases could be filed outside of the territory, which for present purposes of course means Puerto Rico. The most obvious locale would be New York, where an board office might make sense for negotiations with bondholders.
  • I don't see a provision comparable to §921(b), which would allow for the selection of a specific judge to preside over the case.
  • The provisions regarding professional compensation and retention are no longer incorporated into title III, so title III becomes more like chapter 9 in this respect.
  • Those parts of chapter 9 that are not incorporated into title III are largely set forth within title III itself – e.g., §§929, 941, 943. Title III is chapter 9+ in all but name. The bill expressly provides that it will not be codified in title 11, however.
  • I wonder if all the implications of the definition of "trustee" in title III to mean "the board" have been thought through. For example, do they intend this to apply with regard to section 926, which is incorporated into title III?
  • The relationship between the board and the debtor during the case generally seems like it will be quite confusing. Under proposed section 315, the board will act on behalf of the debtor throughout the case, but in other instances the bill speaks as though the debtor itself will be taking action in the case.

Puerto Rico: The Commonwealth Plays Hardball

posted by Stephen Lubben

The question is whether it is playing against the House of Representatives, and its heavy handed PROMESA draft bill, or its creditors.

In any event, according to the Financial Times, Puerto Rico's legislature has passed a law giving its governor "the power to declare a state of emergency and halt payments to creditors until January 2017."

There is a long history of these sorts of laws in the United States, most from the Nineteenth Century, although there were a few in the Great Depression too.  Most were eventually struck down as violations of the Contracts Clause, but collection against Puerto Rico itself might run up against whatever sovereign immunity the Commonwealth might posses.

Puerto Rico: PROMESA draft bill, title III (initial thoughts)

posted by Stephen Lubben

Some quick thoughts on the "bankruptcy" part of the proposed bill:

  • If we read Ry. Labor Execs.’ Ass’n v. Gibbons, 455 U.S. 457 (1982) carefully, especially its discussion of the Commerce Clause, I'm not sure it really matters that this is proposed under Congress' territories powers, rather than the Bankruptcy Clause.
  • Proposed title III incorporates all of the same provisions that section 901 of the Code incorporates into chapter 9, other than section 301.
  • The proposed title also incorporates section 327 to 331, so apparently the court will have oversight of professionals under the procedure.
  • Speaking of courts, I see no provisions to move cases under title III to the local bankruptcy court. In short, these cases will stay with the district judges. It's unclear which district, as Jacoby notes.
  • Presumably the lack of a reference concept is driven by the same considerations that keeps the district courts involved in the various proposed "chapter 14" procedures for financial institutions. On the other hand, the district judges in almost every district tend to be from public law backgrounds, and largely have no experience with insolvency law.

So this will be a chapter 9 preceding in all but name, with the oversight board acting for the debtor, whether the debtor likes it or not, in front of district judge who will be reading up on chapter 9 on the fly. In short, we are reinventing the wheel in a new, more complicated way.

Puerto Rico: Debt Restructuring and Takings Law

posted by Melissa Jacoby

ConstitutionPer the last words of my PROMESA post, click here for an interview with Professor Charles Tabb, who discusses the (limited) impact of the Takings Clause on debt restructuring and moratorium legislation. 

Constitution image courtesy of Shutterstock.com

Puerto Rico: PROMESAnkruptcy

posted by Melissa Jacoby

301The House Natural Resources Committee has released draft legislation - with the acroynym PROMESA - in response to Puerto Rico's financial crisis and Speaker Ryan's call for action. The contents continued to shift over the past few days but a recent version is here. PROMESA spans many topics, including an oversight board, employment law, infrastructure, and beyond. Without detracting from the importance of this range of topics, this is Credit Slips, so these initial observations focus on debt restructuring provisions principally housed in Title III of the bill.

  1. PROMESAnkruptcy: The new territorial debt restructuring law would not be in title 11 (home of the Bankruptcy Code). But as shown in the visual, section 301 incorporates many key title 11/Bankruptcy Code provisions, including automatic stay, financing, majority voting rules, cramdown, discharge, and the discharge injunction. Other sections of PROMESA repurpose title 11 provisions with slight tweaks, while still others expressly depart from current bankruptcy law and make new rules. For the lawyers, also note that the Federal Rules of Bankruptcy Procedure also apply (section 308). Still, the drafters don't want to call it bankruptcy or chapter 9. Okay. I commend the drafters for recognizing the importance of a mechanism to bind holdouts and I'll call it whatever they want, within reason. PROMESAnkruptcy may sound a little funny, but let's be clear that Puerto Rico's dire situation is no joke. 

Continue reading "Puerto Rico: PROMESAnkruptcy" »

Puerto Rico: The Recovery Act's Potential Second Wind

posted by Melissa Jacoby

 

This post continues the long-running Credit Slips discussion of Puerto Rico's Recovery Act, now the subject of U.S. Supreme Court review in Puerto Rico v. Franklin California Tax-Free Trust, 15-233, as indicated in Lubben's recent post and in last week's preview. In the video above, posted with permission of the American Bankruptcy Institute, I interview Bill Rochelle, who was at the Supreme Court for oral argument and makes some intriguing predictions on the vote, timing of issuing the opinion, judicial selection, and other matters. A few more reflections below the break.

Continue reading "Puerto Rico: The Recovery Act's Potential Second Wind " »

Lessons for Puerto Rico from ... Arkansas?

posted by Jason Kilborn

I did not realize that a US state had defaulted on its bonds, offering a historical comparative example of the difficulties facing Puerto Rico, its creditors, and mostly its citizens if the mess there is not subjected to an orderly, judicially supervised debt cleanup process of some kind. In a new working paper from the Cleveland Fed, O. Emre Ergungor tells the interesting story of the Depression-era default by Arkansas on various road construction bonds and its messy and politically charged path to a workout. A couple of apparent lessons are troubling. First, reaffirming the aphorism that $#!@ rolls downhill, most of the pain was suffered by Arkansas citizens and ordinary creditors, with bondholders pulling every available lever to ensure a soft landing for themselves. Ergungor sums up this lesson nicely: "in the absence of a dedicated judicial process for preserving the governmental functions of a state in debt renegotiations, sovereignty offers meager protections for the interests of the general public." Second, in a prophetic warning about bailouts, Ergungor describes the intervention of the federal Reconstruction Finance Corporation to provide liquidity for a refinancing of the workout bonds years later. As one would expect, a Chicago Tribune article took the feds to task for helping Arkansas in this way, insisting that the RFC chief "ought to be willing to to do as much for Illinois, Indiana, Michigan, Iowa, and all the rest of the states." I know Illinois would surely appreciate some federal support for its current behemoth pension burden. If the Executive intervenes in the Puerto Rico situation today, will we see another Tribune article like the one that criticized selective federal intervention for Arkansas? Does it matter that, technically, it is Puerto Rico's sub-units that are in distress, not the Territory itself? I struggle to understand even what all the issues are in the Puerto Rico debate, but Ergungor's paper helps me to put at least the financial problems in some useful context.

Puerto Rico: Further Supreme Court Thoughts

posted by Stephen Lubben

So Noah Feldman has a column up on Bloomberg that suggests that section 903(1) of the Code should clearly apply to the Commonwealth. It's a sensible argument, if you read that section entirely in isolation and know nothing about the overall structure of the Bankruptcy Code.

And while I say that intending a bit of the obvious snark – what else could be expected, he’s suggesting that my analysis is essentially daft – it is important to remember that the Supreme Court is not made up of bankruptcy experts. Thus, his column provides a fairly clear analysis of how Puerto Rico might still lose, despite the apparent leanings of the Justices in yesterday’s oral argument.

So if there is a non-frivolous argument for preemption of the Recovery Act, why do I think the Court might still overturn the First Circuit? It could happen one of two ways.

Continue reading "Puerto Rico: Further Supreme Court Thoughts" »

Puerto Rico: Supreme Court Argument

posted by Stephen Lubben

The transcript can be found here.  Based on my initial read, it seems like the First Circuit might be reversed, which opens up all the issues Jacoby noted earlier (namely, will the statute pass Contracts Clause review – assuming the Clause even applies to the Commonwealth).

Puerto Rico: Help Still Wanted

posted by Melissa Jacoby

BranchFor the past two weeks, Credit Slips posts have considered the role of the Executive Branch in facilitating a Puerto Rico debt restructuring in the absence of Congressional action. That constraint is hereby relaxed, and thus future posts may well include the role of Congress and the judiciary in various combinations. For example, whatever one's view of the GM and Chrysler bankruptcies, they show that the administration can shape a restructuring by working within the framework of formal bankruptcy law. Imagine, for example, that Congress adopts the most modest of the proposals, H.R. 870, which merely fixes the unfortunate exclusion of Puerto Rico municipalities from ordinary chapter 9. The administration could put together post-filing financing packages with the stream of loan proceeds conditioned on the inclusion of various covenants, including those imposing fiscal reforms.  

Meanwhile, March 22 is drawing near. On that date, the United States Supreme Court will review a legal challenge to the Puerto Rico Public Corporation Debt Enforcement and Recovery Act. Below the jump are reminders and new points about the role of this court fight in Puerto Rico's debt crisis and why Congress and the Executive Branch are not off the hook. 

Continue reading "Puerto Rico: Help Still Wanted" »

Puerto Rico: Colonial Chickens, Structural Priority, and Contingent Debt

posted by Anna Gelpern

It has been a humbling torrent of creativity, and I am honored to chip in a tuppence at the eleventh hour. After an existential preface, I consider how one might use (or resist using) federal credit enhancement in the inevitable debt exchange.

Continue reading "Puerto Rico: Colonial Chickens, Structural Priority, and Contingent Debt" »

Puerto Rico: LoPucki's Virtual Bankruptcy Proposal

posted by Melissa Jacoby

Hard to believe it has been over a year since a creditor representative opposing H.R. 870 characterized chapter 9 municipal bankruptcy as "the Wild West" in Congressional testimony. Whatever uncertainties bankruptcy law contains (and, sure, they are not trivial), our symposium reveals that the true legal wilderness in government debt restructuring lies beyond the boundaries of title 11. 

Enriching the collective brainstorm is a proposal by the always-innovative UCLA law professor Lynn M. LoPucki published in the Huffington Post. Here's the link, and here's a quote:  

LoPuckiVirtual9

 

 

 

 

 

The full story offers plenty of caveats and risks for creditors - including that this approach could be considerably less protective of creditors' interests than bankruptcy - so do read the whole thing. Although the piece does not expressly mention the Executive Branch, prior Credit Slips posts (such as here) have illustrated the potential combination of the Administration's use of soft powers to promote restructuring efforts formally initiated by Puerto Rico - again, potentially without the creditor protections normally associated with bankruptcy and without other pieces of financial reform that many have advocated. 

 

 

[UPDATED] Puerto Rico: More Views, Including on the Role of the Obama Administration

posted by Melissa Jacoby

Watch here at 1pm ET to see former Treasury official Brad Setser, now senior fellow at the Council on Foreign Relations, talk about Puerto Rico (along with Cate Long, Dick Ravitch, and Aaron Kuriloff). [March 9 UPDATE: transcript available here]

Read here for proposals of Puerto Rico governor candidate Ricardo Rosselló Nevares, including Treasury assisting with interim financing, with an analogy to GM and Chrysler during the 2008 financial crisis (see point 6 in the document).

[March 9 UPDATE: lest anyone need reminding of what can happen when a majority of creditors cannot bind holdouts, check out Anna Gelpern's recent assessment of the Argentina settlement]  

 

Puerto Rico: The Multiple Issuer Problem

posted by Adam Levitin

One problem complicating any resolution of Puerto Rico's financial distress is that there are a multiplicity of issuers. There are separate claims on separate issuers, and it won't work to resolve just some of them, as they are all ultimately drawing on the same set of economic resources.  While there are claims on different assets, they value of those assets derive from Puerto Rico's overall economic production.  This multiple debtor problem makes Puerto Rico materially different from, say Detroit, where there was one primary debtor (the City of Detroit). (I don't know the legal status of Detroit Public Schools--is it separate from the City, the way the Chicago Public Schools are?) As far as I'm aware, Chapter 9 filings have almost always been single entity filings, rather than filings of multiple associated cases, as occurs with Chapter 11. 

So what can be done to deal with the multiple issuer problem? Even if Puerto Rico were allowed to file for bankruptcy (or its various sub-territorial entities were allowed to file), it doesn't solve the problem. While there can be multiple bankruptcy filings and the different cases can be administratively consolidated, that is a very different thing that actual consolidation of debtors, and the inability to resolve claims on one debtor can hold the other cases hostage.  It doesn't do any good to resolve the general obligation debt if creditors can force the electric utility to raise prices through the roof.  With this sort of multiple entity case, the hostage value held by creditors increases significantly.

Puerto Rico's division of governmental authority into various government units is a form of asset partitioning.  This asset partitioning might have helped Puerto Rico get more credit than it should have on cheaper terms ex ante (for a model, see here), but ex post this sort of asset partitioning can blow up in a debtor's face if there is no way to reconsolidate in order to restructure. (Consider, for example, the value of the LA Dodgers without their stadium and without the parking lots by the stadium.) Partitioning via devolution of authority to multiple local government units and authorities is a more permanently binding form of asset partitioning than corporate subsidiaries or even than some securitization arrangements.

Below I present three ideas for how to resolve the multiple issuer problem: consolidation via exchange offer; consolidation via merger; and consolidation via the creation of a common co-issuer entity that is bankruptcy eligible.  

Continue reading "Puerto Rico: The Multiple Issuer Problem" »

Puerto Rico Symposium: Of Wills and Ways

posted by Melissa Jacoby

JigsawDebt relief without Congress? No one promised it would be pretty.  

Our brainstorm (remember the ground rules) has included Levitin's MacGyver-inspired local currency, eminent domain, and liberally-interpreted exchange stabilization, Weidemaier's use of COFINA doubts to wedge open the door for a Executive Branch/Puerto Rico partnership, and, thanks to economist Arturo Estrella, a long menu of options with examples, summarized succinctly as "where there is a will, there is a way" (p. 1) (english report at bottom of this page). Could the federal government underwrite new bonds in an exchange offer, asks Pottow? Be the mediator with a big stick, asks Lubben?  Might a holdout creditor be liable to shareholders if it rebuffed a reasonable deal, asks Jiménez? (scroll to the comments). Marc Joffe notes the potential analogy of the City of Hercules tender offer (as well as the fact that Levitin's local currency suggestion has a history from the Depression). 

Lawless reminds us of the risks associated with discriminatory treatment of Puerto Rico's debt and access to legal tools. Of course, there is a long history here. Maria de los Angeles Trigo points to UT professor Bartholomew Sparrow's study of the Insular cases. And while most expect debt relief will be conditioned on some sort of fiscal oversight, it needs to be designed in a way to avoid the foibles of the past.

Returning to Lubben's mediation theme, let's push the brainstorming a step farther: could Treasury appoint a federal judge, such as Chief District Judge Gerald Rosen (E.D. Mich.), to oversee the mediation, and demand that all creditors participate in good faith until released? Even in the absence of legal authority for this move, would creditors formally object or fail to show up? 

Thanks to participants and readers for active involvement so far, and please keep your thoughts and reactions coming this way.  

Puzzle photo courtesy of Shutterstock.com

Puerto Rico: Facilitate an Exchange Offer, Now

posted by Stephen Lubben

Jacoby asks what can the Executive Branch do to help out Puerto Rico.  The most practical thing it could do, right now, is to facilitate an exchange offer.  Whether the Treasury itself can act as a mediator, or at least facilitate mediation by some outsider, this seems like the quickest way to a real solution to the near-term problems the Commonwealth faces.  Treasury might also act as an overseer of reforms and a (comparatively) neutral voice with regard to Puerto Rico’s financial information.

Yes, it would be great to resolve the Commonwealth’s awkward legal status – and maybe, just maybe the Supreme Court will do that this term.  Or at least start the process.  But long before that can happen, Puerto Rico is facing potential defaults.  Those need to be addressed right now.  If the Executive Branch can facilitate the negotiation of a comprehensive exchange offer, the Commonwealth will gain time to solve those bigger, long term issues.

Puerto Rico: Eminent Domain, Greenbacks, and the Exchange Stabilization Fund--Some Outside-the-Box Musings

posted by Adam Levitin
The Puerto Rico situation feels a little like a McGuyver episode.  How do we get out of a locked room with only a rubber band and a toothpick?  Here are some half-baked thoughts, first on the nature of the problems and then some ideas for solutions.  

Continue reading "Puerto Rico: Eminent Domain, Greenbacks, and the Exchange Stabilization Fund--Some Outside-the-Box Musings" »

Puerto Rico And (Very) Soft Executive Power

posted by Mark Weidemaier

Melissa's post asked what the executive branch could do to facilitate restructuring of Puerto Rico's debt. I'll get to that, but I first want to talk about Puerto Rico itself. At first glance, the Commonwealth seems to be in a uniquely terrible position. It has the disadvantages of a sovereign (e.g., no bankruptcy) but lacks the advantages (e.g., legal and/or practical immunity from legal enforcement). In fact, it lacks only most of the advantages. One advantage of sovereignty it does enjoy--and that many "true" sovereign borrowers are obliged to forego when they borrow--is that much of its debt is governed by its own law. That law can be changed (subject to constraints in the U.S. constitution) or interpreted in ways that give the Commonwealth needed restructuring flexibility. 

Continue reading "Puerto Rico And (Very) Soft Executive Power" »

Credit Slips Presents: A Virtual Symposium on Puerto Rico

posted by Melissa Jacoby

TablePuerto Rico debt restructuring legislation is flying fast and furious around Congress. But the air contains more than a whiff of defeatism regarding the prospects of passage. Bills vary greatly in substance and scope, and yet apparently the response of powerful creditors is consistent: they want to retain the right to be holdouts and are making that position perfectly clear to our elected representatives.

Credit Slips contributors are no strangers to anti-restructuring advocacy, whether framed as moral hazard or otherwise. To that end, we embark on a virtual symposium inspired by the following question: What could the Executive Branch do to facilitate the restructuring of government debt in Puerto Rico absent Congressional action? 

On tap to brainstorm around this theme in the next two weeks are (in alphabetical order): Anna Gelpern, Melissa Jacoby, Bob Lawless, Adam Levitin, Stephen Lubben, Katherine Porter, John Pottow, Mark Weidemaier, and Jay Westbrook.

Continue reading "Credit Slips Presents: A Virtual Symposium on Puerto Rico" »

Argentina and the Holdouts Reach a Deal

posted by Mark Weidemaier

The title pretty much sums it up, but this fastFT article gives a few details. The short of it: $4.65 billion to the group of holdouts led by NML (a roughly 25% haircut, reportedly), with the payment still requiring legislative approval in Argentina.

Pari Passu Closing Ceremonies Quote Parade

posted by Anna Gelpern

Supplementing Mark's post, here are the many magic words, in order of their appearance in the Order ... reliving the saga like it was yesterday.

In 1994, the Republic began issuing bonds pursuant to a Fiscal Agency Agreement (“FAA”), which contains the famed pari passu clause...

Hey, it's not "equal treatment clause" anymore!

Continue reading "Pari Passu Closing Ceremonies Quote Parade" »

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