D-DebtCon 2020 Starts in Pretoria Labor Day Monday 9 AM EDT

DebtCon4 (aka the 4th Interdisciplinary Sovereign Debt Research and Management Conference) was all set to meet at the European University Institute tomorrow ... then #2020 tried to one-up snowzilla. But DebtCon does not quit--certainly not when exports crater, inflows turn into outflows, and debt levels go through the roof around the world--DebtCon doubles down, marches on, and smites the plague with a truly humbling show of global cooperation.

When DebtCon4 in Florence had to be postponed to 2021, ten host committees around the world miraculously reconstituted as the first-ever virtual Distributed DebtCon (#DDebtCon), a two-week sovereign debt-a-thon spanning nine countries,* five time zones, and every continent save for Australia and Antarctica. 

*We counted - (1) Argentina, (2) Barbados, (3) China, (4) Italy, (5) Singapore, (6) South Africa, (7) Switzerland, (8) UK, (9) US - plus global and regional host organizations, including III (also co-sponsoring the event), CEPR, and ABFER.

Keeping Cosy by the Dumpster Fire: Argentina Reads Its Contracts ... Twice ... Quel Scandale!

Argentina's capacity to trigger outrage in sovereign debt circles is to behold. After nine defaults, thousands of lawsuits, and enough intrigue and screaming matches to break Big Data, wouldn't you think that someone somewhere would learn to yawn at another Argentina debt drama. And yet ... on the eve of tomorrow's debtapalooza, the internet is hopping mad again about a restructuring proposal from Bueons Aires--not the money (that's regular old mad), but the red-hot-appalling abuse of the shiny new Collective Action Clauses (CACs) in the 2016 bond indenture. The government again managed to tick off both its private creditors, who discovered that their contracts let the debtor gerrymander bond voting pools after the vote, and the well-wishing policy wonks watching their baby--decades of international bond contract reform--swirl down the drain with this one deal's bathwater. Because much of the technical ground was ably covered by my colleagues earlier this evening (don't miss the link to Rodrigo Olivares-Caminal), I have the luxury of using the rest of this post to speculate about the implications of the brouhaha for sovereign debt policy and sovereign debt markets.

Keeping Cosy by the Dumpster Fire: A Sovereign Debt Series

Lest anyone thought they could quarantine or protest in peace, no such luck in the sovereign debt world.

Remember when everyone thought a standstill starting May 1 was a great idea, at least through the rest of 2020? For all the good will, May 1 has come and gone, with few takers and fewer givers.

On the subject of give-and-take -- with another default in the rear view mirror, Argentina's government and its creditors are edging closer to a deal this week ... unless their talks get bogged down in extreme distrust, undo more than two decades' worth of sovereign debt contract reform, and drag the rest of the world off the cliff with them ... which would surprise exactly no one who has ever followed that dysfunctional marriage. 

Speaking of no one -- no one seems to have a handle on who owes what to whom on what terms -- not with any precision, in any event -- which is an awkward place to be when pitched warnings of a mega-debt crisis migrate from research volumes to the New York Times.  And no, it is not all China's fault, it's a structural problem with this ecosystem.

Meanwhile, fears of worldwide sovereign debt distress seem to be driving comparisons to the 1980s, which in turn mean different things to different people -- a banking crisis and a Lost Decade to some, market-based (aka publicly subsidized) debt operations to others, and giant shoulder pads to the rest. 

And yet--against predictions and barring classification error--markets have been lending up a storm to vulnerable countries without bothering too much about their contracts.

All this begs two questions--what gives, and what do we do now? -- that are the subject of what should be an excellent Sovereign Debt Forum panel on Wednesday morning, led by Rosa Lastra at Queen Mary, co-sponsored with Georgetown IIEL, and including all the usual suspects. Of course I have no answers, but I will try to noodle these and related questions here in the next few days. In particular, I want to unpack what might have gone wrong with the G-20 call for a standstill, ask whether Argentina's debt restructuring threatens international financial architecture, and yell a bit about our collective obsession with Default ... among other things that will surely come up in the next 24 hours. 

Now That Everyone Is on the Standstill Bandwagon ... Where to? Part II

Delivering pandemic-fighting resources through debt relief channels poses at least three overlapping implementation challenges--no bandwidth today, Groundhog Day tomorrow, and inter-creditor equity forever--in addition to the challenge of monitoring the use of proceeds I flagged in Part I. I sketch these three below, alongside three possible solutions -- a model standstill agreement for all kinds of debt, retrofitting contingent standstill terms in all kinds of debt contracts, and a standing sovereign debt coordinating group.

Now That Everyone Is on the Standstill Bandwagon ... Where to? Part I

A sovereign debt standstill might not cure COVID-19, but it sure seems like the one thing we can all agree on.

In the run-up to last week's all-virtual IMF-World Bank-G-20 meetings, a chorus of private and public sector, NGO, think tank and academic voices (me included) had called for some version of a pandemic-themed pause on sovereign debt payments. Hardly anyone opposed the idea in public, but relief proposals ran the gamut from ambitious to cosmetic, and it took intense negotiations to get the G-20 to agree on a relatively modest NPV-neutral eight-month respite for the world's poorest countries.  Perhaps most importantly, Saudi Arabia was in the chair and China signed on, signaling that the new(ish) creditor cohort might be taking ownership of the global sovereign debt regime alongside the old bilateral and multilateral creditors. If they follow through, it is a major achievement, and a long overdue first step. The fact that a big financial industry group worked closely with the G-20 and is on board with the outcome is also a good sign. All that's left is ... elaborating the substance and implementing the thing. In this post, I try to sort out what problems a standstill might solve, and how these fit with the G-20 statement. Part II offers three ideas on implementation.

ECB + CACs: Fig Leaf Aflutter

Further to Mitu's post about the European Central Bank's bond-buying bellyache, let us linger on the rationale for the 33.33% limit on the central bank's holdings of a euro area sovereign bond series. 

In the middle of the Greek sovereign debt crisis, euro area policy makers agreed to adopt functionally identical collective action clauses (CACs) in member state sovereign bonds, with two amendment options for important financial terms: (1) series-by-series voting or (2) aggregated voting, pooling two or more series. In a series-by series vote, two-thirds of the principal amount outstanding can override opposition by a third. In an aggregated vote, amendment requires at least two-thirds of the total principal amount outstanding in the voting pool plus at least half of each series in the pool.* 

The ECB has taken the position that "in the context of a restructuring subject to CACs, it will always vote against a full or partial waiver of its claims" to comply with the European treaty framework. This means that, if the ECB held more than one-third of a bond series, it would single-handedly block a single-series restructuring. If the ECB held more than half of a series, it could force it to drop out of an aggregated restructuring as well. To avoid being the holdout, the ECB adopted the 33.33% bond purchase limit in 2015 (see Article 5 of this and this excellent piece by Sebastian Grund). Of course, no matter how little sovereign debt it holds, the ECB makes life easier for other holdouts with its pre-commitment to vote against restructuring -- the others need to buy that much less to free ride.

It is unclear whether the 33.33% series limit was motivated by the mere possibility that a government would restructure its debt by written consent* using series-by-series CACs--or a view that this approach was most likely, or even required. Perhaps 33.33% was the the lowest plausible limit, since it is hard to predict how pooling and aggregated voting would work in any given case. Who knows? The only certainty is that in 2015, the ECB voluntarily subjected itself to some oddly-reasoned bond buying caps, and that today, these could knee-cap Italy.

The limit makes even less sense in light of the 2018-2019 commitments by euro area policy makers to adopt so-called "single limb" aggregated stock-wide voting.  Under the latest market standard (due to take effect in the euro area in 2022), a government need not even poll individual series. Now add the likelihood that a country like Italy would restructure using domestic statutes, rather than CACs, as explained in Mitu's post and his article with Ugo Panizza, and 33.33% begins to look mighty random. 

To be sure, it is politically and maybe legally awkward to say that a government would ignore CACs and use domestic law in a restructuring after pushing those clauses as the be-all for years.  It would be more awkward still to say that a government would ignore contracts, statutes, and any other law that might get in its way in an emergency, because aside from peacetime liability management operations, most sovereign debt restructurings could make out a pretty decent case for emergency/necessity rule.

But even if you assume that all euro area sovereign bonds have CACs (they do not) and that they would use them in the unlikely event of a restructuring (they would not), a 33.33% ex ante purchase cap makes little sense. It does not prevent the ECB from helping holdouts, or even from being the main holdout. It does not protect the ECB from losses in the event it is outvoted or suffers a default. It looks like a skimpy formalistic fig leaf covering up for real problems in the underlying treaty framework and short-sighted pre-commitments, at the cost of potentially impeding the ECB's monetary policy efforts at a critical time. The central bank (and the world) would be better off if it were disenfranchised altogether or at least confined to a separate voting pool. Besides, disenfranchisement and confinement are so au courant.

 

*The thresholds are different for votes taken in a meeting (25%+) and by written consent (33.33%+).

Imagine Riding the Ceteris Pari-bus into the Sunset ... in Argentina

Imagine sovereign debt without Argentina -- no Paris Club, no pari passu, no CACs, no SDRM ... even sovereign immunity might look totally different. History teaches that whatever happens in Argentina's imminent bond restructuring (revisiting, reprofiling, rejiggering, revamping --the difference is overblown) is likely to have consequences beyond the long-suffering Republic. The fact that Argentina has an actual government with authority over the economy and some capacity to execute a restructuring (unlike, say, Venezuela) justifies wading into the small print of its bond disclosure--as Mark and Mitu have done. Their able interventions free me to focus on two under-covered points. Methinks that (1) the single-minded focus on voting thresholds is misguided, and that (2) it helps to think of "uniformly applicable" as the latest incarnation of pari passu, which goes to show that inter-creditor equity remains a perennial problem in sovereign debt.

DebtCon3: A Curtain Raiser and a Love Story

DebtCon3, the Third Interdisciplinary Sovereign Debt Research and Management Conference, is starting in just a few hours at Georgetown Law. This year's DebtCon takes place in parallel with IMF and World Bank Spring Meetings. When we first launched the DebtCon project in the snowstorms of 2016, the idea was to have a giant party -- a sovereign debt Coachella -- channeling nerdy energy across different academic disciplines and institutional ecosystems, gathering everyone willing to obsess over public debt to help solve a handful of concrete problems. Mitu wanted to serve frozen pizza, but kind souls chipped in for dinner, and we had fish. The Argentina (!#@%*!) panel was snowed out. Nobody got the Sovereign Debt Research and Management joke ...but the temporary tattoos worked on key demographics, and we came back. In 2017,   Ugo Panizza and his colleagues at the Graduate Institute put on a fabulous DebtCon2 in Geneva, which set an impossibly (Swissly!) high bar for organization, and here we go again. At last count, the star-studded DebtCon3 program has some 120 speakers, plus over 200 registered guests from around the world -- a humongous number for what is often considered a narrow topic. So what is it about sovereign debt? ... and what is it about DebtCon?

Central Bank Immunity - Don't Miss

This is an important intervention about a massively important topic that comes up over and over again in sovereign restructurings, and will come up in more and more interesting ways in the next few years.

Short version here.

Alter Ego and Alter Id, Venezuela Edition

Venezuela is really really careening sideways into chaotic default. We know this not just because it has been missing payments and the ISDA Determinations Committee said so, but also because the government seems to be in a hurry to hand out what assets it might have to what claimants might show up on its doorstep with a credible threat to do ... something. ... or just to make them go away and buy another five minutes of delusional gambling for resurrection.

If I Were a Holdout ...

Bond pricing has always been a puzzle to me, so I leave it to Mitu. But one thing has bugged me for more than a year. Ever since Venezuela has joined the ranks of the walking dead, market participants have differentiated among its bond contracts in a way that might seem sensible--even sophisticated--to those who think that investors do (or should) occasionally read the small print. In particular, Venezuelan bonds that require 100% of the holders to consent to an amendment of financial terms have fetched a higher price than comparable bonds with so-called collective action clauses, or CACs, which can be amended by either 85% or 75% of the holders, depending on the bond issue. The 100% bonds also have relatively more enforcement-friendly pari passu clauses, which could make it easier to replicate the fabulously successful holdout strategy in Argentina. The price premium must reflect rational investors on the eve of default paying for the power to veto a restructuring or drop out and get paid in full, right? Not quite. As you read the bond documents, the 100>85 reasoning unravels, and the 100% bond starts looking like a pretty fishy holdout vehicle.

Your Friendly Neighborhood Sanctions Running Strategy

We are about to hit an anniversary of sorts, a year since Venezuela was surely going to default on its debt ... except that it still hasn't, so the U.S. government has decided to nudge it along. Retroactive debt sanctions imposed on August 25 prohibit, among other things, extending new credit to the government of Venezuela and its state oil company PDVSA beyond 30 days and 90 days, respectively, as well as any transactions in previously issued government debt, and, separately, any direct or indirect, old or new bond-buying from the Venezuelan government. The sanctions are a big headache for U.S. bank compliance departments, but they also got some glorious creative juices running. Mark & Mitu offer a contrarian reading of the sanctions order and one of the general licenses issued by the Treasury's Office of Foreign Assets Control (OFAC) as part of its implementation. As M&M read it, Venezuela cannot restructure all its debt in a debt swap (that would require issuing new bonds), but it could amend some of its old bonds using collective action clauses (CACs), and gain breathing room until oil prices recover, things change, or pigs fly. 

Venezuela Is Like ... (Part II)

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 …

Venezuela Is Like ... (Part I)

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.

Puerto Rico: Just Another Deadline or the Big One?

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.

Ukraine's Loss: A Skid, Not a Crash

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.

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

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.

Pari Passu Closing Ceremonies Quote Parade

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!

Love and Exhaustion in Argentina

Further to Mark's post on the settlement negotiations, we now have an order from Judge Griesa that brings more love from New York to Argentina than it has seen in a decade, maybe ever.

The order, granted near-instantly on the Republic's request, tells the remaining holdouts (call them hyper-holdouts for short), to show the court by February 18 why it should not lift the pari passu injunctions. It turns the question, "Why should the court help Argentina?" into "Why not?"

Puerto Rico: A Flash of Federal Ambition

After months of fielding criticism for standing idly by while Puerto Rico sank under a $72 billion debt heap, the Obama Administration is getting creative. On October 21, the U.S. Treasury, the Department of Health and Human Services, and the National Economic Council released a joint proposal for federal bankruptcy legislation to restructure all of Puerto Rico’s debts. Debt relief would come in exchange for fairly intrusive federal oversight, combined with Medicaid reform and federal tax relief to help mend the island’s fraying social safety net.

Thoughts on the Greek Referendum and the Democracy Mismatch in Public Debt Crises

Today's Greek referendum might look like a high point for democratic accountability, but it is not. When Greek citizens vote on the demands of their government’s international creditors, the outcome will bind Greek politicians, but not the creditors that have prescribed economic policy for Greece since 2010. Instead, the European institutions and the IMF answer to a complex tangle of constituents outside Greece, including taxpayers in other countries that stand to lose money if Greece fails to pay its debts, and those who would suffer shock-waves from Greece abandoning the euro as its currency.

This democracy mismatch can lead to over-lending and over-borrowing based on flawed policies and improbable assumptions, which might have been rejected if the creditors had a more direct stake in the consequences of their prescriptions for Greece from the start. Tying a small portion of debt repayment to policy outcomes would improve accountability and help align incentives for the borrowing government and its creditors alike.

More on AIG: Between Hysteria and Complacency

I agree with Adam about all that post-Starr hyperventilation. No, it does not mean that bailouts are over, that the Fed has been slapped down, or any of that lurid stuff. (Though tabloidness does feel strangely gratifying in financial journalism.) Nevertheless, we should be careful not to dismiss the AIG decision as a realist vignette. Its implications for crisis management will become clearer over time, and may well turn out to be important.

At first blush, Starr feels like a stock crisis move by the Court of Claims, evoking the Gold Clause cases in 1935, where the U.S. Supreme Court held that the Congress violated the 14th amendment when it stripped gold clauses from U.S. Government debt, but denied Court of Claims jurisdiction because the creditors suffered no damages. Had they gotten the gold, they would have had to hand it right over to the Feds. And if you measured the creditors' suffering in purchasing power terms, getting their nominal dollars back still put them way ahead of where they had been in 1918 thanks to all the deflation.

Putting this history together with Starr, I wonder about two implications. First, it would have to be awfully hard for a firm getting federal rescue funds in a systemic crisis to prove damages. See also the car bailout stuff. By definition, the firm's best case is the gray zone between illiquidity and insolvency (I called it "illiquency" back then). If you accept that a court is unlikely to enjoin a caper like AIG in the middle of a crisis, this gives the government a fair amount of scope to act, even if it turns out to be off on authority after the fact.

Second, the Greek mess makes me think that the real concern in crisis is not with ex ante constraints on bailouts working as planned, but rather with accidental institutional malfunction. At some point (not yet), all the sand in the wheels will create enough friction that policy makers will not be able to respond to a tail event in a sensible way. No institution would have the authority to do "whatever it takes," and no decision-maker would be willing to take the risk. Maybe this is as it should be, but it does give me pause. 

Ukraine's Bond Restructuring: Surgery, Conspiracy, and Campaign

Debt restructuring is the second largest source of outside financing for Ukraine’s new IMF program. The Fund itself brings $17.5 billion over four years; $9.6 billion comes from governments and other multilaterals (including Europe, the United States, and most recently, China), leaving $15.3 billion for the "debt operation." The jargon makes debt restructuring sound like a mix of surgery, conspiracy, and military campaign, which together pretty much sum up Ukraine's challenge.

Russia's Bond: It's Official! (... and Private ... and Anything Else It Wants to Be ...)

Ukraine's bond restructuring talks are in high gear, and, as ever, Russia is trouble du jour. Not only is it threatening to hold out in the bond deal and take Ukraine to arbitration, Russia also seems poised to block IMF disbursements to Ukraine using an arcane Fund policy on "lending into arrears." My hunch is that this last risk is overblown, and in any event should not drive IMF policy or Ukraine's restructuring strategy. 

Fifty Lashes and Hobson's Choice, Argentina Edition

Big day in sovereign debt. After months of kicking the can down the road and a couple of anticlimactic decisions from English courts that made no practical difference in the pari passu injunction, a giant big shoe has just dropped in the Southern District of New York. Judge Griesa ruled that Argentina's dollar-denominated local law bonds were covered by his injunction just the same as New York and English law bonds. In the process, he defined (or redefined?) the injunction super-broadly, effectively blocked Argentina from issuing new foreign currency debt under its own law, potentially expanded the reach of the pari passu clause for other sovereigns, told Argentina that it was all out of comity, and told Citi to choose between New York and Cristina Fernandez de Kirchner.

Ukraine: One Debt Tea Leaf in the IMF Program

The IMF has approved a new 4-year $17.5 billion program for Ukraine, with an immediate disbursement of $5 billion. This is a big economic, institutional, and geopolitical deal. I will comment on one small piece of one small piece: the treatment of Russia's $3 billion loan to the last Ukrainian government, about which I have written at various levels of weediness here, here, and here.

The IMF program is approved under the Fund's existing "exceptional access" (huge $$) policy, which has been interpreted to require debt restructuring unless the country's debt is "sustainable with high probability" (for some of the back-and-forth on the reform proposals, see here, or watch here and here). The Ukraine program therefore expressly hinges on a government and government-guaranteed debt "operation" to achieve sustainability, plus rolling over most of the debts owed by Ukrainian banks and corporations (lots of it to Russia). Brilliant minds are crunching the numbers now to figure out whether Ukraine's bondholders might get by without principal reduction, and without suspending interest payments, based on any realistic set of assumptions.

I am struck by one bit of arithmetic: Ukraine has about $7.7 billion in external sovereign debt payments due in 2015, of which $5.8 billion is principal, of which $3 billion is to Russia  (see p. 138). The IMF document contemplates $5.2 billion in financing from the "debt operation" in 2015 (see p. 12). Since 7.7-5.2=2.5, and since 2.5<3, Russia does not seem to be getting its $3 billion repayment in December. The fact that the IMF board, which includes Russia, approved this scenario, seems important. But (a) the details are super-foggy and (b) I may be missing something, like a big guarantee payment.

The IMF press release says that the debt operation must have "high participation" and be successfully concluded by the first program review, scheduled for June 15. If participation is not high, it would have to be ocean-deep. Since Russia and Franklin Templeton together likely hold more than half of the debt, a deal without both seems inconceivable. On the other hand, the top two creditors also presumably have blocking positions in lots (if not all) bonds for purposes of a restructuring vote--though other creditors could also coordinate to block votes. This will be one fascinating "voluntary" "operation."

To its credit, the IMF document highlights a slew of risks to the program and the debt restructuring operation, all of which seem scary-plausible, especially considering the optimistic gloss that must go with program approval. Buckle up. 

Sheep, Goats, and Government Debts - Happy Lunar New Year, 1937 Edition

Like many others, I have been struggling to figure out whether the new lunar year is a Sheep or a Goat. I found the answer last week in the archives of the League of Nations Committee for the Study of International Loan Contracts, which spent four years from 1935 to 1939 investigating why sovereign debt was so screwed up, and what to do about it. During these four years, committee notables and their experts managed to foresee just about every 21st century sovereign debt controversy, from pari passu and feckless trustees to the epic and tiresome battle between contractual and statutory sovereign bankruptcy. The 1937 meeting minutes below also show a solid grasp of Odious Debt and sovereign lemons. Some governments might walk away from their debts just because, others have good economic or moral reasons not to pay, but the creditors cannot tell the two apart. The committee saw this as a problem of "telling the sheep from the goats," and ultimately concluded that there was not much to be done about it -- but not before considering contract reforms to let creditors monitor whether loan proceeds were used for the benefit of the country.

Bottom line: you cannot tell a sovereign sheep from a sovereign goat. And 1937 was the year of the [Ram] OX (aaargh!!! How many horned animals are there ...).

ICMA CACs, New York Edition - Vietnam! - and More Un-Boilerplate

Mexico's public offering with New York-style ICMA CACs is a huge deal. But it turns out that Vietnam's exempt offering on November 6, also under New York law, was there first. Since it is not a public offering, the disclosure document is not public, and the one press article describing it is behind a paywall. Here are a few bits that struck me as interesting about the three adoptions so far.

The Clause Formerly Known as Pari Passu:

Like Kazakhstan and Mexico, Vietnam fixes the pari passu clause to exclude the ratable payment interpretation. Funnily enough, the three seem to do it in slightly different ways:

Kazakhstan:

The Notes will at all times rank pari passu without preference among themselves and at least pari passu in right of payment, with all other unsecured External Indebtedness of the Issuer from time to time outstanding, provided, however, that the Issuer shall have no obligation to effect equal or rateable payment(s) at any time with respect to the Notes or any other External Indebtedness and, in particular, shall have no obligation to pay other External Indebtedness at the same time or as a condition of paying sums due on the Notes and vice versa.

Vietnam:

The Notes shall at all times rank without any preference among themselves and equally with all other present and future unsecured and unsubordinated External Indebtedness (subject to Condition 11 below [Negative Pledge]) provided, however, consistent with similar provisions in the Government’s other External Indebtedness, that this provision shall not be construed so as to oblige the Government to effect equal or rateable payment(s) at any time with respect to any such other External Indebtedness and, in particular, it shall not be construed so as to oblige the Government to pay other External Indebtedness at the same time or as a condition of paying sums due on the Notes and vice versa.

Mexico:

The debt securities rank and will rank without any preference among themselves and equally with all other unsubordinated public external indebtedness of Mexico. It is understood that this provision shall not be construed so as to require Mexico to make payments under the debt securities ratably with payments being made under any other public external indebtedness.

Majority Voting:

In substance, all three are the same as the ICMA model. They allow series-by-series, two-tier aggregated, and stock-wide aggregated votes at the option of the issuer--though they are drafted differently. Kazakhstan and Vietnam mostly use the ICMA language. Mexico is in line with its existing New York documentation, more pared down -- but really a matter of style. The voting thresholds are the same: 75% of outstanding for individual series and stock-wide votes, 66 2/3% of each series + 50% of stock for two-tier aggregated votes. In a stock-wide vote, the output must be uniformly applicable (same instrument or same menu for all).

Collective Representation and Majority Enforcement:

Kazakhstan and Vietnam have fiscal agency agreements; Mexico has a trust indenture. All three require a creditor vote of 25% to accelerate. Kazakhstan provides for a noteholder committee if bad things happen; Vietnam and Mexico do not. ICMA has recommended contract clauses on committees since 2004; some issuers in London have taken up the call, but virtually none in New York have. Note that you do not need a contract clause ex ante to form a committee ex post; in contrast, you cannot have majority voting, ranking, or trustees unless your contract provides for them in advance.

ICMA CACs v. 2.0: Mexico Moves in New York

Mexico has just filed a registration statement with the SEC for New York-law bonds with a version of ICMA collective action clauses (CACs), cheered here just a few months ago, among other refinements. This is a big deal for three reasons: Mexico, New York, and the clauses. Bottom line -- a classy, confident move.

In 2003, Mexico led the market shift from unanimous consent to majority modification in New York. Once Mexico issued with CACs, everyone else followed. This time around, some expressed doubts that Kazakhstan, which adopted ICMA CACs in English-law bonds hot off the press in early October, could exert a comparable gravitational pull, especially in New York. As if to prove the point, a few Latin American issuers have issued in New York since Kazakhstan with revised pari passu clauses, but no new CACs. Mexico fixed both pari passu and CACs, and has a track record of bringing the market along.

New York is a big deal because all these contract reforms respond, at least in part, to U.S. court rulings, which (a) interpreted Argentina's pari passu clause as requiring ratable payment to holdout creditors, (b) said that CACs could cure the common cold, and (c) told market participants that they could avoid Argentina's fate by fixing their contracts. From this perspective, fixing English-law contracts is prudent; fixing New York-law contracts is imperative.

Mexico's refurbished contracts are notable in three ways.

1. The new bonds would be issued under an indenture, with its attendant collective enforcement provisions. Holdouts would have to get 25% of their series to instruct and indemnify the trustee before bringing a lawsuit for accelerated principal. Not very mavericky.
2. The pari passu clause has been stripped of all Latin, and disavows the ratable payment construction.
3. ICMA majority modification terms march on in substance, but in sparser (New Yorkier?) language. Modification of key terms can now happen 

(a) with a 75% vote of each series (as in the traditional English or post-2003 New York CACs),

(b) with a 2/3 vote of the aggregated bond stock or subset, *plus* a 50% vote of each modified series (as in Uruguay et al post 2003 and in the Euro area post 2013), or

(c) with a single 75% vote of the aggregated bond stock or subset. Here the outcome must be "uniformly applicable" -- ie, everyone gets the same instrument or the same menu.

 So -- if you are into sovereign debt contracts, this is your iPhone 6. Behold the un-boilerplate.

IMF and Kazakhstan, Fixing Sovereign Debt in Unison

The IMF released its long-awaited paper on sovereign debt contract reform, advocating single-tier aggregated collective action (majority amendment) clauses and a clarification of the pari passu clause to preclude its future use to block payments on restrutured bonds, a la NML v. Argentina. An accessible summary of key points per IMF GC Sean Hagan is here. The recommendations were coordinated with ICMA (whose reform proposal is discussed here and here), as well as wealthy and emerging market governments.

Somewhat miraculously, Kazakhstan just issued a bond where it adopted the bulk of ICMA recommendations, which also puts it in line with the IMF's hot-off-the-press policy. The miracle is both in the issuer and in the timing. Kazakhstan's bond had been stop-and-go for some time (not the place one might expect experimentation). Moreover, the last time the IMF and its major shareholders advocated contract reform, it took YEARS for the first mover to emerge (Mexico). To be sure, first mover is no market shift, but a huge deal nonetheless.

I will have more on the whole subject of debt restructuring reform later, but for now, I just wonder why it was so hard the last time, and so not-nearly-as-hard this time. Is it that the market finally learned that CACs are an innocuous voting device, not the Trojan Horse of default? Is it that the Argentina mess has finally focused the minds? Is it that Kazakhstan balanced the new CACs with concessions to the creditors? Is it that none of it matters? Or that the relevant characters--government debtors, government creditors, market participants, lawyers, international organizations, and trade groups--have finally figured out how to work together?

Still thinking about the possibilities, but in all, indubitably a good thing.

Contract Exuberance

Ding Dong! The Witch is Dead! We have a contract fix against holdouts in sovereign debt restructuring. Here are my two cents on the proposed reforms, as of last Friday. Bottom line is way positive. In my admittedly biased opinion, this is unusually meaningful change. That said, after three days of celebrating in the press and debt relief circles, it is time for a bit of perspective.

Argentina and the Swap Puzzle

President Cristina Fernandez de Kirchner has proposed a law authorizing the executive to reroute payments on the restructured bonds out of New York, and to offer all bondholders local-law bonds on 2010 exchange terms. All the buzz has been about the swap. But there is no swap on the table, no capacity to execute a swap, and no more details about the swap than there have been in the press for months. We have even had a hearing about this swap (no, Judge Griesa did not like the idea--though he will have more to say soon, I am sure).

Even if Argentina put a real proposal on the table and figured out a way to execute a swap without the help of any of the mainstream intermediaries worried about New York court orders, any new FX bonds issued in that swap would likely be covered by the same injunction that threatens Argentine-law FX bonds paid through Citi, pending appeal. (Would a swap announcement help or hurt the appeal? Hmmm....) In other words, miles to go from here to there, and nothing to act on for the bondholders just now.

On the other hand, Argentina has the capacity on its own to deposit the next bond payment at Banco Nacion. Sure, this would violate the various court orders and the indenture, but if you are a bondholder and want to get paid, you might just have a real choice come September. I still think few people will show up, for many of the same reasons that would gum up a swap--but there is a high probability of an action-forcing event here.

More to the point, any attempt at firing Bank of New York Mellon and unilateral action in contempt of court would present a real problem for BNYM, the various clearing houses, paying agents and advisers involved. I suspect more lawsuits and resignations will come before any swap is launched.

... which makes me think, again, that this was more about the 40-page retelling of the history and the politics of it all. Escalation is the message.

Escalating to Nowhere?

Here is the proposed law rerouting payments under the restructured, now-defaulted Argentine bonds away from New York. Contrary to reports, the big news is not the swap, but the unilateral attempt at firing Bank of New York Mellon and substituting Banco Nacion in Buenos Aires (or an alternative, if voted by the bondholders). Bondholders could then show up in Buenos Aires or wherever Nacion sends their money to get paid. The proposal would also reopen the 2010 swap to the restructured bondholders and the remaining holdouts.(HT Vladimir Werning, Katia Porzecanski) *Correction/Clarification*: Everyone would be invited to go into the swap on 2010 terms under Argentine law and jurisdiction. Since 2010 terms are old news and local law FX bonds are subject to the injunction pending appeals, I am not sure how this helps ... not to mention the transaction costs.

Although the ultimate beneficial holders are not bound by the court orders, it is hard to see how most would get their hands on the FX without the help of entities that would either be clearly bound by or worried about New York court orders (banks, payment and clearing systems with a presence in New York). Some might show up in BA, but I am not holding my breath for a large turnout.

The move is obviously a violation of the court orders (so I guess that would be double contempt?), and not exactly in line with the indenture, which requires any replacement trustee to be a New York financial institution. But this is unremarkable--Argentina's actions so far have not exactly been about clever ways to comply (see full-page ads and ICJ lawsuit).

To me, the tone of the legislative proposal is much more remarkable than the content. It takes 40 pages to tell Argentina's version of the events, including the ways in which the U.S. court system and others have failed it. As an aggrieved sovereign, it has no choice but ...

If ever there was a U.S. strategy, it is no more. Not now, not in January. I am not holding my breath for a RUFO sunrise. For now, I am watching Bank of New York Mellon (still sitting on $539 million in limbo from the June payment) and other agents and advisers in New York. One big mess just got messier.

Twisted Logic Contagion, WaPo Edition

From today's Washington Post editorial:

And the battle between Argentina and the hedgies has certainly clarified U.S. law, to wit: If you borrow money, sooner or later, you have to pay it back.

Injunction Math: Acceleration and the Incredible Shrinking Payment Percentage

If some or all of Argentina's Exchange Bond holders accelerate their bonds after last night's default, the amount Argentina owes NML et al. under the terms of Judge Griesa's injunction could plummet.

It Depends, Argentina Edition

The phrase "it depends" was invented 130 year ago by a small group of drunk lawyers from London and New York for the sole purpose of annoying first-year law students, nonlawyers, and people from civil law jurisdictions. Like all things annoying, "it depends" is enjoying a surge in popularity as tensions spike in the Argentine debt saga."It depends" is a magically useful phrase because it can cover up ignorance, describe uncertainty, or assign probabilities in a risky situation. If you are camping out in front of the Special Master's office in New York and hear "it depends" in response to a basic question, you might reasonably wonder which one it is. Here is a mini-guide: 

Pari Passu Poignancy

It is too easy to miss poignant moments in the news avalanche of Argentina debt litigation. Here is one from Judge Griesa's monologue at the July 22 hearing:

I can't remember whether it was 2010 or 2011, but thereabouts, the attorneys for the plaintiffs requested the Court to recognize a provision which had been in the contractual documents all along but had not been relied on, and that is the pari passu provisions, essentially meaning if the republic paid certain kinds of debts, there had to be a recognition -- and I'm not trying to get into the arithmetic -- there had to be a recognition of the rights of people with judgments under the pari passu clauses, whatever they were.

Whatever they were indeed.

Argentina: The RUFO Crazy

Kudos to Joseph Cotterill at FTAlphaville for an excellent post on the obsession with the Rights-Upon-Future-Offers (RUFO) clause in Argentina's restructured bonds, which seems to be driving Argentina to a payment default on those very bonds. Judge Griesa is not buying it, though --  at a hearing on July 22, he again denied the Republic's request for a stay of his orders blocking restructured bond payments, unless Argentina pays the holdouts pro rata. He also deferred the hugely consequential decisions on paying creditors under English and Argentine-law bonds; that mess is for another post.

Missed Payment Date Musings - Offshore Openings, Free Riding the Free Riders, and Argentina's "Uniqueness"

Extra! Extra!  Today is just another day in Argentina's bond saga. It may well come and go with no payments either to the NML plaintiffs or to the restructured bondholders. However, a Sunday filing by Argentina's Euro-denominated exchange bond holders might lead to substantive developments eclipsing the purely symbolic significance of a missed payment date and the start of a 30-day contractual grace period.  The Euro bond holders' move is a good place to start thinking about the next steps and beyond.

After Argentina

It's done!  As Mark has chronicled, the U.S. Supreme Court has drawn the curtain on the pari passu drama, and separately has rejected Argentina's appeal to limit the scope of discovery by creditors with judgments against it. I am still undecided about how much I will miss it all. Meanwhile, here are two lists -- so-what and what-next.

Ukraine's Russian Bonds - A Gazprom Clause?

About a month ago, smart folks zeroed in on a single clause in Russia's two-year $3 billion loan to Ukraine. The December 2013 loan was documented as an ordinary-looking eurobond, apart from a promise by Ukraine to keep its debt under 60% of its GDP. No other Ukrainian bond had the debt/GDP clause, which naturally looked awkward when the sole bondholder started hacking at the denominator of the debt/GDP fraction (Crimea, about 3% of GDP; east and south, about 45%).

Since then, I have communed a bit with Ukrainian bond prospectuses, and stumbled on another clause only found in the Russian bond. All of Ukraine's state and state-guaranteed foreign bonds cross-default to one another: if Ukraine skips a bond payment due in 2014, holders of the bond due in 2021 can accelerate. However, the Russian bond also cross-defaults to "any indebtedness ... owed to the Noteholder or to any entity controlled or majority-owned by the Noteholder". Compare the cross-default provision in this Ukrainian bond to this one  (search "Events of Default", "Indebtedness of Ukraine" and "Relevant Indebtedness").

One wonders whether they were thinking of Gazprom, majority-owned by the Russian government, and perennially claiming billions in arrears from Ukraine's Naftogaz. If Ukraine is late with its gas bills, Russia can accelerate its $3 billion. Since, according to Russia, Ukraine was already in gas arrears at the time the $3 billion bond was issued, that bond might have been callable at will all along.

Pari Passu VIPs and Mexico's CAC Gravitas

Today is the day for filing amicus briefs with the U.S. Supreme Court in NML v. Argentina (pari passu case). Brazil, France, Mexico, the Jubilee Network and Nobel Laureate Joseph Stiglitz are all asking the court to take the case. Others will doubtless come in on all sides; then the court might ask for the United States to say something ... it's a long story; stay tuned.

For now, I only highlight Mexico's priceless intervention against the courts' misuse of Collective Action Clauses (CACs)  in the pari passu argument. Recall that according to the Second Circuit, NML v. Argentina has no policy significance because CACs can be used since 2003 to bind holdouts in a sovereign debt restructuring. No holdouts, no lawsuits, no pari passu. This happens to be completely wrong because CACs specifically provide for dissent and mechanisms to hold out, and because not all debt instruments have CACs.

It is one thing for me to rant about it--but Mexico has unique credibility on CACs. In February 2003, Mexico spearheaded the very market shift in New York on which the court relies to make its totally wrong statement. And this amicus is not shy about its special status:

Mexico is thus well positioned to disagree with a stated foundation for the Court’s reasoning: that contract provisions in sovereign debt instruments known as “collective action clauses,” or “CACs,” will limit the decision’s ramifications to Argentina alone. CACs permit a specified majority of bondholders to adjust the terms of sovereign bonds. While Mexico adopted CACs for its own external debt instruments in 2003, and was the first nation to do so in the modern era, Mexico also understands that CACs have clear limitations and will not eliminate the threat to orderly debt restructuring engendered by the decision below. In addition, Mexico—like other nations—has legacy debt obligations with no CAC protection at all.

Preach.

Now, whether any of this adds up to review and reversal is another story ...

My Crimean Summers and Ukraine's Odious Debts

Every elementary school summer I was shipped out of Leningrad on a two-day train journey to the Black Sea, where a succession of family members would make me eat tomatoes and roast in the sun for three months to store vitamins for the winter. A human conserve. My Soviet engineer parents would rent a room in someone's rickety dacha on the outskirts of Sevastopol--one rouble per bed, except for the high-end place with lace-trimmed pillowcases that went for one-fifty. The fellow to the right  was our landlord, already chocolate-brown in early June, sleeping it off next to his sandy-brown boxer, when we were still fresh-from-the-north gray-green (photo courtesy dad). Sevastopol was a "closed" military city then, but to me, it was one happy, sleepy, dusty morning walk to the beach, trying to spy a poppy flower, sand, salt, sand, and sleepier afternoons under the sour cherry tree, trying to spy the landlady's grandson. Bleached, salty brown with a spot of red.

Another Run at SCOTUS for Argentina, ISO Friends

Earlier today Argentina filed its petition for Superme Court review of the Second Circuit decision in the pari passu case. You may recall that its last request was rebuffed without explanation, perhaps because it was premature -- the Second Circuit had not quite finished ruling against Argentina. Now the appeals judges are all done, and Argentina has filed the the real thing. The new petition is notable for raising a broader range of issues than the first.

This need not reflect a view that the new "question presented" on contract interpretation is a big winner. The Foreign Sovereign Immunities Act may still be Argentina's best chance for review. However, having Argentina raise the contract point hould make it easier for more would-be friends of the court to chime in on the different things they care about. France might have company this time. Mark your calendars for the last week of March. Another year, another party.

Meanwhile, Mitu Gulati and friends keep digging up more cool pari passu history. Next thing you know, those Paleolithic cave pictures will turn out to have been all about pari passu bison hunting.

OMG! SOS! SDRM! ... LOL ... (wherein we uncover the Sovereign Debt Restructuring Conspiracy)

You may have read about those radical plans by the International Monetary Fund (IMF) to force governments to default on their debts as a condition of IMF support. Debates over the place of sovereign debt restructuring in a financial crisis are getting more muddled and acrimonious, in no small part because no one wants to face the underlying governance challenge: political pressure to lend public money to contain the crisis, even if it means paying private creditors in full and adding to a sky-high pile of sovereign debt. As this year of public debt drama draws to a close, it is useful to separate fact from fiction before considering the way forward.

I'll See Your Pari Passu and Raise You Absolute Priority!

As a special treat for the Argentina-Is-Unique contingent, Mitu Gulati shows the way to get rich quick off recent developments in sovereign debt litigation. Bring him your tattered, your fading, your just-bought-on-eBay bonds that matured a century ago, and he will guide you to a happy retirement via the latest doctrinal shifts in sovereign immunity, statute of limitations, and intercreditor equity.

His example is especially attractive because it involves more than a promise of equal treatment, but a promise of absolute priority by the Chinese Imperial Government. If you had bought this baby, you'd be first in line. No Latin mumbo jumbo to hide behind, just a straight up problem of sovereign payment prioritization, familiar by now to all ye debt ceiling geeks (see Chapter 6).

Ah, sovereign debt -- irresistable, unenforceable, immortal.

Argentina Gets No SCOTUS Review - Yet (Yawn)

To the surprise of nobody, the Supreme Court rejected Argentina's June 2013 request to review the Second Circuit's October 2012 decision that it violated the pari passu clause in its defaulted bonds. The court gave no reason, which is normal.

The August 2013 Second Circuit decision has not yet been appealed. The 90 day clock for Argentina to file starts running after the Second Circuit rejects its en banc review petition (who knows when, but soon).

This Supreme Court rejection of the June appeal was widely expected, especially since the Second Circuit itself snarkily observed in footnote 6  of its August decision that Argentina should have waited. All it means is that the saga continues.

Argentina is not precluded from raising the issues it raised in June when it appeals the whole case again sometime later this year -- or next -- depending on how long it takes for the remaining process in the Second Circuit to run. More interestingly, as my colleague Amanda Frost has observed, SCOTUS is free to raise issues on its own if and when it were to take the case.

So please do go back to your morning coffee--the end is not in sight.

More interesting to me are the non-participation of Justice Sotomayor, and the implications from President Cristina Fernandez de Kirchner's illness. But those are for another day.

Pari Passu Wishful Thinking (Settlement Thought for the Day)

With little to add to Mark's wonderful analysis of the Second Circuit decision in NML v. Argentina and the ensuing crazy, my thoughts drift to settlement. Until recently, my entire view of this case had been premised on the two sides locked in a mortal battle, driven by factors far beyond the law and economics of the transactions at hand. I had assumed that for Argentina, it was primarily about anti-vulture politics, publicly defined as not paying NML more than the rest--while for NML, it was primarily about finding a superior enforcement path, defined as getting paid demonstrably more than the rest. By definition, neither can live while the other survives.

Contemplating recent events while cut off from civilization, something felt different.

Un-Denouement

With about 30 seconds of wi-fi, here are my two cents on top of Mark's and Stephen's. This feels weirdly like a pox-on-all-your-houses decision.

Pari Passu's Caribbean Detour

I wonder if this is how late night comedians feel about Anthony Weiner. He is, surely, the biggest gift that keeps on giving to their profession. On the other hand, it is summer, a time to relax and tell some knock-knock jokes ... but some people just cannot help themselves.

And so it is with pari passu. On the one hand, I will never have to look for content again. On the other hand, I do wish we could use the hiatus before the Second Circuit rules against Argentina to learn macrame or the Volcker Rule. But no. Another federal district judge in New York refused to dissmiss another pari passu case yesterday, and sent it full steam ahead to media frenzy.