The Super Cool Belize "Debt for Coral Reefs" Restructuring

This blog post draws on ideas developed with Ugo Panizza (Professor of International Economics, Graduate Institute) that form part of a paper we are working on. I am to blame for any errors though. 

In 2020, the stock of public debt in debt in developing and emerging market economies surpassed $19 trillion and reached 63% of the group’s GDP (up from 55% in 2019). Such levels of debt significantly increase the risk of multiple devastating debt crises hitting the global economy at the roughly the same time; a situation not seen since the Latin American debt crisis of the 1980s. This is a scary prospect at a time when nations need to scale-up investment in climate change and sustainable growth.

The recent restructuring of Belize’s sovereign debt is an example of how a country can address a debt crisis while preserving investment that can promote sustainable growth. Hard hit by covid-19, Belize is restructuring its sovereign debt for the fifth time in two decades. So, why is this debt restructuring so exciting?

The Cheekiest Artist of Modern Times?

One of the students in my 1L Contracts class pointed me to this delightful article from the New York Times -- delightful because this is going to be so fun for us to discuss in class (here)

Here is the story as I understand it. A Danish artist, Jens Haaning, was commissioned by a Danish museum (the Kunsten Museum of Modern Art) to reproduce a couple of his prior works, where he had framed piles of real euros and kroner to symbolize wages and work in Austria and Denmark.  To do the reproduction work, the artist was paid 10,000 kroner and then also given a bunch of cash (532, 549 kroner) to put in the installation pieces.

The cheeky artist sent in a couple of blank canvases titled "Take the Money and Run", which seem to describe exactly what he did.  (The Times article literally has multiple photos of guests to the museum admiring the blank canvases -- or at least looking at them with interest).

The artist says that he gave them art -- symbolizing taking the money and running, (a modern critique of capitalism?). The museum director, Mr. Lasse Anderson (representing the capitalist museum?), appears neither amused nor pleased. He says: breach of contract.  

It is simply not possible to make this stuff up.  Maybe Tess and Dave will do an episode about this case for their brilliant Promises, Promises podcast?

I very much want the artist to win the contract suit. But if the museum director is right that the contract was for a reproduction of the prior piles of cash pieces (which seems likely from what the Times piece tells us), Jens will probably have to give the moolah back.  But not until after having gotten international notoriety as the cheekiest artist of modern times. And maybe that's all he was going for after all. Win win. 

I can only begin to imagine the kind of fun opinion someone like Richard Posner might have written on a case like this.

Many thanks to Maggie Rosenberg, 1L at U Virginia.

Scott & Kraus on the Private Law Podcast -- Magnifique!

Last year, when I was in zoom teaching hell and desperately looking for videos or podcasts with my contracts heroes to try and give my students a window into the magic of contract law and theory, I was unable to find anything at all that I could use for class from Bob Scott and Jody Kraus.  Lots of erudite law journal articles, yes. But I hate lengthy law review articles. I wanted to hear them talk and answer questions. 

My prayers have been answered, thanks to Felipe Jimenez's wonderful Private Law Podcast (here). The episode posted today is about Bob and Jody's wonderful and special collaboration that has given the world of contract law so much. And Felipe is brilliant in his gentle but insightful questioning (as an aside, if you are a fan of contracts theory, you might also like the episode with Brian Bix; I loved it).

Thank you, Felipe. Thank you, Bob and Jody. 

Coral Reef Protection in Exchange for Debt Relief: Could it Really Work?

Belize, as of this writing, is undertaking a restructuring of its sovereign bonds. Hard hit by covid and general economic woes, this is that nation’s fifth debt restructuring over the past decade and a half. This time though, Belize is trying to do something different with its restructuring.  Something that just might contain lessons for other emerging market nations struggling with covid related economic downturns.

Using funding from the environmental group, The Nature Conservancy (TNC), Belize is doing a bond buyback, offering investors around 50% of face value.  Once purchased, the bonds are to be cancelled.  Belize has collective action clauses in the so-called superbond in question, so the deal will be binding on all holders of its external debt if a supermajority of creditors (75%) agree to the deal.  The dynamics of collective action clauses have been examined in excruciating detail elsewhere and I won’t get into that here. What interests me, and has intrigued many in the financial press (e.g., see here,  here, here, here, and here) is Belize’s attempt to tie a promise to behave in a greener fashion in the future to its request for debt relief from investors.

Specifically, Belize is promising investors that it will, in conjunction with TNC set aside a significant portion of the funds that it will save from doing the restructuring for environmental protection endeavors in the future (Belize's gorgeous coral reefs feature prominently in most accounts of the deal). As explained by a Belizean official:

As an integral part of the offer to repurchase the bonds, Belize will commit to its bondholders to transfer an amount equal to 1.3% of the country’s 2020 GDP to fund a Marine Conservation Endowment Account to be administered by a TNC affiliate. After a period in which the Endowment Account will retain its investment earnings in order to reach a targeted aggregate size, the annual earnings on the Account will thereafter be used, in perpetuity, to fund marine conservation projects in Belize identified by TNC and approved by the Government of Belize.

I have at least four questions that strike me as relevant to figuring out whether this strategy can work for other nations also facing covid related debt restructuring needs.

Bypassing the Indenture Trustee?

Mark Weidemaier & Mitu Gulati

Earlier today we had a great time recording a Clauses and Controversies episode about the Province of Buenos Aires restructuring, which should post sometime next week. Our guest was Bloomberg reporter Scott Squires, who knows the Argentine context inside out and has also taken a deep dive into the mechanics and details of this restructuring. We got to talk about the PBA’s various shenanigans, and one aspect of our conversation continues to confuse us all. PBA offered to pay past due interest to creditors who consented to the restructuring; non-consenters did not receive the payment.

In the post linked above we wondered whether this payment, when added to PBA’s various threats, made the deal coercive. And we wondered why creditors, despite receiving fairly generous financial terms, were willing to accept this treatment. One answer we got from multiple sources is that it is simply too difficult and time consuming to deal with the trustee. Basically, it’s hard to get the trustee to act. First, holders of 25% in principal amount must instruct it to bring suit, then they have to negotiate the trustee’s indemnity, etc. And all this takes time. Meanwhile, the so-called “no action” clause in the indenture blocks individual bondholders from filing suit unless and until the trustee fails to act for 60 days. Perhaps any challenge the PBA’s conduct required quick, forceful legal action, but bondholders upset by the deal couldn’t muster the required 25% support or viewed the delay inherent in this process as a deal-breaker.

This would all make sense, were it not for the unusual drafting of another contract term. The clause played an important role in a lawsuit initially filed by Goldentree, one of PBA’s biggest creditors. Goldentree later changed course and were viewed as one of the drivers of the eventual deal. But the lawsuit was premised on the ability of individual bondholders to circumvent the trustee, found in this language (emphasis ours):

[E]ach Holder of Debt Securities shall have the right, which is absolute and unconditional, to receive payment of the principal of and interest on (including Additional Amounts) its Debt Security on the stated maturity date for such payment expressed in such Debt Security (as such Debt Security may be amended or modified pursuant to Article Eleven) and to institute suit for the enforcement of any such payment, and such right shall not be impaired without the consent of such Holder.

Our issuer-side friends have scoffed at this reading, telling us that the “no action” clause plainly requires all bondholder litigation to go through the trustee, at least until the bond has matured. That may be the common understanding. But that reading isn’t easy to square with the language above, which can plausibly be read to give individual investors the right to sue for missed coupon payments. Investors have a right to get “principal and interest on . . . the stated maturity date for such payment.” This is an unusual formulation. It is natural to say that principal comes due on the maturity date. But interest? Does interest “mature?” Our issuer-side friends would say, we assume, that the use of “stated maturity date” reinforces their understanding of the effect of the no action clause. But that reading seems to ignore the language “for such payment” (underlined above). This seems quite clearly to refer to individual payments, and the clause refers to both principal and interest. And it seems perfectly reasonable to interpret all of this to mean that, on the date when the interest is due, the interest obligation matures. Under this reading, investors can always sue for missed payments. It is other litigation—such as an acceleration in response to a cross-default trigger—that must go through the trustee.

Anyway, reading further, the clause says that an investor’s right to “such payment” – i.e., the interest that was due – and to institute suit” cannot be impaired “without the consent of such Holder.” That would at least arguably have enabled individual bondholder suits for past interest.

Again, many of our contacts in the market think this reading is nonsense and ignores the purpose and history of this clause. And we don’t really have a strong opinion as to which reading is correct. But we do think the reading above—which is presumably the reading underlying Goldentree’s suit—is plausible. Certainly there is a fairly straightforward argument to that effect based on the text of the clause, and text seems to matter quite a bit to judges applying New York law. It never ceases to amaze us how many seemingly settled questions—at least in the eyes of market participants—are not well reflected in contract language.

Investors in Province of Buenos Aires Bonds Might Want to Look at their Prescription Clauses

Mark Weidemaier & Mitu Gulati

The Province of Buenos Aires (PBA) is about to conclude its much delayed exchange offer. The exchange offer has been revised over and over and has featured many restructuring techniques detested by investors (Pac Man, re-designation, hard-nosed exit consents). But it seems as if the exchange may finally go through.

Rather than write about redesignation or any of the more salient features of the exchange, we want to discuss a more obscure feature, which differs in the two types of bond contracts PBA is offering. (Investors don’t have a choice; those with old bonds (from 2006) get one set of provisions and those with newer bonds (from 2015) get another.) This post is about the different prescription provisions being offered to the two types of bondholders, old and new.

Afsharipour on "Women and M&A"

I'm writing to second Melissa's wonderful post (below) on Afra Afsharipour's recent article.  My thanks to Melissa for pointing out this super piece.

There is a rich literature on the question of the gender gap in the legal profession, with wonderful work by scholars such as Elizabeth Gorman, Ronit Dinotvitzer, Fiona Kay, Joyce Sperling and others. One of the gaps in this literature that I've found over the years though is the lack of in-depth analyses of particular practice areas or individual firms.  Many of the analyses look at the gender gaps in the fractions of law students, junior associates and partners and stop there (I am guilty as charged on this). But, of course, we know (or at least suspect) that there is likely tremendous variation across fields. Understanding that variation might help us better understand what causes the gender gap and how to remedy it.

The Emperor's Old Bonds

Andres Paciuc, Mike Chen & Charlie Fendrych, have just published their delightful paper on Chinese Imperial Debt in the Duke Journal of Comparative and International Law. This is a version of a paper that they did for my sovereign debt class with Mark Weidemaier a few years ago. Bravo! The paper is available here.

Here is the abstract:

Recent news articles have suggested that Trump’s trade war may finally provide relief to American holders of defaulted, pre-1950s Chinese bonds. Here, we examine the hurdles set before these bondholders, namely establishing jurisdiction over the People’s Republic of China as a sovereign and the long-lapsed statute of limitations. We also evaluate the Chinese government’s possible recourse.

Our investigation yielded key takeaways. First, to establish jurisdiction in the U.S., the bond must be denominated in U.S. Dollars or state a place of performance within the country. Second, to overcome the long-expired statute of limitations and win an equitable remedy, it must be shown that the PRC violated an absolute priority or pari passu clause and is a “uniquely recalcitrant” debtor. Finally, despite China’s commitment to the odious debt doctrine, the doctrine is unlikely to provide meaningful legal protection in an otherwise successful suit. Overall, it is a difficult suit to bring. However, through our investigations, we have discovered one issue in particular which holds the greatest danger—or perhaps the greatest promise: the Chinese Government 2-Year 6% Treasury Notes of 1919.

Cheeky Cruise Company Lawyering

This past week’s episode of Andrew Jennings’ Business Scholarship Podcast tells a wonderful story of sneaky cruise ship lawyering. Andrew’s guest was John Coyle, contracts/choice-of-law guru. The discussion focused on the 11^th Circuit’s recent decision in Myhra v. Royal Caribbean Cruises, Ltd., and John’s new article about that case, “Cruise Contracts, Public Policy, and Foreign Forum Selection Clauses”  

The backdrop to this story is US federal law that constrains cruise companies from contracting to limit liability in the small print of their contracts with customers; contract provisions that few read and fewer still pay attention to.  John explains:

46 U.S.C. § 30509 . . . prohibits cruise companies from writing provisions into their passenger contracts that limit the company’s liability for personal injury or death incurred on cruises that stop at a U.S. port.  The policy goal underlying this statute is simple.  A cruise contract is the prototypical contract of adhesion.  Absent the constraints imposed by the statute, a cruise company could write language into its passenger contracts that would absolve the company from liability for passenger injuries even when the company was at fault.  The statute clearly states that such provisions are void as against U.S. public policy and directs courts not to give them any effect.

That strikes me as a pretty clear dictate to the courts.  And if I were a cruise company contract lawyer, I’d be worried about trying to draft around such a clear dictate.  (Wouldn’t courts, customers, and just about everyone else look with disfavor upon such sneakiness?). Cruise company lawyers though, at least in the 11^th Circuit (which is the key circuit for such matters, since it covers Florida) have figured out a back door way around the explicit prohibition by using a combination of forum selection and governing law clauses.  This enables them to limit liability to foreign customers, even though they are taking the same cruise as their US counterparts.  John’s article explains:

Notwithstanding this clear statement of U.S. policy, cruise companies have worked diligently to develop a workaround to Section 30509 for passengers who reside outside the United States. First, the companies write choice-of-law clauses into their passenger contracts selecting the law of the passenger’s home country.  In many cases, the enforcement of such clauses will result in the application of the Athens Convention, a multilateral treaty which caps the liability of cruise ship companies.  When the Athens Convention applies, an injured cruise ship passenger generally cannot recover more than $66,000 in a tort suit against the cruise ship company.  In this way, the cruise company seeks to accomplish indirectly through a choice-of-law clause what it could not achieve directly via a contract provision limiting their liability.

I’m astonished.  Surely a US federal court would not permit such a sneaky workaround.  And John’s article explains, after canvasing a large set of cases across a range of subject areas, that that is the case. Except, maybe, if you are a cruise company litigating in the 11^th Circuit against a foreign customer.

Antique Chinese Debt - The Latest

Mark Weidemaier and I have talked about antique Chinese (mostly Imperial) debt often on this site.  And we've also discussed these debts on our podcast with sovereign debt gurus Tracy Alloway and Lee Buchheit (here).  Yes, we are a bit obsessed. Part of our fascination with this topic is that the Chinese government asserted a defense of odiousness to paying these debts.  The lenders (backed by western powers, seeking influence in China) and the Imperial borrowers (seeking to sell access to their country in exchange for self preservation) had, in essence, sold out the people of China.  End result: Revolution and refusal of successor communist governments to pay these debts, no matter what - even today, when China is a financial behemoth.  

Below is the abstract for a wonderful new paper, "Confirming the Obvious: Why Antique Chinese Bonds Should Remain Antique" in the U Penn Asian L. Rev. by two of our former Duke students, Alex Xiao and Brenda Luo.  Bravo! We are so proud.

As the Sino-U.S. relationship goes on a downward spiral, points of conflict have sparked at places one might not expect: antique sovereign bonds. In recent years, the idea of making China pay for the sovereign bonds issued by its predecessor regimes a century ago have received increasing attention in the U.S. This note takes this seeming strange idea seriously and maps out the possible legal issues surrounding a revival of these century-old bonds. Although two particular bonds show some potential for revival—the Hukuang Railways 5% Sinking Fund Gold Bonds of 1911 and the Pacific Development Loan of 1937—the private bondholders would unlikely be able to toll the statute of limitations on the repayment claims based on these bonds. Even in the unlikely scenario that they succeed, the Chinese government would have an arsenal of contract law arguments against the enforcement of these bonds, most notably defenses based on duress, impracticality, and public policy. By going into the details of the legal arguments and history behind these bonds, we seek to confirm the obvious, that is, the idea of making China pay for these bonds is as far-fetched as it sounds and would not be taken seriously by courts.

Elliott, Apollo, Caesar's Palace and a Bunch of Bankruptcy Law Professors

One of the most dramatic stories in corporate finance and bankruptcy over the past decade has been the Caesar's Palace battle between a bunch of hard nosed distressed debt hedge funds and big bad private equity shops.  A bunch of masters of the universe types fighting it out to the death. (For my part: I'm interested in this because some of the big players from the Argentine pari passu battle are involved and there was a battle over the aggressive use of Exit Consents).

Turns out that this Caesar's story is going to be front and center at an upcoming bankruptcy conference that three good friends, Bob Rasmussen, Mike Simkovic and Samir Parikh are running, where one of the authors of "The Caesar's Palace Coup", the FT's Sujeet Indap, is going to be on a panel with the heavy hitters, Ken Liang, Bruce Bennett and Richard Davis. I always find it fascinating to hear how financial journalists and law professors, both of whom have dug deep into a set of events, tell the same story. 

The formal announcement, courtesy of Samir Parikh, is here:

The $900 Million Back Office Error

I love this story -- a bank erroneously sends money to a bunch of lenders who are angry with the bank and the debtor for other reasons. The bank discovers the computer error and asks for its money back. The angry lenders refuse to give back what was clearly an erroneous deposit. There is litigation. And the court says to the lenders who received the erroneous deposit: You can keep the money.  

I remember telling my students in Contracts about it when the news was first reported, and the matter had not been to court yet. I told them that this was an easy case and that the lenders would have to give the money back.  If memory serves, I told them something along the lines of: "If a bank erroneously deposits money in your account, you don't get to keep it. You have to give back what is not yours. Finders are not automatically keepers." I was wrong, to put it mildly.

Elisabeth de Fontenay has a delightful piece on this that is coming out soon in the Capital Markets Law Journal (here). Among other things, Elisabeth asks the deeper question of why it is that lenders and borrowers these days seem to be asserting what look to be highly opportunistic claims on a much more frequent basis than in the past. It used to be -- or so the veteran lawyers in this business tell me --  that reputation and norms constrained these repeat players from misbehaving. Not these days.

Of course, there is more to the story, like why the judge (Jesse Furman) ruled the way he did. Turns out that there was a wormy precedent directing him and he was not willing to turn the usual judicial cartwheels to produce the "fair" outcome. Or maybe, in terms of weighing bad behavior on the two sides, he found shenanigans on both sides and decided to just follow precedent? Or maybe Judge Furman hates the big banks? I'm kidding (I think very highly of Judge Furman), but he has decided a number of big commercial cases recently that have caused drama (e.g., here (Windstream) and here (Cash America)).

The abstract for Elisabeth's paper is here:

The Citibank case dealt with a $900 million payment sent in error to the lenders of Revlon, Inc., in the midst of a fraught dispute over the loan restructuring. Surprising most market participants, the court ruled that the lenders who refused to return the funds to the administrative agent were entitled to keep the money. The case (currently on appeal) attracted commentary primarily due to the sheer size of the payment error, and the corresponding risks posed by “back-office” functions at financial institutions. But Citibank also highlights the widening gap in leveraged finance between the wishes and expectations of market participants and the actual outcomes they achieve under either (1) common-law default rules or (2) heavily negotiated contracts. In particular, the case raises questions such as (1) whether New York law remains an appropriate default choice for financing transactions; (2) whether the common-law of contracts does or should continue to have relevance for financing transactions among sophisticated parties; and (3) whether parties truly can contract for their desired outcomes when opportunistic behavior is prevalent in the market.

For more, Matt Levine of Bloomberg has a hilarious piece, here. It talks about the back office disaster in India and how this goof actually happened (as an aside, the firm involved on the Indian side is a highly respected one -- this was no fly by night operation).  Matt also talks about the wonderfully named Banque Worms case.  One could not make this stuff up even if one wanted to.

I'm hoping that my favorite business law podcaster, Andrew Jennings (here), will do an episode on this soon.

The Argentine 2020 Restructuring Drama: An Insider's Perspective

There has been much discussion of the recent (2020) Argentine restructuring on creditslips, including by Anna Gelpern (here) and Mark Weidemaier (here), two people who know more about these matters than pretty much anyone else anywhere.  And significant portions of that discussion have been critical (or at least questioning) of the wisdom of two of the strategies that Argentina attempted to utilize during its recent restructuring: Pac Man and Re-designation.  These criticisms also showed up in the financial press, in articles by Anna Szymanski (here) and Colby Smith (here), among others.

Yesterday, two of the key players on the Argentine restructuring team, Andres de la Cruz and Ignacio Lagos (both of Cleary Gottlieb) put out on ssrn a spirited defense of the Pac Man and Re-designation strategies.  The article, “CACs at Work: What Next?” is available here (and should be forthcoming in the Capital Markets Law Journal soon).  To cut to the chase, Andres and Ignacio argue that their strategies were misunderstood by commentators and, in the end, were actually embraced by investors.

The New Thing in Contract Research - The Contract Production Process

Cathy Hwang and Matt Jennejohn, two of the brightest young stars of the contract world, just put up a paper summarizing their view of one of the exciting new directions that contract research is taking. They describe it as the study of contractual complexity ("The New Research on Contractual Complexity", is their title). But I don't like the term "contractual complexity" at all, since I simply cannot take seriously the idea that anything that lawyers do is all that complex.  Convoluted, confused and obscure, yes.  But complex? Hell no.  What I see their wonderful paper as being about is the new research on the production of contracts.  As they point out, it all starts from the foundations laid in a set of important papers by the brilliant Barak Richman.  Barak has long been puzzled as to why contract scholars have generally had little interest in how contracts are produced -- even though key assumptions about the production process form the backbone for theories and doctrines of contract interpretation (something that contract scholars, old and new, do care deeply about).

And now we have an entire cool new set of papers by folks like Rob Anderson, Jeff Manns, Dave Hoffman, Tess-Wilkinson Ryan, Michelle Boardman, Julian Nyarko, John Coyle, Mark Weidemaier, Adam Badawi, Elisabeth de Fontenay, Anna Gelpern and, of course, Cathy and Matt (and more).  Some using fancy empirical techniques well beyond my capacity (yes, those are complex), others use cool experiments (again, complex and beyond my skill level) and still others use interviews (yup, complex).

Three cheers for the study of how contracts are produced -- complex ones, confused ones and all the rest.

The ssrn link to Cathy and Matt's paper from the Capital Markets Law Journal is here: 

Their abstract reads:

In the last few years, the academic literature has begun catching up with private practice. In this essay, we review the growing literature on contractual complexity and outline its key insights for contract design and enforcement. Our purview is broad, capturing new theories and new empirical tools that have recently been developed to understand contractual complexity. We also propose avenues for future research, which we extend as an invitation to academics and practitioners as an opportunity to further the collective knowledge in this field.