The Puzzle of Diaspora Bonds: A Case Study of Israel's Program

Many countries have attempted to tap their diasporas by issuing bonds.  This has particularly been the case in times of dire need (wars, pandemics, international sanctions, financial crises, and more).  Ukraine is the most recent to have attempted to do this and failed.  Other recent failures include Pakistan, India, Ethiopia and Greece, some of whom turned to bank deposit schemes when attempts to do full scale bond issuances did not succeed

A superb new paper by Doug Mulliken, motivated by the many failures to issue diaspora bonds, does a deep dive into the one program that has not only been successful, but has remained so for over a seventy-five year period: The Israel Bonds program.  

Doug's paper, titled, "It’s not just money; you are investing in your identity”: Israel, the Jewish Diaspora, and the Israel Bonds program,is on ssrn.com.

The abstract reads:

Israel has been selling diaspora bonds for almost as long as the country has been in existence, with the original 1951 Independence Bonds being issued just three years after the State of Israel’s establishment as an independent nation. For over 70 years, both in times of crisis and times of strength, Israel has used the Israel Bonds program to call on the Jewish diaspora — most significantly in the United States but also in Canada and across the world — to provide the country with a layer of financial security that is, in many ways, unprecedented in modern history. The importance of Israel’s diaspora bond sales has evolved over time: it functioned as a load-bearing support of Israel’s economy in the program’s early days when, in the aftermath of World War II, sovereign debt markets had essentially disappeared; it now serves a far more important symbolic function, allowing Jews across the world to develop a connection with Israel by contributing some modest amount to the country’s well-being.

This analysis considers the social and historical context of the Israel Bonds program, taking into consideration the almost emotional connection that the bonds allow members of the Jewish diaspora to feel towards the State of Israel. Most importantly, this study examines the terms of the bonds themselves, comparing both how Israel Bonds mirror traditional Eurobonds and, in particular, how the two types of issuances differ. With this, the analysis hopes to shine a light on an under-studied, but incredibly significant, aspect of Israel’s economic development.

 

Restructuring Conference Announcement

Announcement that slipsters might be interested in:

Financial Restructuring Roundtable

Call for Papers

The Financial Restructuring Roundtable (formerly the West Coast Bankruptcy Roundtable) will be held in person on April 6, 2023 in New York City. Spearheaded by Tony Casey, Samir Parikh, Robert Rasmussen, and Michael Simkovic, this invitation-only event brings together practitioners, jurists, scholars, and finance industry professionals to discuss important financial restructuring and business law issues. 

Private Equity Debt Shenanigans Conference

I'm obsessed with debt shenanigans and, in particular, the emergence of an entire industry (or so it seems) of lawyers who specialize in finding and exploiting contract loopholes in places where the parties to the transaction had no idea there were gaps.  And there are others who defend against this.  (Anyone remember J.Screwed or Windstream?). 

One area where the payouts of successful loophole detection and exploitation has shown big returns is the world of Private Equity. 

And now the Penn Law Review is hosting a conference on this topic. (Okay -- Their description of the topic is slightly different than mine).  Yay!

Call for papers is below:

The University of Pennsylvania Law Review will host its annual symposium on Friday, October 7, 2022, in-person. This year’s topic, “Debt Market Complexity: Shadowed Practices and Financial Injustice”, will explore the rise of increasingly complicated debt structures associated with private equity. We are issuing a call for papers for publication in the Law Review’s corresponding symposium issue.

To submit a paper for consideration, please provide an abstract no longer than 750 words to [email protected] by July 31st, 2022. If selected for publication, completed drafts will be due January 1st, 2023. 

The complete call for papers, which includes more detail, is available here. 

Yehuda Adar on Contract Damages -- In a Bond Default

Figuring out the right damages measure for default on an actively traded financial asset such as a government bond is, at first, obvious -- just pay what you promised on the bond.  But then, when one thinks about features of damages law such as the option to substitute performance or mitigation, things get murkier.

Yehuda Adar, a guru of the messy law of damages at Haifa, has a super new paper on ssrn.com (here).  How he manages to be so very clear and coherent about a topic that is so messy is beyond me. 

Here is the abstract:

What are the damages to which an investor facing a repudiation or a material breach by a government issuer is entitled? The conventional answer that most investors would probably give is that, in the face of such a default on the bond indenture, damages should include both the repayment of the principal (‘par’) and the payment of any remaining (i.e., unpaid) coupons (discounted to present value). Is this conventional understanding warranted? For at least some sovereign bond experts, the answer is not at all obvious and straightforward at it might seem at first blush. Aren’t such damages over-compensatory? Indeed, by obtaining – prior to maturity – both the par and every remaining coupon payment, isn’t the bondholder being put in a better position than if the contract had been performed? Indeed, if there had been no breach, wouldn’t the bondholder have to wait for those payments to be made until maturity date? Secondly, if damages are to be calculated this way, isn’t the bondholder going to receive something more valuable than what he had before the breach? More concretely, whereas prior to breach the bond’s market value reflected the issuer’s credit ranking, the conventional measure of damages seems to treat the bondholder as if he owned a U.S. treasury bond. Third, shouldn’t the investor be expected to purchase a substitute on either the primary or secondary market to eliminate or at least minimize his damages? Shouldn’t this option significantly reduce the scope of the issuer’s liability?

As basic as these questions sound, they have managed to escape rigorous analysis in the sovereign bonds literature. One can hardly find a comprehensive analysis of remedial issues within this vast body of scholarship. What, then, is the correct measure of damages for the breach of a government bond? By closely inspecting this deceptively simple question, this Article highlights the availability, under the general law of contract damages, of no less than four different methods for measuring a bondholder’s expectation damages. The Article presents to the reader each of these alternative measures and illustrates how to implement each of them in a hypothetical case described at the outset of the Article. Then, the Article addresses two analytical challenges facing a court (or an arbitrator) wishing to reach the correct decision on the damages issue. The first involves a choice between two ways of conceptualizing the bondholder’s loss; namely, the loss of the promised performance of the indenture on the one hand, and the market value of the bond on the other hand. The next challenge is that of applying the mitigation of damages doctrine. Considering the normative and practical considerations pertinent to each of these challenges, the Article ultimately concludes that in most cases courts will tend to implement the ‘Gross Lost Profit’ measure of damages, which is the most generous of the four expectation damage measures. Surprisingly or not (depending on one’s intuitions), this measure coincides with the wisdom of the crowd.

 

 

Co Authoring in Legal Academia

Co authoring saved me. Literally.  But for the fact that my senior colleagues at UCLA did not care whether I ever wrote anything sole authored, I don't think I would have written anything. I was (and am) just too racked with insecurities.  And then I'd probably have had to get a real job. Aiyiyiyi.  I owe an ever lasting debt to those colleagues -- thank you to Bill Klein, Devon Carbado, Steve Bainbridge, Rick Sander and more.

But I had heard, at the time (a long long time ago) that other schools were not so encouraging. Some of them, the rumor was, discounted co authored work or refused to count it at all in the tenure file.  The model of the worthy scholar was the solo romantic creator toiling away on the magnum opus in solitude.  

Things have changed since then though, as this brilliant piece, The Evolving Network of Legal Scholars,  by Andrew Hayashi shows (although, I have to ask Andrew: Why is the article on co authorship not co authored?).  Even putting aside the fact that I find the topic fascinating (of course, I'd like anything about co authorship), it is beautifully written and has the coolest graphs.  Every section says something new and insightful and one is left wanting more at the end. That is not how I feel at the end of most law journal articles -- actually, I don't even reach the end of most law journal articles because they are such torture to read (especially mine).

Abstract is here:

The law professoriate is a network connected by scholarly interactions of various kinds, including co-authorship. I study the evolution of the co-authorship network from 1980-2020 and document a sharp increase in the number of scholars, the amount of scholarship, and explosive growth in the network of legal scholars during this period. Despite this growth, however, the distance between legal scholars has shrunk such that legal academia can be characterized as a “small world.” I describe the increase in the number and scholarly contributions of women, minorities, and lesbian, gay and bisexual (LGB) scholars and the rise of co-authorship, including “mixed” co-authorship. I find that members of the same gender or minority groups tend to coauthor with each other, but that this correlation has declined over time resulting in more co-authorship across identity categories. Finally, examining the ordering of author names on coauthored articles, I find that racial minority scholars make up a greater share of first authors than their share of authors in general, while women and LGB scholars make up a smaller share of first authors than one might expect if authorship were randomly assigned.

Just a few questions for Andrew, for his next article on this topic:

1. The article focuses on co authorship in law journals. But what about peer review journals.  Might it be the case that the types of folks who migrate towards the co authorship model tend to publish more in peer review journals? Especially in fields like health law? Does that create an under count?

2. Do things change over the life cycle of a scholar?  Does co authoring at some stage lead to working on larger and larger teams over time? (as one sees the benefits - I'm thinking of Eric Posner's podcast  conversation with Orin Kerr about this topic (here))

3. Can you tell us more about the schools where co authorship thrives more than others?  Are they more collaborative? Do they produce better (more creative) or worse ideas?

4. What about co teaching?  Some schools encourage co teaching in the way they give credit.  Does that result in more co authorship?

Confiscating Russian Assets (Now?)

As the Russia-Ukraine conflict continues and the amount of destruction to lives and property grows exponentially, a question that has come up is whether Russian assets overseas should be confiscated and made available to those who the Russian invasion has harmed  (e.g., here).  The list of those is growing larger minute by minute:  refugees, families of those who have died, people whose homes and livelihoods have been blown apart and on and on and on.

The amount of harm that Mr. Putin's craziness has caused is already far greater than the value of the frozen assets -- in the many trillions whereas the frozen assets (even if one adds in the oligarch properties) is in the hundreds of billions.  But should we wait until Mr. Putin has taken whatever portion of Ukraine he wants (e.g., 20-30%), installed some puppet government, and is finally willing to negotiate for peace?  At that point, as part of the negotiation, he is going to want to ask for his frozen assets back.  And the leaders of the countries where the frozen assets are located, who will be desperate for peace, might be tempted to give the assets back.  Let us not kid ourselves.  The political flesh is weak.  If those politicians see themselves garnering advantage at the ballot box by negotiating a quick peace (to the detriment of the claims or refugees and others), they will do that.  So, maybe there is an argument to confiscating the assets now while there is political will to do so.

On the other hand, there is the small matter of the law.  Due process before taking people's property and all that.  Does it allow for the confiscation of the property of a sovereign engaging in an egregious violation of international law by invading a neighbor?  There is the proverbial slippery slope of countries confiscating the property of other sovereigns whose behavior has displeased them without first ensuring that they are legally entitled to.

To my mind, these are fascinating questions to which there are not clear answers.

Two giants of the legal academy, Larry Tribe and Paul Stephan have been debating this in the context of what Mr. Biden is allowed to do.  The assets can be frozen. But can they be confiscated?

Here is the abstract of Paul's superb new paper that describes the issues:

This article addresses the legal issues that the United States would confront were it to move from freezing to seizing. It looks first at the executive branch’s existing legal authority to confiscate foreign property. It considers legislative proposals to extend that authority. Both existing law and possible future legislation face constraints under constitutional law. These constraints are unique to the United States but reflect principles of legality and due process that western states generally embrace. Finally, it provides a snapshot of the international legal issues that seizure of Russian state assets might present.

First and foremost, existing law does not permit the executive branch to dispose of Russian state assets in advance of a settlement with that state. A civil process exists to forfeit assets to the state, including those of state-owned entities, but that entails resort to the courts and requires some evidence of criminality. Legislation currently under consideration in the United States would enhance that process but not abandon it. It would not apply to the largest portion of assets, the deposits of the Russian Central Bank in US financial institutions, absent some proof that those deposits can be traced to criminal activity. US constitutional guarantees against expropriation in the absence of compensation and of civil forfeiture in the absence of due process almost certainly apply.

Finally, the seizure of assets belonging to the Russian state outside of normal criminal and regulatory processes would violate international law. What international law probably would permit, however, is the use of these assets to satisfy legal judgments rendered against the Russian Federation by duly constituted international investment tribunals established under treaties to which Russia is a party. The United States and other countries in the West might explore ways of encouraging the beneficiaries of these awards, both present and future, to devote their recoveries to Ukrainian reconstruction.

A Tournament of Lawyers: Who Should Sri Lanka Hire to Manage its Debt Restructuring?

Rumor is that close to thirty leading international law firms have put in bids to assist Sri Lanka in its upcoming debt restructuring.  Makes sense -- there is a fat paycheck for whoever gets the mandate.  Given the stakes, my guess is that these firms -- and I'm just guessing -- are busy trying to "influence" whomsoever they can in both the current government and in the opposition (after all, the current government might fall any day now) to get ahead in the competition.  Yuck.

Having a good adviser can make a huge difference in terms of how well one's debt restructuring goes.  Hopefully, the decision will made as a function of which adviser will give Sri Lanka the best restructuring design and not made as a function of who is best buddies with the President's closest flunky.  I'm not optimistic though.

I have a suggestion.  I know it has zero chance, but I'm going to make it anyway.  We should have a competition, a tournament of lawyers. Each of these firms should have to put up on  ssrn.com a ten page plan as to how it plans to solve the likely holdout problem with Sri Lanka's restructuring.  Then, Sri Lanka could have a neutral panel of respected restructuring experts pick the firm with the best plan. Or the experts could pick four semi finalists and those semi finalists could be given the opportunity to present their plans and answer questions in an open setting. 

Wouldn't it be a lot better for these firms to be spending their resources competing to design the best possible plan for Sri Lanka than competing to please the president's best friend or the cousin of the leader of the opposition?

These foreign advisers are expensive. And perhaps rightly so, given what they provide.  But they should have to earn every penny they charge a country in deep distress.  Maybe some of them with a really good plan might even offer to work pro bono?  After all, fame and fortune can come alongside a beautifully conducted restructuring.

Let the games begin.

 

Can Russia Pay its 2022 Dollar Bond Obligation in Rubles? (More dodgy Russian bond clauses?)

I didn't think so. But one of my students has me questioning myself.

As of this writing, in April 2022, the press is reporting that Russia is on the brink of default because its foreign currency funds are frozen (here). Russia says that it is not in default because it is unable to make the dollar or euro payments as a result of the sanctions and is entitled to make its payments in rubles.  Investors have dismissed this idea – saying that it is “crystal clear” that payments on the bonds with payments due April 2022 have to be paid in foreign currency (here).

Yes, there are some bonds, containing an “Alternate Payments Currency” clause issued in the post-2014 period, where Russia is arguably entitled to make payments in rubles if, for reasons out of its control, it is unable to pay in the primary currency specified in the bond (here).  But the bonds that have come due in April 2022 do not contain that Alternate Payment Currency clause. And hence the assumption seems to be that the ruble payment constitutes a default.  And I confess that that was my assumption until a student, Doug Mulliken, pointed out a clause that I had previously missed.

It is clause number 15, titled “Currency Indemnity.”  The first sentence of the clause says:

The U.S. dollar is the sole currency of account and payment for all sums payable by the Russian Federation . . . in connection with the Bonds, including damages.

That’s well and good.  The US dollar is the currency of payment.  But then the clause goes on to say:

Any amount received . . . in a currency other than the U.S. dollar . . . by any Bondholder in respect of any sum . . . due to it from the Russian Federation shall only constitute a discharge to the Russian Federation to the extent of the U.S. dollar amount which the recipient is able to purchase with the amount so received or recovered in that other currency on the date of that receipt or recovery . . . If that U.S. dollar amount is less than the U.S. dollar amount expressed to be due to the recipient under any Bond, the Russian Federation shall indemnify such recipient against any loss sustained by it as a result. In any event, the Russian Federation shall indemnify the recipient against the cost of making any such purchase.

To my reading, Doug is right. Boiled down, the clause seems to say that payment in a different currency (e.g., rubles) can constitute a “discharge”, so long as the recipient can use those rubles to buy a sufficient number of dollars.  That seems to mean that Russia, can discharge its obligations by paying in rubles.

Now, maybe I have missed some other clause in the document that negates this.  It would not be the first time that that’s happened.  But I do remember reading a chapter in Lee Buchheit’s, How to Negotiate Eurocurrency Loan Agreements, (Chapter 20, if memory serves) that not only describes clauses like this, but also explains how they are a potential source of mischief if the clause was not written tightly enough to protect against the debtor using capital controls in a sneaky fashion.

The sneaky thing for Mr. Putin to do would be to make the payments in rubles into an account in Russia, immediately convert the rubles to dollars and then say that the dollars are frozen in place under capital controls.  Pay enough rubles and, according to the strict terms of the contract, that would be a discharge.  And Mr. Putin could say that those dollars would be frozen until his foreign assets in the west were unfrozen.

One might ask here: Doesn't the bond require payments to be made in NY?  Yes, but Section 15, the Currency Indemnity clause, describes what happens if the holder “recovers OR RECEIVES” a payment in another currency, presumably in another place.

And it says that the USD payment is “discharged” if the holder receives a sufficient amount of that other currency to buy $$$ in the amount originally due on the date the other currency is received or recovered.

All of that will have happened.

Would a court buy any of this? Probably depends on where the court is located.  London, NY or Moscow.

The problem probably could have been obviated had the Currency Indemnity clause specified that the dollars acquired with the other currency (rubles, in our hypothetical) be "freely transferrable dollars". But it doesn't say that.

Aiyiyiyi

Credit to Doug Mulliken. Errors are mine.

Spoils Don't go to the Aggressor

Mark Weidemaier & Mitu Gulati

Ukraine has suffered an unprovoked invasion by a militarily more powerful neighbor, Russia, that covets its territory. The weaker Ukraine, in danger of being overrun, desperately seeks external financing for defense and to support its population. What might we think the rules of international law would be regarding the responsibility to pay that debt?

The relevant law here is antiquated. There are a handful of precedents from the nineteenth and early twentieth centuries where, best we can tell, the law was whatever it was convenient for the victor to assert. But, if one were to try and extract a doctrine out of those precedents, it would be that, while a victorious invader inherits the debts of the nation it invaded, it does not necessarily inherit debts incurred to resist the invasion. The doctrine even has a name: the law of “war debts”. To quote a 1924 treatise, “A creditor who advances money to a belligerent during a war to some extent adventures his money on the faith of the borrower’s success”.

That’s nuts. That doctrine incentivizes potential lenders to invest in the debt of the more powerful actor, even if the less powerful actor has a legitimate right to self-defense. It is perhaps not surprising that such an upside-down rule existed in the colonial era, when great powers constructed the law to justify their acquisition of territory (the original articulation of this doctrine seems to come from Britain after the Boer War). But today? In the supposed post-colonial era when borders are supposed to be sacrosanct absent the most egregious violations of human rights and colonial acquisitions by force are not supposed to happen? When an aggressor launches an unprovoked attack (Mr. Putin has his own version, we recognize), it seems logical both that that the aggressor should bear the cost of the victim’s self-defense and those who funded it should be the ones at risk. This rule internalizes the cost of misbehavior and might help deter aggression. This rule seems to set the right incentives whether or not the aggressor nation winds up being victorious.

In the Russia-Ukraine context then, who should be responsible for the extra borrowing that Ukraine has to do to defend itself? If the goal is to cause the misbehaving actor to internalize the costs it is imposing, the answer is surely Russia. Furthermore, to the extent lenders helped finance the Russian invasion, they are the ones who should face a high risk of nonpayment, not those who funded the Ukrainian defense. If we were to imagine a situation, post-war, where the international community had to allocate a limited pool of assets (e.g., frozen Russian reserves), we’d probably say that claimants who funded Ukraine’s self-defense should have a higher priority than claimants who helped fund Russian misbehavior. That is especially so if the lenders to Russia had reason to expect misbehavior. Maybe Russia even told them in its risk disclosures whilst borrowing – “Hey, don’t be surprised if I get sanctioned in the future – because I tend to misbehave”. (see Tracy Alloway (here), Adam Tooze (here), and us (here) on this).

None of this is rocket science. One of the things that legal rules are supposed to do is to incentivize good behavior and disincentivize bad behavior. As of this writing, the World Bank has just announced an emergency financing package of $700 million for Ukraine. Maybe that lending will be repaid by Russia, in a post invasion scenario on the theory that multilateral institutions such as the World Bank are not allowed to finance military expenditures. We don’t remember seeing any multilateral organization exception in the law of war debts though.

More important though, Ukraine needs financial assistance to defend itself and is surely going to be trying to borrow from the private markets. And lenders are going to be reluctant to fund it (or, will charge more) if they think they face significant risk of non-payment if Russia wins. Whether one liked it or not, risk disclosures would probably have to be made in the prospectus regarding the doctrines of state succession and war debts.

But what if the rule instead were that those who provided financing to Ukraine during these dire times were to have first shot at those frozen Russian assets in the post war period? (in legal lingo, priority)? Those risk disclosures and the pricing of the financing of the Ukrainian resistance might be different.

Maybe, just maybe, the free nations of the world (including those former colonial powers who created these doctrines) should announce a new and improved doctrine of war debts for the modern era: Spoils don’t go to the aggressor.

The "American Default" of 1933 and Some Possible Sanctions

Last week, my International Debt class was fortunate last week to have the opportunity to talk to Sebastian Edwards about his wonderful book “American Default”.  The book tells the astonishing (to me at least) story of the abrogation of gold clauses in US corporate and government bonds in 1933 and how that abrogation is then upheld by at 5-4 vote of the US Supreme Court in 1935.  Equally astonishing, as Sebastian’s book describes, the spillover effects in terms of costs to US future government borrowing, were near zero.  If anything, USG bonds were oversubscribed.

Our class session with Sebastian was last Wednesday and the world has witnessed some remarkable and disturbing events since then in Ukraine.  In the wake of our discussion of FDR’s 1933 abrogation of the gold clauses though, I found myself wondering about the following hypothetical for purposes of class discussion.

A large country, Bearland, brags that it has $630 billion of international reserves, the largest portion of which is held in the form of US Treasury bonds. 

Tomorrow afternoon the US Congress passes the following law:

Commencing at 12:00 noon EST on February 26, 2022, holders of US Government debt securities will be required, in order to redeem those instruments at maturity, to certify that neither they nor any predecessor in title to the securities has ever invaded the Republic of Ukraine.   Securities owned by any holder who cannot make this certification will be redeemed at maturity and the proceeds deposited in a blocked account at the Federal Reserve Bank of New York.  

Context: Acme Capital, a New York based hedge fund, has acquired $1 billion of US Treasury bonds previously owned by Bearland.  Acme sues to declare the law unconstitutional and unenforceable. You are a law clerk to Justice Gelpern on the US Supreme Court.   She has asked you this question:  Don’t the Gold Clause cases from 1935 control this issue?   After all, Acme is getting its money so they are not harmed in that sense.  Acme just doesn’t like the fact that the money is blocked at the Fed”.

The foregoing strikes me as example of a situation in which the justices (and law clerks) must not only consider the legal correctness of the advice, but also its real world consequences.  In other words, very much the situation in 1935.

In the Bearland example, the legal question is whether the Bearland legislation imposes an ex post interference with contract or unconstitutional taking of Acme’s property by requiring the no-invasion certification.   

Advising that the measure is kosher, however, potentially puts all USG debt at risk of political interference. To see this, just change the words “invade Ukraine” in the Bearland certification to “invade Taiwan”.  Would any foreign state be prepared to buy US Treasury bonds knowing that they could be weaponized at any moment?  How much would that add to the interest rate on those bonds? Anything?

I wonder whether folks at the UST are considering strategies along these lines.  Maybe?

Law School Rankings: How Much do They Really Matter?

I've long assumed that law school rankings are very important to law student choices regarding where to attend school. After all, why else would law schools themselves care so much about the rankings -- sometimes even hiring and firing deans based on this single variable (my assumption here is the most in the academy don't see there to be much of substance in the rankings -- but I may be wrong).

A wonderful new study from Albert Yoon and Jesse Rothstein, "Choice as Revelation" two of my favorite empiricists in the academy (I loved their prior paper about mismatch), challenges the conventional wisdom.  As I understand the core finding, students don't attach much difference to small differences in rankings. They care about other things in these choices among close competitors.  Strikes me that this is an important finding.

This is not to say that students don't care at all about rankings; they do -- especially at the very top (Harvard, Stanford, Yale).  After that though, not so much.  

The abstract reads:

Education is a credence good. While the virtues of education are widely embraced, its qualities are difficult to discern, even among its consumers. The sizeable and increasing cost of tuition – as in the case of U.S. law schools – only add to the stakes. In response, law school rankings have emerged, with the purported goal to help students make more informed choices. While these rankings have generated both interest and debate, an important question has remained unanswered: how do prospective law students perceive these schools? Drawing upon data provided by the Law School Admissions Council (LSAC), we analyze the universe of law school applications for the period 1989 through 2017, creating a revealed preference ranking of law schools based solely on where applicants choose to matriculate given their offers of admission. We find that applicants strongly prefer Yale, Stanford, and Harvard, and to a lesser extent other schools in the top 20, but do not draw such sharp distinctions outside of these schools. For all but the very top schools, we cannot rule out that schools adjacent in the rankings are equally preferred by admitted students. We also separately analyze the application, admission, and matriculation stages of the law school matching process. Applicants apply broadly, we find, but that admissions and matriculation decisions hew closely to academic indicators. Our revealed preference rankings are similar those of the U.S. News law rankings at the top but bear little resemblance for the remaining schools. Our rankings offer a compelling alternative to commercial rankings, which are opaque and highly manipulatable. Our analyses also highlight the limitations of ordinal rankings, which by themselves can suggest meaningful differences amongst alternatives where they do not exist.

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. 

Argentina-Inspired Reforms to Sovereign Debt Contract Terms (Yes, Again)

In terms of innovations in the boilerplate of sovereign debt contract terms, Argentina is the gift that keeps on giving (and giving and giving).  At least within my lifetime, its behavior has inspired more contract innovation than any other country (even Ecuador, that probably comes a close second).

Here is the abstract of a wonderful new paper by two sovereign debt legal experts from White & Case (London), Ian Clark and Dimitrios Lyratzakis (White & Case has a long history of innovation in sovereign debt contracts; it was one of the firms at the forefront of Collective Action Clause innovations way back in the 1980s):

The Collective Action Clauses published by the International Capital Markets Association in 2014/2015 aim to facilitate orderly and consensual sovereign debt restructurings. The clauses were designed to give sovereigns flexibility in structuring and consummating a transaction that would be capable of attracting broad creditor support, while safeguarding the integrity of the process and the rights of creditor minorities. The recent restructurings of Argentina and Ecuador presented the first opportunities for the ICMA CACs to be tested in practice, but the “re-designation” and “PAC-man” strategies first seen in the Argentine restructuring revealed shortcomings in the ICMA contractual architecture.

Argentina’s and Ecuador’s creditors responded by negotiating tailored refinements to the standard CACs that would mitigate the risk that a sovereign could compel a restructuring that is not supported by the requisite creditor supermajorities. The qualified restrictions on “re-designation” and “PAC-man” adopted by Ecuador and Argentina enhance the ICMA architecture and provide strong incentives for a sovereign to engage constructively with its private creditors in a consensus-building process that results in a restructuring proposal capable of achieving supermajority support.

The paper, "Toward a More Robust Sovereign Debt Architecture: Innovations from Ecuador and Argentina" (forthcoming in Capital Markets Law Journal) is particularly interesting because Ian and Dimitrios are two of the creditor-side lawyers who were involved in creating the innovations that they discuss. (Much of the writing in this area has tended to be from the debtor side). Now, it remains to be seen how the market responds to these innovations. In particular, will other deals embrace the changes that have been made in the Ecuador and Argentine restructuring documents or will there be yet more experimentation?

I'm particularly intrigued by some rather crucial differences in deal documents that seem to correlate to the governing laws (NY v. England).  Informally, there has been much chatter about whether those differences were the product of drafting goofs in the model clauses on one or the other sides of the Atlantic or intentional (Each side asserts that the other has goofed -- albeit in a very polite and passive aggressive fashion). Given that debate, and the unwillingness of anyone to openly talk about the issues, I wonder whether those differences will continue out of a sheer unwillingness to admit error. (Of course, this is a topic that Dimitrios and Ian diplomatically and cleverly avoid).

J. Screwed - A Paper

A number of months ago now, I listened to a fun podcast episode on Planet Money titled "J. Screwed" about contract shenanigans by J.Crew, as it was making its way into deep financial distress.  I'm fascinated by the exploitation of contract loopholes in debt contracts. So, of course, I wanted to know more. I went digging into the world of Google.  But I couldn't find anything good in the literature that explained to me the details of what was going on (the contract term in question, how widespread this problem was, how the market had reacted, etc., etc.). The best I found was a blog post that fellow slipster, Adam Levitin, kindly pointed to me.

But now there is a wonderful article up on ssrn by the author of that post (a former student of Adam at Georgetown Law, I believe).  The appropriately titled article, "The Development of Collateral Stripping By Distressed Borrowers" by Mitchell Mengden, is here.

The abstract reads as follows:

In the past decade, private equity sponsors have taken a more aggressive stance against creditors of their portfolio companies, the most recent iteration of which has come in the form of collateral stripping. Sponsors have been using creative lawyering to transfer valuable collateral out of the reach of creditors. This Article delves deeper into the issue by examining the contract terms and litigation claims raised by these transactions.

The lack of protective covenants and ease of manipulating EBITDA and asset valuations are key conditions that permit collateral stripping. Each of these conditions were present in the past decade, primarily due to the protracted expansionary stage of the credit cycle. Lenders, however, can protect themselves from collateral stripping by negotiating stricter covenants and tighter EBITDA definitions, as well as pursuing ex post litigation for fraudulent transfers, illegal distributions, and claims for breach of fiduciary duty.

Contractual opportunism and creative lawyering will almost certainly continue to pervade credit markets. This Article provides a roadmap of ways that lenders can protect themselves from opportunism during contracting and throughout the course of the loan. As this Article concludes, ex post litigation claims are often an inadequate remedy, so lenders should seek to tighten EBITDA definitions and broaden protective covenants—even if to do so requires other concessions—to avoid litigation.

Brilliant Contracts Podcast From Hoffman & Wilkinson-Ryan

I suspect that slipsters already know about this podcast.  But, just in case any of you have not, I wanted to flag Promises, Promises by Dave Hoffman and Tess Wilkinson-Ryan.  This is especially wonderful if you are teaching contract law via zoom this term and need additional content to add to what you are doing already. The podcast has been my savior in that it brightens my mood so much to hear these two brilliant scholars have fun talking through the classic cases while I'm on long walks. (Indeed, today I discussed their discussion of Hamer v. Sidway with Anna Gelpern for over an hour while I was walking).

Listening to the conversations between Tess and Dave makes me remember why I wanted to be an academic in the first place -- and it was not to write boring law review articles with ridiculous numbers of footnotes. It was at least in part to have conversations like the ones Tess and Dave have on their podcast (ideally, with some good scotch at hand).  I imagine that it is a special treat to be a student in their classes (or to be their colleague).

Bravo, my friends. Bravo.

The podcast is available on iTunes, Spotify and a bunch of other places.  

p.s. I wonder whether I might be able to persuade them to do an episode on the Gold Clause cases.  Hmmm.

Back to the Future (Again): Horatio Gadfly and Those Imperial Chinese Bonds

FT Alphaville has had a long line of quirky and brilliant reporters over the years, something that I've always enjoyed (Joseph Cotterill, Tracy Alloway, Colby Smith, Cardiff Garcia and more). And I've especially liked the pieces that do deep dives into obscure and arcane sovereign debt matters.

The latest such piece is from Izabella Kaminska, on the the topic of antique imperial Chinese bonds and the possibilities for recovery (from about ten hours ago, here).  The likelihood of using purely legal methods and recovering on these today is near zero.  But near zero is not zero and periodically, as a means to get students engaged on the thorny questions of statutes of limitations and sovereign immunity, Mark Weidemaier and I will assign them the task of figuring out which of the defaulted imperial sovereign bonds have the best chance of recovery. The assignment is usually framed in terms of a set of bonds that Mr. Horatio Gadfly inherited (here) (Joseph Cotterill's hilarious piece on Mr. Gadfly's adventures is here)).

This past semester, a group of our students -- Michael Chen, Charlie Fendrych, and Andres Paciuc, dug deep and found a small subset of bonds that maybe, just maybe, had a long shot. Their fun paper, "The Emperor's Old Bonds" (soon to appear in print in the Duke Journal of Comparative and International Law) is here.

Izabella's article today makes a deeper point, which is that these legal claims -- while implausible if viewed in purely legal terms -- can acquire muscle as a function of political context.  Is this such a time?  Maybe.  Coronavirus, trade talks, election rhetoric, Taiwan, and given that some of Trump's supporters have lots of these old Chinese bonds and Trump is . . . well, Trump may have changed the equation from what it has been for the past century.  Steve Bannon, of all people, has talked about imperial Chinese bonds on his War Room show multiple times (e.g., this War Room episode at about 40:50. . . Aiyiyiyi . . . here).  

If you are intrigued and want to go down the rabbit hole, this question of politics and antique Chinese bonds has come up before -- see Tracy Alloway's piece on Bloomberg (here), Cardiff Garcia on NPR (here) and Mark Weidemaier on creditslips (here and here). 

Izabella is (I hope) not done with her writing on this topic and there might be more on Alphaville soon (today's teaser was in the main paper).  This topic connects to so many other fun topics relating to historic wrongs too -- like the fact that the British museum holds the Elgin Marbles and the British crown holds the Koh-i-Noor diamond (US museums undoubtedly have lots of these sorts of items as well). If Chinese imperial bonds need to get paid, maybe it is time to give the Elgin Marbles and the Koh-i-Noor back? Come to think of it, maybe it is time to give them back regardless of the bonds? Sovereigns are infinitely lived, which means that their obligations are too -- if someone can figure out a way to get around the statutes of limitations.

Brazilian 5 Year Sovereign Bonds at a 2.875% Yield: Aiyiyiyi

Paul Krugman had a piece in yesterday’s NYT about the lunacy in the stock market, where a bankrupt company like Hertz is merrily issuing new stock (here).  Matt Levine of Bloomberg has similarly, and hilariously, discussed the Hertz case and other recent examples of this bizarre pandemic bubble (here). Why the rush to buy overpriced rubbish?

I have no answer to the question posed by Krugman. But it is not just the stock market. A similar lunacy is occurring in the sovereign bond markets (here). Exhibit number one: Brazil. Reading the press, it seems clear that Brazil is in deep crisis thanks to the disastrous manner in which it has handled the covid-19 pandemic so far (see here and here, for discussions of how Brazil’s response to the pandemic has been among the worst in the world).  Yet, on June 3, it issued over 3 billion dollars in five- and ten-year bonds.  The five-year bonds had a coupon of 2.875%.  (the ten-year bonds were at 3.875%). I cannot understand this yield. What sane investor could possibly look at the current state of Brazil’s response to the pandemic, the fact that its leadership seems to show no signs of reversing course, and the resulting economic forecasts, and think that Brazil is such a safe bet to repay its borrowing in just five years that it should receive funding at 2.875%. Of course, from Brazil’s perspective, why not issue even more debt, if the response of the market to worsening conditions is to offer even more and cheaper money.

It is worth, however, thinking about what will happen if and when countries like Brazil cannot repay these bonds when they mature. I suspect that investors will not remember that they deliberately anesthetized their risk instincts when they bought the bonds. Some of those investors will loudly demand payment in full -- in other words, it's Brazil's fault for having offered the bonds, not the investors' fault for ignoring the risks when they bought them. Along those lines, I wonder why official sector institutions like the IMF – who know how bleak the latest economic forecasts are -- are not urging sovereigns to take advantage of the market lunacy to put in pandemic clauses. These are clauses that would give the countries like Brazil relief in the future if it turns out that covid-19 causes so much harm to the Brazilian economy that it cannot pay back the debt. After all, if investors are willing to buy any rubbish that is put out there, why not ask for better contract terms for when the party ends?

Italian Sovereign Debt: Time to Worry or Party?

Italian sovereign borrowing is increasing, as the costs of dealing with a stalled economy and the pandemic build.  A recipe for disaster?  Turns out that Italian yields (and spreads with the risk free benchmark rate) are actually going down; down in the vicinity of zero. (for the WSJ's treatment of this last week, see here). And at least some Italian economist friends of mine are beginning to talk about how debt/GDP levels around 180% or maybe even 200% could be sustainable.  Aiyiyiyi. That sounds loony; given that the economic fundamentals -- thanks especially to the horror of covid-19 -- are going in the opposite direction. That said, I'm no economist and I definitely do not understand the current market patterns. As further evidence of this lunacy, Brazil was able to borrow $3.5 billion a few weeks ago at lower rates than it was having to pay before the pandemic; a pandemic to which its response has been spectacularly Trumpian. (And yes, I have economist friends of mine who insist that Brazilian debt is safe and will remain sustainable because of factors such as Fed swap lines and Trump's friendship with Bolsonaro. I'll readily admit that I don't understand the swap line theory of debt sustainability. But on that other point . . . . Really dudes? You are going to bet on Trump bailing out Bolsonaro because of their special relationship?).

Not everyone, fortunately, thinks that the markets are going to continue to adequately and fully fund this covid-19 recovery.  Below is the abstract of Tyler Zelinger's new paper on preparations Italy could make in anticipation of the need to do a debt restructuring someday soon (and he is only using them as an exemplar, since they seem to be on the precipice -- despite their current borrowing costs). If things begin to tank -- as I worry they will sooner rather than later -- papers like this that do the advance preparation that governments are refusing to do, will be invaluable. Tyler even finds a silver lining in all of this for the hypothetical Italian debt restructurer.

The abstract of the paper (just posted on ssrn) is below:

As the global economy has become more integrated and increasingly complex, the need for a system that administers government default has become more and more apparent. The body of "sovereign debt law" that has emerged to fill this need in the context of the Eurozone is an amalgamation of treaty obligations, domestic law constitutional principles, and tensions between state government and supranational government actors. Using a hypothetical Italian restructuring, this paper seeks to explore how these different bodies of law operate together to create a system that protects government function as opposed to guaranteeing creditor recovery. Further, this paper explores how an exogenous shock as the COVID-19 pandemic effects the analyses undertaken at various points in the sovereign debt legal framework.

This analysis reveals a silver lining: although Italy has suffered horrible losses as the result of the COVID-19 pandemic, the effects of the pandemic will help mitigate the legal challenges faced by Italy in the course of a local-law restructuring effort and thus smooth the path to a successful post-COVID recovery.

The Drama Over the Windstream Case: Boiled Down

One the most discussed and debated corporate finance/contracts cases of 2019 was Windsteam LLC v. Aurelius (SDNY 2019) (Stephen L posted on this here).  A couple of days ago, Elisabeth de Fontenay put up her article "Windstream and Contract Opportunism" on ssrn (here) that is one of first deep dives into the implications of what happened in the case.

I find this case especially interesting because it is about contract arbitrage. Cribbing from Elisabeth's superb narrative, the saga starts when the company in question, Windstream, does a sale-leaseback transaction in violation of its bond covenants (it claims it is not actually violating the covenant because it did the transaction through a subsidiary blah blah -- but as the judge points out, its attempt to elevate form over substance falls flat). As it turns out though, none of the bondholders seem to have either noticed or cared about the violation at the time it happened. The violation only bubbles to the surface when Aurelius, a notorious hedge fund, shows up two years later and demands that the trustee declare a default. At this point, I'd have expected that Windstream would have paid Aurelius greenmail to get them to disappear and everyone would have lived happily after.  But that doesn't happen.  Instead, Windstream officials and Aurelius fund managers get into a nasty battle of words in the press and (I'm guessing) both sides decide that they will fight this to the death.

At this point, Windstream tries to retroactively cure its covenant violation by getting the non-Aurelius creditors to say that they were okay with the transaction and do not want to call the company to the carpet. In theory this should have been doable via exit consents and other familiar corporate moves.  But, in a comedy of errors, Windstream manages to screw up the retroactive cure (and the judge wasn't willing to elevate substance over form on this side of the equation).  End result: Windstream loses and goes into bankruptcy.  That is, everyone loses, including the bondholders, because the value of their bonds goes into the toilet.

What Can One Do With 50% plus One?

Today is the final day of my Duke-NYU sovereign debt seminar with Steve Choi and Lee Buchheit, and that makes me sad.  The students have delivered in spades this term, notwithstanding the disruptions to their lives as a result of corona drama. I can't begin to express how proud I am.  And teaching with Steve and Lee (with cameos by Ugo Panizza, Mark Weidemaier, Theresa Arnold, Anna Gelpern, Jeromin Zettelmeyer, Chanda De Long, Yannis Manuelides, Anna Szymanski, Felix Salmon, Jon Zonis, Robin Wigglesworth, and Colby Smith) has been special. I’m grateful for how much I've learned from them and the students.

In preparation for today’s final presentations, I want to note a couple of ideas from the student papers that arrived last night. These ideas struck me as both intriguing and audacious.  I haven’t thought them through adequately, but they got me thinking.  So, here goes. Some preliminary thoughts.

What to do When Your Contract is a Dog's Breakfast

Tomorrow is the first of the two days when the students in my international debt class (with Steve Choi and Lee Buchheit) present their final papers to a group of outside experts.  The students have come up with some intriguing ideas for the restructurings of Lebanese and Argentine debt, a couple of which I flag below.

1. What to do When Your Contract is a Dog's Breakfast?

Mark and I have complained about the Lebanese sovereign bond contracts on this site before (here).  I confess that there are portions of it -- the CACs and the pari passu clauses in particular -- that utterly befuddle me.  Now, maybe this is because I'm easily confused and a more sophisticated reader would understand the contract. But let us assume for the sake of argument that this contract really is the proverbial dog's breakfast. That then raises the question of: What is a court to do when faced with a contract full of confusion? (drafting guru Ken Adams uses the following delightful expression for some especially horrid contracts that he has seen -- dumpster fire).  My sense is that New York courts generally pretend that even contracts that they suspect are the product of bad cut and paste jobs were intentionally and rationally drafted.  The theory being that this gives parties -- especially those represented by fancy lawyers -- an incentive to do a better job the next time. 

At least two student groups though (Adriana and Luke from NYU, here, and Alex, Chris & Brenda from Duke, here), suggest that there is reason to think this situation could play out otherwise.  They've identified a provision in the Lebanese bonds (23(1) c of the Fiscal Agency Agreement) that gives the authority to cure any ambiguity or appropriately supplement any provision to the issuer.  Yes, sole authority goes to the issuer with the only constraint being that the issuer cannot make changes that harm the holders of the bonds (basically, that the issuer cannot act opportunistically).  This is potentially huge for Lebanon, since I am willing to wager that it would not be that difficult to get expert testimony from a dozen or so of the most eminent sovereign debt lawyers that the contract here has some major issues.  Further, since these are standard form contracts where it is easy to figure out what the market standard for the provisions in question say, the issuer can safely fill the gaps without being at substantial risk of being found to have acted opportunistically in violation of 23(1) (the student papers do a nice job of digging into the literature and identifying the relevant market standards -- which would, as I understand the arguments in the papers, help Lebanon considerably). Game, set and match to Lebanon?

Question is: Will the Lebanese lawyers use this contractual advantage?  The above language from 23(1) was also present in the Argentine sovereign debt contracts that contained the infamous pari passu clauses that got Argentina into horrible trouble with Judge Greisa and then the Second Circuit almost a decade ago. Those provisions were widely agreed to be relics of the past that no one understood and had little contemporary value.  Yet, even though there was hushed discussion of using the Argentine equivalent of 23(1) in some circles, the Argentine lawyers never used 23(1) to help clarify the meaning of their pari passu clause.  And that makes me wonder whether there was some reason that I'm not seeing as to why the argument was not used (maybe lawyers don't like saying that contracts drafted by their predecessors were dumpster fires?).  I'll find out more tomorrow, I hope.

    2. The Necessity Doctrine in the Time of Corona

A second intriguing possibility that a number of student papers have raised, but that one student paper focuses exclusively on, is the Necessity defense from customary international law.  Simplifying, the doctrine says that nations can get temporary relief from their contractual obligations in the narrow circumstances where some exogenous event occurs that causes them to need to divert resources towards helping their populace.  Charlie, Andres and Michael (here) argue that the current pandemic is precisely the kind of rare situation the Necessity doctrine was designed for.  They are not by any means saying that Argentina is entitled to a reduction in its debt obligations under the Necessity doctrine. Instead, if I understand their paper, their argument is that current levels of uncertainty so high and the need to put resources into health care so palpable that courts should be willing to grant Argentina temporary relief from suit.  And the fact that the G20 countries have just indicated that they are indeed contemplating temporary standstills for the debt obligations of the most distressed nations around the globe (here) is some support for the argument that Charlie, Michael and Andres make on behalf of Argentina.  

As as aside, Mark and I discussed the use of the Necessity defense many moons ago in the context of the Casa Express v. Venezuela case, where we thought it was something of a long shot (here).  The reason being that there was a pretty strong argument that Venezuela's financial crisis was one of its own making.  And one could argue that Argentina's debt crisis is of its own making. But Charlie, Andres and Michael respond to this argument by reiterating that they are not asking for debt relief on account of the Coronavirus -- just a temporary standstill so that the country can help save the lives of its own people.  Question is: Can they persuade a New York court that these circumstances are so unique that the recognition of the defense will not destroy the market?  

The Myth of Optimal Expectation Damages

Roughly eighty years ago, Lon Fuller and William Perdue (the former, then a faculty member at Duke Law, and the latter, a 3L), wrote two of the most famous articles in contract law (here). One of the puzzles they posed -- about why the law favors the expectation damages measure -- resulted in an entire body of scholarship, including the theory of efficient breach. And although there are a number of superb articles that have been written on this matter (Craswell, Scott, Goetz, Triantis, Posner, Klass and more), I confess that I have always had a strong distaste for this body of optimal damages scholarship because it was too complicated for me. I have, however, been most grateful to Fuller and Perdue because, in the wake of their famous collaboration, they set up a scholarship at Duke to fund faculty-student research collaborations that I have frequently applied for funding to. Last summer, I finally had to pay the price though, because three of my Duke students (one former and two current) asked if we could work on a legal realist examination of the Fuller-Perdue optimal damages question itself. I was resistant, but Jamie Boyle (who has written a fabulous piece linking Fuller's work in both public and private law (here)), urged that the students were right about this being a fun project. 

Jamie and the students were right about this being a fun project, in spades (we owe a special debt to Mark Weidemaier, who is a saint in terms of his generosity with comments and advice). All credit to Theresa, Amanda and Madison (errors are mine).

With thanks to Lon Fuller and William Perdue, the paper is here, and the abstract is below:

One of the most debated questions in the literature on contract law is what the optimal measure of damages for breach should be.  The standard casebook answer, drawing from the theory of efficient breach, is expectations damages.  This standard answer, once considered a major contribution of the law and economics field, has increasingly come under attack by theoreticians within that field itself. To shed an empirical perspective on the question, we look at data in one setting (prepayment clauses in international debt contracts) on what types of damages provisions parties contract for themselves. We find little evidence of a preference for the expectations damages measure.

Lebanon’s Unusual Pari Passu Clause and the Question of How to Construct Credible Priority

A few weeks ago, Mark Weidemaier and I blogged about Lebanon’s unusual pari passu clause and Collective Action Clauses. The question we were interested in – and the one our students are focused on – was how to engineer a restructuring that would be protected against the risk of holdout creditors (here).  One of the few methods available, assuming that creditors were likely to have blocking positions in a number of the Lebanese foreign law bonds, was to utilize Lebanon’s unusual pari passu clause to do an Exit Exchange.  Yesterday, one of the students in my debt restructuring class, who is working on designing a plan for Lebanon, posed the following inconvenient questions: Isn’t this clause internally inconsistent, with the second half of the clause contradicting the first half?  And if so, won’t a court disregard the second half as a scrivener’s error?

Boer Bonds and the Doctrine of War Debts

Concentrating on just about anything during these days of the coronavirus, let alone academic writing, has been a trifle difficult.  A splendid new paper on Boer Bonds by Kim Oosterlinck and Marie Van Gansbeke (here) did, however, get me focused (for a bit).  And that’s in part because their paper has potentially turned upside down what I thought was an established part of customary international law.  That is, the law of “War Debts.”

The international law of state succession, standard treatises will tell you, is strict.  New states (and new governments) inherit the debt of predecessor states (and governments), regardless or changes in political philosophies.  One of the only exceptions to this strict rule is the doctrine of War Debts.  This doctrine, that I thought was implemented by the British Crown in 1900, in the wake of Boer War, says that debts incurred during hostilities by the losing party do not need to be taken on by the victor.  The refusal of the United States to take responsibility for the debts incurred by the Confederacy during the Civil War is another example.

The historical materials that I looked at in my prior work were lacking in clarity, to put in mildly.  And my sources – old treatises and cases -- were all secondary.  In a paper from over a decade ago, here is what my co authors (Lee Buchheit and Bob Thompson) and I conjectured that the doctrine of War Debts was (full paper is here):

The British Government did not at the time articulate the rationale for this policy. Perhaps it believed the justification to be obvious. Paying the debts of a former adversary is one thing, particularly when victory brings sovereignty over the disputed territory and resources. But paying off the very loans that both delayed and added to the cost of that victory is quite another thing.

Moreover, anyone lending to a belligerent power after hostilities have begun is placing an obvious bet—an all-or-nothing bet—on the outcome of the war. This aspect of the war-debt limitation to the doctrine of state succession is significant because it introduces into the debate the reasonable expectations of the creditor when extending the loan.

Kim Oosterlinck and Marie Van Gansbeke, both financial historians, look beyond the secondary sources to primary sources – the debates among the legal advisers to the British Crown, the archival records of the investment banks, and most importantly, the prices of the Boer bonds issuer prior to and after the hostilities with the British began. The story they conclude with is different from the one than what my co authors and I conjectured a decade ago (being careful historians, they couch their bottom line with caveats about the need for further research).

Do CACs Constrain the ECB From Buying Even More Bonds?

Answer: No

(This post borrows heavily from the ideas of my co author, Ugo Panizza, of the international economics department of the Graduate Institute in Geneva).

Press accounts of last Wednesday’s emergency ECB Governing Council meeting report that some of the hawks on the Council are resistant to the ECB buying more Euro area sovereign bonds.  The concern being that such purchases might take the ECB’s holdings of particular bond issues to more than a third. If this happens, the ECB would have a blocking minority in any future debt restructuring negotiations where the sovereign is seeking to use its Collective Action Clauses (CACs) to engineer that restructuring.  And (some claim) because voting for a restructuring would amount to monetary financing, the ECB would be forced to vote no and block the restructuring.   Hence, no buying above 33.33% of a bond issue should be done.

This is nuts. Let’s first state the obvious: large ECB interventions will reduce the likelihood that a restructuring will be needed. The reactions of sovereign spreads to President Lagarde’s botched comment that the ECB is “not here to close spreads” and to the successive ECB announcements make this clear.

But let us assume that, even with vigorous ECB intervention, a restructuring is needed and let us take the case of Italy which is what everyone is really talking about.  Close to 99% of Italian sovereign debt is governed by Italian local law. That gives Italy the so-called “local law advantage” (here we focus on Italy, but the local law advantage applies to most bonds issued by euro area sovereigns except Greece and Cyprus).  Translated, it means that Italy has a wide variety of strategies it could use to restructure its debts. 

The collective action clause or CAC mechanism – one where the debt can be restructured in a fashion that is binding on dissenting creditors if a super majority of creditors votes in favor of the restructuring -- is but one of many options that Italy could use to restructure its debt (we describe these options here; see also Weidemaier (2019), here). CACs may be the most market friendly of the various restructuring options, since it requires the approval of a super majority of creditors to work. But it is neither the easiest nor the cleanest restructuring technique for a country that enjoys the local law advantage.  More important, to answer those hawks on the ECB governing council, the restructuring could occur without the need for the ECB to vote one way or the other.

From the Vault: Lee Buchheit on "How to Restructure Greek Debt" Videos

My sovereign debt class is discussing the March 2012 Greek debt restructuring on Tuesday afternoon.  The magic here was in significant part the product of Lee Buchheit's genius. That said, I do not wish to discount the contributions of his star studded team, which had debt gurus like Andrew Shutter and Andres de la Cruz who played invaluable roles.  

In class, we are thinking a lot about how Lee used the "local law advantage" in Greece. The reason being that we are (to put it mildly) somewhat focused on strategies that could be used to get Italy significant debt relief in the midst of this current crisis -- especially if the ECB drops the ball in terms of providing adequate financial assistance.  Lee just announced his retirement, a few months ago. I'm hoping that he comes back out of it. (Hopefully, we can get him to answer questions via zoom on Tuesday).

From the vault, here are some amazing videos of Lee from both before and after the March 2012 restructuring. They are amazing because they give us a sense of how his thinking evolved as his strategy moved from a hypothetical thought experiment that had no chance of being implemented to the one plausible strategy left on the table.

Videos:

Lee – Plan B (June 21, 2010) (Pre Greek Restructuring) – start watching at 20 minute point in:

https://www.youtube.com/watch?v=w8Zvfn3DjdY

 

Lee -- The Options Now (in the wake of the Greek debt restructuring) (Nov. 6, 2012)

https://www.youtube.com/watch?v=Q6G14SF4-sQ

 

The Options Now (Part II) (Q&A)

https://www.youtube.com/watch?v=e8bBWbKCdT8&t=26s

 

Lee, with an introduction by Ugo Panizza -- European debt restructuring/Greece (and some talk of Argentina) (Nov. 26, 2013) 

https://www.youtube.com/watch?v=nLZrTzvNBT0

Puerto Rican Debt and Force Majeure

Among other things, the Coronavirus and the near global shutdown, has gotten contracting parties scrambling to read their force majeure clauses.  But what about if the parties in question didn’t explicitly contract for an “act of god” clause that covered unexpected pandemics? The question, as we’ve discussed on this blog before, would become one of whether such a clause was implicit in the contract (here).  That, in turn, will in part be a function of the contract’s governing law (here).  Puerto Rico, already mired in a debt crisis, is going to need even more relief now.  Question is: Does the fact that its debt contracts are almost all governed by local Puerto Rican civil law embed a source of temporary relief for it?

My casual impression is that the leading common law jurisdictions for contract law, such as New York and England, would be reluctant to find an implied force majeure term in contracts among sophisticated parties.  By contrast, civil law jurisdictions such as France, the Netherlands and Spain, sometimes have such a clause baked into the civil law and also appear more willing to find such a provision implicit (for discussions of the common law v. civil law approaches, see these memos from White & Case and Cleary Gottlieb memos, here and here).

Particularly intriguing in the context of a sovereign or quasi sovereign debt, is the possibility that an implication of the civil law jurisdiction in question having force majeure as part of the civil code means that the relevant government can, through legislation, make it clear that a particular event (Coronavirus) satisfies the conditions for force majeure (here).  China has apparently done just that, even issuing force majeure certificates in some cases (here and here).

A reason I’ve been thinking about implied force majeure clauses is that my seminar with Guy Charles has been discussing Puerto Rico’s debt crisis.  (Two of our recent guests to the seminar were David Skeel and Sam Erman, both of whom had fascinating papers on the topic of Puerto Rico).  Puerto Rico is, unlike most of the US,  a civil law jurisdiction.  Better still, almost all of its debt is under local Puerto Rican law (now, in the case of anything redone under PROMESA, with an overlay of that federal law). 

One has to concede up front that the Puerto Rican debt crisis is not the product of some exogenous event such as a hurricane or the coronavirus.  But surely everyone would agree that the virus has the potential to push Puerto Rico (back) over the financial brink, just as its seems to be getting back its sea legs (see here). And, so the question is, does Puerto Rico, as part of the implicit terms of any debt contract made locally, have the right to temporary relief from having to perform as a result of the enormous economic slowdown that the virus is already causing.  I haven’t been able to track down anything specific in the Puerto Rican civil code, but the Puerto Rican code has its origins in the Spanish civil code. And the Spanish code has force majeure baked in (for discussions, see here and here).

Hmmm . . . Some years ago, a wonderful group of students did find some promising avenues for Puerto Rican debt relief buried deep in its civil code (here).

*Note (in response to the first few email comments - that I'm most grateful for):  The question of what precise law the new agreements are governed by is thorny.  Best I can tell, it seems to be PROMESA and, to the extent not inconsistent with PROMESA, Puerto Rican law. But what in the world does that mean with respect to what we care about: force majeure for pandemics such as coronavirus?  I don't think there is any federal contract law on that matter; and, if so, that strikes me as pointing to Puerto Rican local law, which in turn might point us to the Spanish civil code. But maybe there is an argument there about how federal law has something to say about force majeure in the context of a pandemic that is escaping me. The actual language of the new governing law clauses is fascinating if you are as obsessed with governing law provisions as Mark W and I have been as of late.  John Coyle of UNC is the leading scholar of governing law clauses in the whole wide world (see here). And he is a contracts guru as well.  Maybe I can get him to opine.  I will try to do so and report back.

Do Italian Sovereign Bonds Have an Implicit Force Majeure Clause?

"Are There Force Majeure Clauses in Italian Sovereign Bonds?"

That’s a question one of the students in my sovereign debt class asked a couple of days ago. After reading about some of Christine Lagarde’s recent statements, she was worried about the possibility that the European authorities might not adequately support the Italian authorities in dealing with Covid19 with financial assistance needed to tackle the crisis (for discussions, here and here).  And, if not, she asked:  Could Italy use the force majeure clauses in its bonds to delay payment on its bonds until the crisis was handled?

My first response was that I was optimistic that the EU would provide Italy with any necessary assistance.  And my second response was that Lagarde and the ECB have walked back/clarified the statement in question. Plus, if memory serves, there is a mechanism for emergency financing to be provided via the ESM for adverse shocks beyond the particular country’s control.  Further, the ECB could probably do even more bond buying of Italian bonds in these circumstances.  That said, this is an event that is impacting multiple countries at the same time and it is perhaps worth it for individual countries to consider what they can do on their own if external help is not adequate.

To start with, it isn’t exactly clear what a force majeure clause is.  I’m no expert, but I believe that this is a French concept that is often referred to as an “act of god” provision.  That, on its face is not exactly a helpful description if you, like me, are unclear on what exactly acts of god are.  The basic idea is that the clause helps allocate the risk of contractual non performance when big cataclysmic events occur that are not the fault of one or the other of the parties and make performance extremely difficult. (for a helpful memo from Shearman & Sterling, see here)  The presence of such a clause in the contract, especially if it addressed the risk of Covid19, would help because it would show where the parties wanted that risk allocated. But, of course, no one knew about Covid19 until quite recently.

In the Italian case, best I know, none of their bonds say anything about which side bears the risk of a big unexpected cataclysmic event (here, the covid19 pandemic).  They are, in other words, no force majeure clauses.  Further, my casual examination of a few dozen bonds today suggests that these clauses are absent from sovereign bonds generally. So, the question is one of filling the silence in the contract.

The Choice of Advisers for the Lebanese Restructuring

An article from a couple of days ago in L'Orient-Le Jour (here) provides a rare window into the process by which financial and legal advisers are chosen for a sovereign restructuring deal. This is the sort of stuff that people talk about quietly in back rooms -- e.g., about how there were shenanigans in the choice of advisers by the sovereign (someone's nephew getting special treatment or something else like that).  But this is the first detailed press account that I've seen.

What I was hoping for, that I didn't get from the piece though, is a sense of what restructuring strategies the different teams offered to provide the Lebanese government when they made their respective pitches. The article suggests that the different teams provided their CVs and the cost of their services.  But the article says nothing about the plans that they proffered. I'd think that if strategy A from Lazard provides for savings of $40 billion with minimal risk of litigation and only a small penalty for future borrowing and strategy B from Rothschild gets you $50 billion in savings, but a high risk of litigation and a 10 basis point higher cost to future borrowing for a couple of years, the way in which the Lebanese high command made the comparison would be the most interesting bit of the saga.  It would give us a window into what calculations the government is making about the future (and they haven't exactly covered themselves in glory on this front during the run up to this crisis).

Alas, there was no mention of the proffered strategies. Instead, the article suggests that all that these various teams brought to the table were their CVs and billing rates. Surely, that cannot be all. These are highly sophisticated lawyers and bankers and they must have planned out strategies ahead of time.

Maybe the folks at L'Orient-Le Jour will do a follow up piece.  And yes, I'm being selfish, because being able to compare the plans in class would be a wonderful learning exercise.

Paper Dragons

Last Saturday evening the Prime Minister of Lebanon announced that the country would not be paying a $1.2 billion Eurobond scheduled to mature today, March 9. As recently as six weeks ago the March 9 bond was trading at 90 cents on the dollar. Today, Lebanon's foreign bonds are deep in the toilet at 18-19 cents.

The London-based hedge fund Ashmore is reported to have bet heavily that the Lebanese authorities would in the end capitulate and pay the bond in full rather than risk a default that could quickly ripple through the country's stock of external debt. Ashmore is said to have admonished the authorities about the deeply unpleasant consequences of such a default, a position that reportedly incurred the wrath of some of the country's other creditors.

This is the second time inside the past few months that a large international investor has played a game of chicken with a sovereign or sub-sovereign bond issuer. In February, the Province of Buenos Aires sought the consent of holders of bond maturing in 2021 bond to delay a $277 million payment due on January 26 for just four months. The justification? Insufficient funds.

When the holders balked, the Province sweetened the offer by proposing to pay 30 percent of the principal of the instrument in addition to the coupon due on January 26. Most holders seemed to disposed to accept that offer but one large institution, Fidelity, held out (here and here). And because Fidelity held a blocking position in the bond, the Province's consent solicitation failed.

The worst outcome in a sovereign debt restructuring is for the issuer to plead poverty, announce the urgent and inescapable need for a debt rearrangement, and then pay the debt in full if the creditors balk at agreeing to the deal. That, however, is exactly what the Province of BA wound up doing. The lasting impression in the market is that the Province's bluff was decisively called. Fidelity, at risk of being perceived as a maverick breaking faith with its fellow lenders, ended up in the position of an equestrian Saint George with its lance deeply embedded in the scales of a paper dragon.

Fidelity won its game of chicken in Argentina; Ashmore apparently did not fare as well in Lebanon. Damage control in Argentina must now take the form of convincing the external creditors of the Republic of Argentina -- who are owed around $100 billion -- that while the Province of BA may have been caught bluffing, the Republic won't be when it announces the terms of its debt restructuring sometime in the next 10 days.

What, I wonder, will damage control look like at Ashmore? If, as widely reported, Ashmore controls more than 25 percent of the outstanding principal of one or more series of Republic of Lebanon bonds, the firm is presumably in a position single-handedly to call for an acceleration of those series. Here is where pride and credibility may play a part. If Lebanon's default on March 9 is NOT followed by the terrible swift sword of creditor enforcement actions, Ashmore's dire warnings to the Lebanese authorities may also take on the character of a paper dragon. I'm betting that Ashmore can't, or won't, let that happen.

At the end of the day, as Lebanese debt guru Anna Szymanski put it in her report on Reuters Breaking Views a few hours ago (here), it will all boil down to what Lebanon’s contracts say and how strong the legal rights of holdouts are.  And, if anyone could actually manage to understand the contractual terms (these are some of the most opaque contracts I’ve ever come across), I think that they will discover that Ashmore has the ability to draw a considerable amount of blood.  

More on the contracts over the next few days, if I can manage to read more than a paragraph of that gibberish without getting a headache. On the other hand, the ACC tournament is starting tomorrow.

Figuring Out the Terms in the Lebanese Bonds (and Why Do the Agents in Sovereign Bonds Suck?)

My students have been valiantly trying to track down the Fiscal Agency Agreements (FAA) for Lebanon that tie in to the offering documents. Those are crucial for anyone trying to figure out a restructuring strategy for the government, which is one of our projects for the term.  And, although I am optimistic that my students will figure out a way to get them, they have so far been met by a brick wall.  None of the various parties who have the documents, such as the Fiscal Agent or the Ministry of Finance or the various advisers to the Lebanese government will do the least bit to help my students.  At the end of last week, some of my students even called the FA's offices to say that they were willing to take a little side trip from their spring break visit to Europe this week to go over to the FA's offices in Luxembourg to copy this precious document in person. The response: The person on the other end hung up. Really?  Is the government really so confident in the restructuring plan that it can afford to have its agent hang up on people willing to delve through the fine print of these documents for free to see if they can come up with helpful suggestions? Maybe Lebanon already has a kickass plan from its expensive advisers and does not need any help. Wait, I forgot that they have no plan.

Skeel on the Puerto Rico Oversight (NOT Control) Board

I have long been a fan of both David Skeel's research and him as a person. Not only was his book Debt's Dominion key to some of the earliest research I did on Collective Action Clauses, but he was always willing to answer my stupid questions about basic concepts (something that fancy tenured professors at Ivy League schools do not often do).  Over the years, as he has gotten fancier and fancier, I have continued to burden him with my stupid questions about bankruptcy and restructuring matters and he has never ceased to be generous; the proverbial gift that keeps on giving and never ever taking.

Last week, to penalize him yet further for his kindness over the years to me, I asked him to please come to talk to the students in my debt class about his work on the Puerto Rico oversight board (e.g., here). In our class, we read his work and it occurred to me that although it was a long shot, it would be cool to be able to talk to David in person.  And he said yes -- and that was even though I warned him that some of our seminar questions would be a tad bit hostile, in terms of pressing him about all the things that the control board had done vis-a-vis pensions, the lack of accountability of the board, imperialism, insular cases, etc., etc.

The session was amazing. The students did not disappoint in terms of relentlessly asking him tough and incisive questions (I was so very proud of them).  And he answered them in the way only he can do: in a generous and candid fashion. Alas, I cannot repeat the details of what he said, since we promised him that we would not report on any of that.  But I can lay out what I think are some of the key questions that I hope David will address in the book that I hope he will write when this is all over.

First, why was the choice made to treat Puerto Rican debt as if it were domestic municipal debt instead of treating it more like sovereign debt?  The fact that Puerto Rican debt circa 2012, when the @#@# hit the fan first, was all under local law meant that Puerto Rico could have used the "local law" advantage that Lee Buchheit's team used in both Greece and Barbados (on the latter, see Andrew Shutter's cool new article in the Capital Markets Law Journal, here).  Yet, Puerto Rico and its advisers decided to go down the municipal bankruptcy route, only to get themselves tied up in expensive legal losses for years.  My guess is that there was some political reason for the choices that were made to try and pretend that Puerto Rican debt was more like state debt than sovereign debt.  But I want to know more.

Second, why was assistance from the IMF not used?  As I understand it, the Oversight Board basically does the kind of job that the IMF does when it goes in to help over indebted countries.  The IMF has developed a lot of expertise in this exercise over the years.  Why aren't there are bunch of ex IMF stalwarts on the Oversight Board, helping out David and his colleagues?  

Third, while I'm full of admiration for some of the aggressive moves that the Oversight Board took vis-a-vis the creditors in terms of, for example, questioning the validity of 2012 and 2014 issuances that were arguably done in violation of certain debt limits, what calculations were made about how much this strategy would impact Puerto Rico's future cost of borrowing?  After all, one of the key objectives of the Oversight Board is supposed to be to return Puerto Rico to the capital markets. Someday, I'd love to see that the report that the financial advisers provided on this. (It probably pointed to the research showing that the sovereign and municipal debt markets have a notoriously short memory).

Fourth, what is the world is happening with the Aurelius case? I thought that we'd have a decision on that, in terms of the legality of the Oversight Board under the Appointments Clause, months ago.  Does the delay mean that those of us who predicted -- based on what happened at oral argument -- that the court was going to rule quickly in favor of the Oversight Board were perhaps wrong? Maybe the delay means that the Court is indeed going to deal with the ugly legacy of the Insular cases, something that they did not seem to want to do in November at the argument? (Yes, I know that David does not have special insight into what the justices are thinking, but I'm curious anyway).

I can't wait for David's book to come out.  I'll assign it in class and ask him to come back to talk to us again!

Odd Lots Podcast on Iraq's Astonishing Debt Restructuring (Next: Ecuador's Dodgy Buyback?)

For sovereign debt fans, there is a very nice podcast from Bloomberg's Odd Lots that was put up a couple of days ago (here).  The title says it all: "How Iraq Pulled Off One of the Biggest Sovereign Debt Restructurings of All Time".  It is a pity that there has not been more writing about the Iraqi debt restructuring because this is one from which there are many lessons to be learned. Lessons that are relevant for Venezuela in particular.

Plus, it was so creative and there were so many colorful characters involved (I loved the podcast, but I wish that they had talked more about the cast of characters and some of the individual stories like those of the neo cons, the US President, LCB, the NGOs, Alexander Sack and so on).

The guest for the podcast was LSE Econ Historian, Simon Hinrichsen (especially impressive that the basis of the podcast is a chapter from his dissertation -- I cannot imagine anything that I wrote in grad school being worthy of much more than toilet paper).

So, I have a request to Joe Weisenthal and Tracy Alloway.  If you are listening, could you guys continue with your historical excavation series and do one on Ecuador's Dodgy Buyback from 2008-09? One of the themes in their discussion with Simon on Iraq was the decision taken ultimately (contrary, I have heard, to the preferences of the US President) to not use the Odious Debt defense.  That probably helped Iraq, but maybe hurt the international system in that that was a wonderful opportunity to change international law for the better.  But it is not the case that no country has run with that defense successfully.  Ecuador in 2008-09 is one. And China, with respect to its Imperial debt is another one.

In class in NY last week, we had some of the folks who worked on the post-buyback resuscitation of Ecuador's reputation in the international markets come and discuss how that had been engineered. It is an amazing story because Ecuador is now a regular and respectable issuer in the EM space. How the hell did that happen so quickly?  Unfortunately, I promised to keep mum about what was said in class last week.  But fabulous reporters like Joe and Tracy could unpack this on a podcast.  And then those of us who study this topic would benefit.

Why Are Those Lebanese Fiscal Agency Agreements So Hard to Find?

Often, the final assignment in my sovereign debt finance class is for the students to try and design a restructuring plan for whatever sovereign is in crisis that year.  This year, we have a number of available candidates: Argentina, Lebanon, Venezuela, Italy(?).

A crucial part of the assignment is for the students to figure out what the relevant contractual documents are that they need to delve into.  There are some students who fail to realize until the end of the term that the offering circulars and prospectus supplements are not in fact the relevant contractual documents and, at best, contain summaries of some of the relevant terms.  To the extent that the language of the offering documents is inconsistent with that in the actual contracts, and the students fail to see this, it can be a disaster – as Andrea Kropp’s excellent forthcoming article “Restructuring Italy’s New York Law Bonds” explains (here).

The majority of students though do figure out that they need the relevant trust indentures or fiscal agency agreements to be able to design a plausible restructuring plan.  The question then is how to find those documents. And that is often not easy. Now, as a matter of pedagogy, I think it is good for the students to learn how to use the various databases such as Bloomberg, Thomson One Banker, Filings Expert, Dealogic and so on to find key financial and legal data.  Enterprising law students often also find other sources, such as the websites of the ministries of finance and the databases of the various exchanges on which these documents are listed. 

Finding these elusive documents is a skill that was invaluable for me at my law firm eons ago because most of the other associates had no clue as to how to find these financial documents (law schools certainly didn't provide training in how to dig up financial contracts). But these above mentioned sources, while providing a good start, rarely have the actual contracts. Instead, what they provide are the sales documents that, at best, contain summaries of the key terms.  And, as noted, those summaries can sometimes be very wrong from a legal perspective because for us the specific wording of clauses can be especially important. 

So, should the public expect for these documents to be readily accessible? I think so. These are the debt contracts of sovereign issuers, often for many billions of dollars that taxpayers are on the hook to repay. One would think that their terms would be a matter of public record so that the public can see what sorts of preparations the governments have made to handle the eventuality of a debt restructuring (in Lebanon’s case, I worry that the answer might be: precious few).  Yet, the reality is that it can sometimes be very difficult – near impossible in some cases – to dig up this stuff. And I’m finding that Lebanon is a prime example.  Indeed, the sales documents for Lebanon's sovereign debt are particularly obtuse in terms of having buried much of the crucial information in the Fiscal Agency Agreement, which no one seems to be able to get access to unless one is an actual holder of the bonds who is willing to show up at the Fiscal Agent's office in Luxembourg or something else altogether ridiculous.  Now, there are ways to figure this stuff out, which my students inevitably do. But why make this exercise so difficult when what we are talking about are public debt documents?

Maybe my friends at the IMF and World Bank will remedy this problem as part of the various "transparency" initiatives they periodically trot out at fancy conferences on the beach in Mauritius, Bali or the Seychelles. But right now, today, I'm willing to bet that they themselves don't have the relevant Lebanese Fiscal Agency Agreements.  At least the unnamed person from one of these institutions who just emailed me to ask whether my students had been able to dig up the Lebanese documents didn't have a clue as to how to find them. I was so very tempted to ask him, in response to his question, how his last transparency initiative conference on whatever beach had gone (he'd have likely responded: "Wonderfully! Pity you couldn't make it").

Aiyiyiyi

The Emperor's Old Bonds

Inspired by Tracy Alloway's recent piece on antique Chinese bonds (here), a group of my students has gone deep down the rabbit hole of the question of how one might recover on them (or, from the Chinese government’s perspective, how one would block recovery).  If I’m reading Michael, Charlie and Andres correctly, they think that the probability of recovery via litigation is near zero on almost all of the antique Chinese bonds.  All except one special bond issue that no one has brought litigation on yet.  I'm not saying that there is a real possibility of recovery here (if one is a legal realist, one would be deeply skeptical), but we are in the era of Trump.

I love their title, "The Emperor's Old Bonds".  But there is much more to this fun paper (here) than the title. The abstract is below:

Tracy Alloway’s recent article in Bloomberg has 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 sovereign and the long-lapsed statute of limitations. We also evaluate the Chinese government’s possible recourse. 

The key takeaways from our investigation: 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. To overcome the long-expired statute of limitations, and win an equitable remedy, it must be shown that the PRC not only violated an absolute priority or pari passu clause, but also that they are a “uniquely recalcitrant” debtor. Finally, despite China’s commitment to the odious debt doctrine, the doctrine is unlikely to provide meaningful legal protection in the event of an otherwise successful suit. 

Overall, it is a difficult suit to bring, but through our investigations we have discovered one issue in particular which holds the greatest danger—or perhaps the greatest promise: the 1919 Gold Bond.

Pre-1949 Chinese Bonds: How Much of a Litigation Threat Do They Pose?

As part of the international debt class that I'm teaching this term with Steve and Lee, we spent a couple of sessions discussing the various lawsuits that have been brought in US courts over China's defaulted pre-1949 debt.  The discussions have been a lot of fun because the students have had interesting perspectives on the question of whether the governments of mainland China and Taiwan need to continue to be concerned about these irritating lawsuits popping up (especially in the age of Trump, given that some of his ardent supporters in Tennessee appear to be big and vociferous holders of these antique debt instruments).

Among the interesting issues that were discussed were whether China's persistent refusal to even engage the debt holders amounted to the kind of "uniquely recalcitrant" debtor behavior that resulted in the New York granting an injunction against Argentina in the infamous NML litigation in 2011 and 2012. This is important because an NML type argument, via the priority clauses in a number of the old Chinese loans (particularly those that were issued in US dollars and via US banks), could be the key to resuscitating these old claims.

Reading cases such as Jackson v. PRC, and especially the US Statement of Interest that was filed there, are enough to convert even the most ardent legal formalists into realists. And, if so, the fact that the present inhabitant of the white house has (maybe, kinda . . .) shown more sympathy towards these holders of antique Chinese bonds than any prior US president in over a half century may be quite relevant.

I've asked our students, if they are willing, to post their views on these matters in the comments (and maybe even links to their papers).  They are quite interesting.

Judgements, CACs and Civil Procedure Quicksand

Mark's post below on whether obtaining a judgement is a clever way of getting around the threat of a cram down via a CAC is unsurprisingly superb.  Pharo's strategy, Mark says, is not at all crazy.  If he is right -- and I have learned over the years of working with Mark that he is almost always right -- then this strategy is going to be relevant not only in Venezuela, but in Argentina as well. It creates the problem, to quote Steven Bodzin of REDD Intelligence, of Rush-ins (as opposed to holdouts).

Interestingly, thanks to an old friend who has a doctorate in international civil procedure and follows these things, I discovered an old IMF paper where the IMF legal gurus (Thomas Laryea and Sean Hagan, most likely) had flagged this issue of judgements potentially undermining CACs for their board as far back as 2003--04. Paragraph 43 of the March 22 Report to the Board titled "Recent Developments in Sovereign Debt Litigation" basically supports Mark's view and warns the Board of precisely the complications we are discussing fifteen years later.  If one wants to go down the rabbit hole here, as I suspect the folks from Pharo have gone, the implications for the resuscitation of an Elliott-style pari passu attack via a judgement are significant. But I'm not wading into that quicksand now.

Now, to return to the question of whether Judgements do indeed quash CACs and to continue the discussion with Mark (with the caveat that he knows best), I have a simple minded query for those who are confident about that conclusion (I'm not confident either way). Take the following:

You and I enter into a contract to lend $100 to Mark. The contract also says that if Mark does not pay on the maturity date, you will refund $50 to me out of your own pocket.

Mark doesn't pay and you get a judgment against him.

Have you avoided paying me the $50?

Sharpened, the issue is whether a CAC is a form of intercreditor undertaking by which each holder promises to all the others that it will accept a supermajority decision about the treatment of the credit in a distressed situation.

After all, the clause does not say the modification "will be binding on all holders until the moment they receive a judgment". It says "binding on all holders".

And if Griesa/Baer are right that the bond continues to have legal vitality even after the awarding of a judgment, is this really so far-fetched?