The Pari Passu Fallacy – Requiescat in Pace
by | posted in: Bankruptcy Roundtable Updates, Cramdown and Priority | 0

Lee C. Buchheit (Cleary Gottlieb Steen & Hamilton LLP)

The pari passu fallacy, first uncloaked in 2000, posits that when a sovereign borrower promises to maintain the equal ranking of a debt with the borrower’s other senior indebtedness, it thereby implicitly promises to pay all of those debts on a ratable basis.  In its 18-year life span, the fallacy has caused considerable mischief in the sovereign debt market.  It even prompted a wholesale change in the drafting of the pari passu clause in sovereign bonds expressly to disavow the ratable payment interpretation of the provision.  Recent decisions of the US federal courts in New York have clarified the circumstances in which a sovereign borrower will be held to breach, and just as importantly when it will be held not to breach, a contractual pari passu undertaking.  These cases confirm that a sovereign borrower will not breach a pari passu covenant merely by paying one creditor while not paying another, equally ranking, lender.

The full paper can be found here.

How to Restructure Venezuelan Debt
by | posted in: International and Comparative, Workouts and Pre-Packs | 0

By Lee C. Buchheit (Cleary Gottlieb Steen & Hamilton LLP) & G. Mitu Gulati (Duke University School of Law).

There is a growing consensus that Venezuela will not be able to persist for much longer with its policy of full external debt service. The social costs are just too great. This implies a debt restructuring of some kind. Venezuela, principally through its state-owned oil company, Petróleos de Venezuela, S.A. (“PDVSA”), has extensive commercial contacts with the United States. Not since Mexico in the 1980s has an emerging market country with this level of commercial contacts attempted to restructure its New York law-governed sovereign debt. Holdout creditors in a restructuring of Venezuelan sovereign debt will therefore present a serious, potentially a debilitating, legal risk. The prime directive for the architects of a restructuring of Venezuelan debt will be to neutralize this risk.

The full article is available here.

Deterring Holdout Creditors in a Restructuring of PDVSA Bonds and Promissory Notes
by | posted in: International and Comparative, Workouts and Pre-Packs | 0

By Lee C. Buchheit (Cleary Gottlieb Steen & Hamilton LLP) & G. Mitu Gulati (Duke University School of Law).

Probably the main reason why the Maduro administration has not attempted to restructure Venezuelan sovereign debt is the potential mischief that may be caused by holdout creditors. The next administration in Venezuela — whenever and however it may arrive — will not want for suggestions about how to minimize or neutralize this holdout creditor threat. One option, before a generalized debt restructuring of some kind affecting all outstanding bonds, is for Venezuela to acknowledge that there really is only one public sector credit risk in the country and that the distinction between Republic bonds and its state-owned oil company, Petróleos de Venezuela, S.A. (“PDVSA”) bonds is artificial, and then to offer to exchange PDVSA bonds for new Republic bonds at par. The question will be, as it always is, how to discourage PDVSA creditors from declining to participate in such an exchange offer.

We suggest that one method might be for PDVSA to pledge all of its assets to the Republic in consideration for the Republic’s assumption of PDVSA’s indebtedness under its outstanding bonds and promissory notes. This is a step expressly permitted by PDVSA’s bonds and promissory notes. Existing PDVSA creditors would be perfectly free to decline to exchange their exposure for new Republic bonds, but they would face the prospect that a senior lienholder (the Republic) would have a first priority claim over any PDVSA assets that the holdout may attempt to attach to satisfy a judgment against PDVSA. That realization should make them think twice about the wisdom of holding out.

The full article is available here.