Not a reference to the Second Circuit’s imminent ruling in the Argentina case, nor the Argentine government’s late-night petitioning to the Supreme Court over pari passu. Although it could be.
We’ve already seen how NML Capital v Argentina has influenced Grenada’s legal battle with the Taiwanese government-owned Export-Import Bank of the Republic of China.
Now for something that might particularly bear on the future.
Grenada’s Taiwan trouble merited a solitary footnote in the IMF’s recent review of sovereign restructuring policy. But if even half of the stuff below survives into later legal argument or a ruling — the official sector will need to pay much more attention here.
1.) Ex-Im Bank wants to use pari passu for the “specific performance” of Grenada paying what it is owed, and also for “preliminary enforcement… against granting other creditors payment preferences over Ex-Im Bank”.
Which is a familiar threat. Separately, Ex-Im Bank also want to use negative pledge language in their loans for the same thing. Which is new and which we’ll cover in a separate post. See this early filing meanwhile for more.
2.) Ex-Im Bank also plans to do all of this using debt on which it already has a judgment from US courts. In another step further, Ex-Im Bank’s injunction targets “payments to sovereign or official creditors on Grenada’s external debt”.
Essentially, Ex-Im Bank might be the T-1000 of sovereign bond terminators.
Basically, this whole story really starts in 2007. This was two years after Grenadaditched Taiwan’s chequebook diplomacy in favour of the People’s Republic of China. Ex-Im Bank’s loans were also excluded from Grenada’s restructuring of its debt following two terribly destructive hurricanes.
It was the year the Royal Grenada Police Band greeted the country’s Chinese suitors with Taiwan’s national anthem. Oops.
But 2007 was also the year Ex-Im Bank won a money judgment against Grenada.
A short digression on judgment debt
Judgment creditors have kept out of Argentina’s pari passu saga, although they are circling now that blood is in the water.
There are no judgments attached to the bonds over which NML and the other holdouts sued, which is why their ratable payment was litigated as pre-judgment ‘equitable’ relief. Argentina’s Supreme Court petition is worth reading on this, because it argues that this relief is just a kind of cheat-code to get around the FSIA’s limitations on money judgments. “A sovereign’s non-payment of judgments was specifically contemplated by Congress… creditors must rely on a sovereign to voluntarily pay any judgments against it”. That sort of thing.
Still, all this parsing hasn’t stopped one abortive attempt to (effectively) smuggle a handful of judgment creditors into the ratable payment formula. Nor some consistent warning (from Kenneth Dart’s fund no less) that pari passu will be tested in the ‘post-judgment context’.
Why care about all this judgment debt foreshadowing? Two reasons. First, there’s the potential cost to sovereigns if it is easier to enforce judgment debt by ‘reactivating’ the pari passu clause.
For Argentina, it could mean that billions of dollars follow the $1.3bn it has been told to pay holdouts. Argentina has screamed to courts that it could end up facing more than $15bn of claims, which could well be an exaggeration. Even so addition of judgment debt would probably still be in the billions. Meanwhile Argentina’s current policies have hardly led to dollar reserves coming out of its ears…
For other sovereigns, the cost of restructuring debt could be higher. They could have to pay off holdouts who would otherwise be quite willing to ‘reduce’ their claims to judgment. There is the ‘greater leverage’ the IMF generally worries about holdouts winning after the Argentina case, but judgment debt might make it greater still. And while we say costs to sovereigns, these could realistically be borne through lower recoveries for restructured creditors.
Intuitively then, you might expect any restructured bondholder to greet a post-judgment pari passu claimant like the plague. It’s like cats and dogs. Intuitively.
Of course, despite all that, the second thing is that ratable payment perhaps logically demands that judgment creditors can grab a piece of the pie going to pre-judgment ones. After all, it’s ratable, and equitable. Isn’t it?
So, that’s the context to Ex-Im Bank’s move over judgment debt.
And it’s not like Ex-Im Bank is an amateur or a copycat at this stuff. They know what they’re doing. Having waited six years for Grenada to cough up, they also know how little power judgment creditors currently have. In fact Ex-Im Bank quite recently hit on a novel means of enforcing against Grenada, by seizing revenues collected from airlines and cruise ships. It was overturned. Concerns over sovereign immunity. The bugbear of any judgment creditor.
Similarly, Ex-Im Bank going after “sovereign or official” lenders to Grenada is another new step in this game of enforcement. In its big report the IMF warned of the rise of “holdout official bilateral creditors who seek favorable treatment of their claims”. It could easily have been talking about Ex-Im Bank. The lenders of (say) the Paris Club, who take up a large share of Grenadian debt, might therefore be prize targets for an enforcement action.
Logical? Maybe, so long as the judgment debt issue is resolved first.
3.) Grenada’s main argument so far has been that Ex-Im Bank is not allowed to reopen its judgment debt, “a second bite at the apple”, to add a pari passu claim.
This goes under some fancy names — res judicata, merger doctrine, claim preclusion. Much more on how they work in an April filing here. These three defences could also be seen as Cleary Gottlieb’s trial run for the wave of judgment creditors about to swamp its other client.
Right here though, it would all have the same basic effect if it worked, and it may be the only argument Grenada needs to dismiss Ex-Im Bank’s suit. (Grenada even points out that Ex-Im Bank accepted lower, court-mandated interest on its judgment debt than it could have got by sustaining its right to the accrual of defaulted interest, so it agreed to closing that part of its contractual claim.)
The end. Or so Grenada wishes.
4.) In the meantime, Grenada has also responded to the substance of Ex-Im Bank’s pari passu claim. This is a plan B if the procedural stuff fails.
This is mostly covered in our first post. Needless to say it’s very NML-inspired.
5.) Now for holders of Grenada’s $193m private debt. These folks are currently holding defaulted and highly distressed assets. While not officially accepted into the case yet, among their number are GMO, Greylock, and Franklin Templeton Investments. Here’s their latest filing.
Outside this case, and whatever Ex-Im Bank ends up getting, these creditors will need to engage in hardball negotiations with Grenada to get a recovery on their debt. Still, they cheer on Grenada’s argument that serious subordination is required to breach its pari passu clause:
Ex-Im Bank does not allege any Grenadian statute, official decree, contract, public statement, or financial account, purporting to legally subordinate its judgment to the Exchange Bonds…
Basically, Grenada hasn’t been stupid enough to pass a lock law — which prevents reopening any of the restructuring offers unless it is suspended.
In general, bondholders come down pretty hard on Ex-Im Bank’s claims about non-payment: namely that the “course of conduct” here isn’t strong enough to justify ratable payment as a remedy. Much of this (again) interprets NML.
6.) There’s another legacy of NML in the bondholders’ response to Ex-Im Bank’s bid for ‘partial judgment’, a kind of fast-track for its desired injunction on payments by Grenada. But it’s also a sign that things are not all as they seem in the bondholders’ intervention…
Grenada’s riposte to such ‘declaratory relief’ is simply that it’s a waste of time. Which is fair enough. Although contrast GMO et al:
That’s rather more convoluted. In fact, it’s a recipe for a sovereign bankruptcyregime in US courts.
‘Sovereign bankruptcy’ often gets attacked as a dream of academics and journalists. This is becoming less believable with time. Increasingly litigants themselves seem to be the ones pushing for something like it, as here. You can’t be too shocked if the equitable powers that have been relied on to fashion ratable payment are then called upon to modify contract itself. This is what the Grenada bondholders imply they’re OK with: “the extent to which Grenada can actually perform its contractual obligations…”
Something similar recently came up in the Argentina case, when the Second Circuit asked the Republic for its ideas on how it would ratably pay holdouts — perhaps giving room for less than full payment, but perhaps just the court ensuring no one could complain Argentina hadn’t been given every chance. We’ll soon find out what the court thought of the response.
On the one hand, the Grenada bondholders clearly aren’t stupid, and must have seen what happened to Argentina’s restructured creditors, who were wrong-footed by the ratable payment order. No surprise to see GMO et al flag up “impact on third parties” from the start.
On the other hand, the bondholders are effectively inviting courts to delve into a lot of policy, not law, regarding sovereign debt restructuring (including the “public interest”). Which could get complicated. Especially when the intervening bondholders are engaged in separate negotiations with Grenada over restructuring their debt once more.
7.) But the most striking part is the bondholder response to that all-important question over judgment debt. They break ranks with Grenada!
As a threshold matter, Ex-Im Bank’s pari passu rights have not merged into the default judgment it obtained, and certainly it can raise and be heard on the Pari Passu Clauses in this litigation. But that does not entitle it to judgment or the pleadings…
This is not the intuitive idea, that judgment creditors seeking full payment should be anathema to restructured holders. Particularly, restructured holders facing another restructuring.
8.) To understand what’s going on, we need to go back to a May filing by the bondholders, and back to those fancy words like ‘merger doctrine’.
One possible motive for the restructured creditors is pretty simple: they might need to get judgments themselves if the current negotiations don’t work out!
But the rebuttal of all that careful Cleary argument seems more complex:
Grenada’s novel theory is that when Ex-Im Bank reduced its debt to judgment, it forfeited these rights (even if a violation of those rights did not occur for years after the judgment was sought). Grenada’s motion would establish a new rule of law that would undoubtedly be cited to extinguish the rights of creditors in a broad array of contexts……the suit Ex-Im Bank has now brought was not viable on March 29, 2006, when the original action was commenced. Ex-Im Bank’s theory of breach of Pari Passu Clauses alleges actions by Grenada over a course of six years, including payments as recently as October, 2012, in support of its claims. The majority of the acts claimed to be wrongful occurred after — most many years after — the original action was filed. In NML Capital, the Court of Appeals affirmed a judgment (entered after an extensive factual record was developed) finding a violation of a pari passu clause in a sovereign debt instrument based on the sovereign debtor’s “course of conduct” over a period of six years.
This is very nuanced — substantively, the bondholders argue Grenada’s “course of conduct” has been nowhere near bad enough to justify ratable payment, butprocedurally that this behaviour took place sufficiently far away from judgment to justify at least litigating pari passu. After all it is directly tied to pari passu rights:
If a lender’s rights vis-a-vis third parties necessarily “merged” into every routine judgment on the debt, then every lender would have to assert all such rights in every default, however routine the circumstances or premature the claim…After NML Capital, such complex suits may be brought from time to time. Ex-Im Bank seeks to bring one here. But the proposition of Grenada’s motion is that every judgment creditor who came to court would have to start such a suit, or lose its rights…
It’s another NML legacy! And perhaps quite a logical one. The bondholders’ argument seems to be that judges’ heads would explode sorting this stuff out. But to us their points also suggest that removing pari passu rights from judgment would make any debt restructuring difficult or even impossible. If all potential holdouts sue over pari passu right at default, creditors who agree to a restructuring could get snared, including before any payments are made. Not a great deal for exchanging your bonds, maybe — if the argument holds.
And so the wheel turns in the pari passu revolution…