NML Capital, Ltd. v. Republic of Argentina and the Changing Roles of the Pari Passu and Collective Action Clauses in Sovereign Debt Agreements

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The recent defaults or threatened defaults of numerous sovereign states such as the Hellenic Republic, Belize, and Cyprus have made sovereign debt restructuring, once again, an important issue for international financial markets. Of particular interest is the commonplace usage of pari passu clauses in bond contracts, spurring post-restructuring litigation by “holdout creditors” who claim they should have at least some sort of binding legal “ratable payment” effect. This Note provides a summary of the development of the pari passu clause from its beginnings as a form of legal subordination to more senior obligations to the “ratable payment” interpretation. It will show that the Second Circuit’s decision in NML Capital, Ltd. v. Republic of Argentina, awarding holdout creditors legal rights to ratable payment via a special injunction against Argentina, is particularly controversial given that it is a radical departure from previous decisions attempting to restrain holdout creditors from disrupting the debt restructuring process. However, the anticipated drastic responses from the legislature, courts, and sovereign debt markets did not occur. This Note posits that the existence of “exogenous factors,” unrelated to the decision itself, explains why the “interpretive shock” of NML Capital did not catalyze revolutionary market change.