The Pari Passu Strategy in Venezuela

Mark Weidemaier & Mitu Gulati

Should Venezuela worry that holdout creditors will use the strategy that NML Capital and other holdouts successfully used against Argentina? In this article, The Pari Passu Fallacy—Requiescat in Pace, Lee Buchheit and Andrés de la Cruz at Cleary Gottlieb argue not. Lee in particular has made no secret of his distaste for the “ratable payment” interpretation of the pari passu clause. (As many readers know, he is also Mitu’s longtime collaborator.) When interpreted to require ratable payments, the pari passu clause requires a government to pay holdouts in full if it intends to pay restructuring participants in accordance with the terms of their debt instruments. In Argentina’s case, the injunction resulted in another massive default, as the government refused to pay holdouts but could not find a way around the injunction.

Lee and Andrés argue that NML’s pari passu strategy was essentially killed by the person who gave it life, the late Judge Griesa. To oversimplify a bit, the judge’s initial decision--and a decision years before in Brussels in a case involving Peru and Elliott Associates--strongly implied that selective nonpayment is enough to violate the pari passu clause. That is, a government violates the clause simply by paying some equally-ranked creditors but not others. And, crucially, he remedied this breach by issuing an injunction barring everyone with any connection to the United States from cooperating in the continuing violation of the pari passu clause. Without that remedy, Argentina would simply have defied his ruling and continued to stiff holdout creditors.

Almost all of Venezuela’s bond debt is governed by New York law; much of it includes pari passu language that essentially mirrors that used by Argentina. At first glance, one would think these bonds perfectly tailored to the pari passu strategy. But in the middle of 2017, in response to another holdout’s attempt to replicate NML’s strategy, Judge Griesa seemed to change course. In this case (White Hawthorne v. Argentina), he explained that selective nonpayment did not constitute a breach of the pari passu clause unless it was paired with additional “extraordinary conduct.” In Argentina’s case,  he explained, that conduct included the passage of a statute barring negotiations with or payments to holdouts and a series of inflammatory comments made by Argentine officials. Argentina had been a “uniquely recalcitrant debtor,” the judge reasoned, and this had constituted a violation of the pari passu clause. Because much had changed by the time of the White Hawthorne case, including the government in Argentina, he ruled that there was no longer a violation.

Given this apparent change in course, Lee and Andrés argue that the pari passu strategy is essentially dead. The reason is that the White Hawthorne case (and a later case also decided in the Southern District of New York) allows governments to stiff holdouts as long as they do not formally disavow liability for the debt, as Argentina seemingly did.

We are a bit less confident. Certainly Judge Griesa appeared to walk back his interpretation of the pari passu clause in the White Hawthorne case. But he did so in ways that leave us utterly perplexed about what the clause is supposed to mean. At a fundamental level, we simply do not understand the logic of interpreting the words “payment obligations … will at all times rank at least equally” to mean that selective nonpayment is fine except when done in a “uniquely recalcitrant” manner. To an investor, isn’t deliberate non-payment… well, deliberate non-payment? As one of us has written previously about the White Hawthorne case, it would have made perfect sense to say that an injunction was no longer an appropriate remedy given the change in circumstances. Injunctions aren’t automatic; they are equitable remedies reserved for exceptional cases. But it makes very little sense to interpret the clause to provide some protection against selective nonpayment, only to confine that protection to such a vague and ill-defined set of cases.

More generally, we’re completely at a loss about what kinds of behavior will constitute “egregious” additional conduct and thus turn selective nonpayment into a violation. From Argentina’s experience, it appears that enshrining the decision not to pay in a statute would be bad. Presumably, government officials should not publicly avow never to pay holdouts. But if a government experiences a bit of recovery and still doesn’t pay, what will really distinguish it from Argentina? Certainly Lee and Andrés are right that the pari passu strategy has become harder to pursue, but time will tell how completely the genie goes back into the bottle.

As a final note, query how much actual contract language matters to the meaning of the pari passu clause. There has been much debate over whether the Argentina-style version of the clause, which refers expressly to the government’s “payment obligations,” means something different from another extant version of the clause, which refers simply to the “ranking” of the debt. But then again, nothing about Argentina’s clause said that the clause only protected against “recalcitrant” governments.