Pesky holdouts, old-timey edition. (Or, more on why Argentina matter...


"[T]he principal beneficiaries of the litigation were an unscrupulous body of commercial pirates, who had purchased ... bonds at a mere nominal price..."

When would you guess the litigation referenced in this quote took place? The sentiment sounds like something an Argentine finance official might have expressed in the last week or so. But the quote (p. 449) refers to buyers of distressed Bolivian bonds in the 1870s. Like modern holdouts, these old-timey "commercial pirates" recovered an amount disproportionate to their investment, and it didn't win them any friends.

In this post, I want to discuss the historic treatment  of holdouts in sovereign debt restructurings. In a (just posted) paper, Mitu Gulati and I review terms used in both sovereign bonds and sovereign debt restructuring proposals over the course of the 20th century. We're primarily interested in collective action clauses-which, as many readers know, are clauses that allow a majority of bondholders to approve a restructuring in a way that will bind dissenters. Indirectly, however, these historic practices also shed light on the pari passu clause at the center of the NML vs. Argentina litigation.

I'm focusing here on restructurings in the first half of the 20th century. There was probably no "typical" restructuring. But as we discuss in our paper, there were some patterns:

First, unlike modern restructurings, no effort was made to bind holdouts. Each bondholder could accept or reject a country's restructuring proposal, and (in most cases) assenting bondholders were bound even if they were the only one to approve the deal. Countries paid so little attention to holdouts that, in one case, the restructuring country followed these typical procedures even though its bonds actually included CACs. (These were Czech bonds issued in 1922.)

Second (and, in this case, just like modern restructurings), holdouts didn't get paid. Often-though, surprisingly, not always-the restructuring country also promised that it would never strike a better deal with holdouts without also giving the new deal to restructuring participants.

Bondholders were typically represented in these restructuring negotiations by a standing committee, such as the Corporation of Foreign Bondholders in Britain or the Foreign Bondholders Protective Council in the US. One way to think of these institutions is as repositories of knowledge about bondholder rights. Put differently, if we want to know what contract language means, we might do better to look to the meaning assigned by these institutions rather than to the meaning assigned by individual bondholders, who are likely to interpret contracts opportunistically in ways that suit their present needs. Plus, because countries were immune from suit in most courts until the latter half of the century, judges didn't have much opportunity to interpret sovereign bond terms.

What does any of this have to do with pari passu? The Second Circuit interpreted Argentina's pari passu clause to prohibit the country from paying restructuring participants the reduced amount they had agreed to take unless it also paid holdouts the higher amounts they insisted on receiving. We don't have any direct evidence of how, or even whether, the CFB and FBPC interpreted the pari passu clause. But we do know that the clause was occasionally included in sovereign bonds in the first half of the 20th century. During that time, the CFB and FBPC routinely negotiated restructuring deals in which participants got paid, and holdouts didn't, without any indication that this practice might violate the terms of some bonds.

To be clear, I don't know whether the CFB and FBPC negotiated a restructuring of bonds that included the pari passu clause. Furthermore, the few pari passu clauses used in the early 20th century did not include the magic "payment" language found in bonds issued by Argentina and other countries. So I'm not suggesting that the court's interpretation is contrary to some settled historical understanding. But I do want to emphasize the significance of the court's holding. In essence, it interpreted the clause as a promise by Argentina to forego a century's worth of restructuring practices. That's a pretty big deal.