Interpreting the pari passu clause in sovereign bond contracts: it is all Hebrew (and Aramaic) to me

* Mark LJ Wright, Senior Economist and Research Advisor, Federal Reserve Bank of Chicago, and Faculty Research Fellow at the National Bureau of Economic Research. The views expressed in this article are those of the author and do not necessarily represent those of the Federal Reserve Bank of Chicago, the Federal Reserve System or the National Bureau of Economic Research. mwright@frbchi.org

Capital Markets Law Journal, Volume 9, Issue 3, July 2014, Pages 259–265, https://doi.org/10.1093/cmlj/kmu019

Cite

Mark L. J. Wright, Interpreting the pari passu clause in sovereign bond contracts: it is all Hebrew (and Aramaic) to me, Capital Markets Law Journal, Volume 9, Issue 3, July 2014, Pages 259–265, https://doi.org/10.1093/cmlj/kmu019

Extract

1. Introduction

Pari passu: Nine letters arranged into four syllables constituting two little Latin words that translate roughly as ‘on equal footing’; two little words that may have a giant effect on international capital markets, for good or for ill. For depending on whom one believes, if the interpretation of the pari passu clause in sovereign bond contracts by a judge in the Southern District of New York 1 is allowed to stand, these words will wreak havoc in the market for sovereign debt—by causing Argentina to default, 2 hindering future sovereign debt restructuring operations, 3 and leading sovereign bond issuers to abandon the New York market 4 —or else act as its saviour—by strengthening creditor rights and allowing for less risky sovereign borrowing at lower interest rates. 5

At issue is both the interpretation of the clause—what it means to place creditors ‘on equal footing’—and its implications—particularly the application of injunctive relief to third parties. Viewed in this context, the contribution of Chabot and Gulati 6 is to further our understanding of the meaning of the pari passu clause. They exhibit the first known bond to use language similar in meaning to pari passu: holders of the Mexican Black Eagle bonds, issued in 1843, were to be treated with a ‘just equality’. Moreover, in documenting the context for the issue of this bond, they show that the clause was introduced in response to a debt restructuring that treated holders of identical claims differently based on their country of residence. The implication is that the language was intended to ensure that holders of identical claims would be treated identically.