All Bonds Are Not Created Equal - Some Are More Equal than Others

Bond Law 101 – The Argentina Experience

Pari Passu – Latin for “equal footing.” All creditors must be regarded equally and repaid at the same time and in the same fractional amount to resolve a default.

CAC – Collective Action Clause.

A CAC allows a proportion of bondholders to agree to a “debt restructuring” – payment to end a default -- that is LEGALLY BINDING ON ALL HOLDERS of the bond -- even those who vote against it.

Financial Times

By Jonathan Wheatley
Jun 26 2014 17:54

The most casual followers of the Argentine debt saga will be familiar with the Latin term pari passu, or “equal footing” – or, in this case, equal payment to all holders of Argentine bonds, whether or not those holders took part in the country’s two restructuring programmes in 2005 and 2010 following its 2001 default.

Now Russ Dallen of Caracas Capital Markets, a veteran commentator on and broker in Latin America’s most exotic bond markets, has introduced another smattering of Latin to the story: pacta sunt servanda, or “contracts are for keeping.”

That’s what Dallen wrote to investors on Thursday as the basket of defaulted Argentina bonds, bought by Dallen for clients last year when they were trading for 30 something cents on the dollar, rose through the mid 80s to reach a bid price of 90 cents on the dollar.

This from his note:

"While Argentina rails and nashes their teeth at the injustice of it all, the US courts in the end are simply enforcing contract law; and like it or not, Argentina wrote bad contracts (or good contracts, depending on which side of the litigation fence you are on)."

There are about $3bn worth of untendered Argentine debt – bonds that did not take part in the restructuring – including about $1.3bn held by investors who have sued Argentina in the US (because the bonds were written under US law), led by Paul Singer’s NML Capital.

“It may well be that Argentina is buying the bonds back,” he says. “It would make sense and it would certainly be the cheapest solution for them, especially if they will have to pay a multiple.”

Argentina’s best course of action now would appear to be to negotiate in good faith with the holdouts. It may well be able to settle for less than the full amount in the bonds’ contracts. Says Dallen, who got his law degrees from Christ Church College Oxford and Nottingham University in the UK and Columbia Law School in the US: “The first thing they teach you on both sides of the Atlantic is pacta sunt servanda. Then they teach you how to get out of it.”



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