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Pari Passu

Could Taiwan’s vulture fund strategy tip the scales in Argentina’s debt lawsuit?

Taiwan’s Export-Import bank is using the toolkit developed by so-called “vulture funds” to sue Grenada in US court for failing to make good on a loan.

The Export-Import Bank of the Republic of China loaned the island country of Grenada some $28 million between 1990 and 2000, but it has stopped making payments on the debt, leading S&P to consider it to be in a state of selective default. Grenada is paying creditors who worked with it to restructure its debt after two hurricanes, but the Ex-Im bank has refused to be part of that process.

The lawsuit, filed by the Ex-Im Bank on March 4, relies on the precedent established by American hedge funds who bought up cheap Argentine debt during the country’s default and are suing Argentina for full repayment. That means relying on the “pari passu” clause in the bond, which demands equal treatment of all creditors, and targeting the debtors’ payment processor in the United States, once again Bank of New York Mellon, to force the debtor to pay all of its creditors, hold-outs and hair-cut takers alike, or no one. Joseph Cotterill can take you through the similarities, step-by-step.

This case touches on worries raised by the precedent set in the Argentina litigation: Will hold-out creditors be able to halt payments to other bond-holders until their concerns are satisfied, making restructuring a huge challenge, or will the inability of the courts to enforce its interpretation of the contract hurt the status of US financial markets? Beyond each case’s individual winners and losers, neither outcome is particularly ideal for anyone—governments seeking to borrow money or the markets who lend to them. 

That has some on Wall Street wondering if the filing might influence the judges that will rule on  the Argentina case. A research note circulating at JP Morgan wondered if pari passu litigation is “going viral,” and if that could lead the court to re-open arguments about how to interpret the requirement for equal treatment among bondholders.

“China vs Grenada … offers those who fear the unknown consequences from a potential upholding of the pari passu ruling against Argentina a piece of evidence that the ramifications of pari passu may well merit more consideration than the Court has been willing to admit so far,” the note continues. “[If] Judges can be induced to entertain second-thoughts regarding the consequences of a potential adverse Argentina ruling (in this way or in others) then such developments could be relevant.”

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