Nml Capital Ltd. v. Republic of Argentina and the Changing Roles of the Pari Passu and Collective Action Clauses in Sovereign Debt Agreements

The recent defaults or threatened defaults of a myriad of sovereign states such as the Hellenic Republic, Belize, and Cyprus have brought the issue of sovereign debt restructuring back to the forefront of international financial markets. Of particular interest is the commonplace usage of pari passu clauses in bond contracts spurring post-restructuring litigation by "holdout creditors" who claim they should have at least some sort of binding legal "ratable payment" effect. Part I of this Note provides a summary of the genealogy of radicalization of the pari passu clause from its initial beginnings as a form of legal subordination to the "ratable payment" interpretation. I will show that the 2nd Circuit's decision in NML Capital Ltd v. Republic of Argentina awarding holdout creditors legal rights to ratable payment via a special injunction against Argentina is particularly controversial given that it is a radical departure from predecessor decisions attempting to restrain the effects of Elliott Associates v. Republic of Peru, which was seen as encouraging holdouts and hindering recovery from default by disrupting the restructuring process. Yet, as examined in Part II, this has not led to a substantial change in the way sovereigns are drafting their debt contracts and utilizing pari passu clauses. In Part III, I posit that the existence of "exogenous factors" such as the widespread use of collective action clauses, the adoption of modification and aggregation mechanisms, and the development of the novel Greek "retrofit" collective action clause, explain why the "interpretive shock" of NML Capital did not catalyze revolutionary market change