THE ‘GREAT GAME’ OF SOVEREIGN DEBT RESTRUCTURING: SOLVING THE HOLDOUT PROBLEM. A CRITICAL ANALYSIS OF THE PARI PASSU AND COLLECTIVE ACTION CLAUSES IN INTERNATIONAL SOVEREIGN BOND CONTRACTS

This paper critically evaluates the law of sovereign debt restructuring pertaining to the regulation of creditor co-ordination and holdout creditors. More precisely, it provides a detailed examination and analysis of two important non-financial clauses in sovereign bond documentation: the ‘collective action clause’ (CAC) and the ‘pari passu clause’. It leads with one research question: does the pari passu clause and CAC adequately address the holdout problem and encourage the orderly restructuring of sovereign debt? It also provides independent judgment as how best to improve this area of law. Overall, this paper argues that the clauses, albeit not a panacea, both reflect an impressive collaborative effort between private and public sectors and mitigate holdout leverage

of consensus on how to reform the international financial architecture. 11 This paper addresses the first aspect by arguing that the enhanced contractual provisions, albeit not a panacea, effectively mitigate holdout leverage. On the issue of reform, it argues that incremental steps towards an improved international framework are important in promoting efficient sovereign debt workouts. This paper is structured as follows: Section B examines the market conditions preceding reforms to sovereign debt contracts to provide contextual understanding of how the market functioned and evolved over time. Section C diagnoses the legal aspects of debt reimbursement vis-à-vis vulture funds and 'recalcitrant' creditors. Within this, it evaluates prominent holdout litigation and the controversial 'rateable' interpretation of the pari passu clause. This is important insofar as a broad (rateable) interpretation can impair a restructuring and harm developing nations. 12 Section D embarks upon a two-part analysis of CACs: the first part examines CACs in the Eurozone and the second analyses the menu of bondholder voting procedures granted to the sovereign. Finally, Section E offers the writer's opinion as to what is the best solution moving forward; the issues discussed will be drawn together to present a conclusive summary of whether the law has struck a balance between preserving creditor rights and diminishing recalcitrant creditor leverage that can obstruct a sovereign debt restructuring. 13

B. HISTORICAL BACKGROUND
Before examining prominent holdout litigation and the contractual tools addressing the holdout dilemma, it is necessary to first explore the market conditions prior to the sovereign bond reforms to understand how and why the current law on sovereign debt restructuring materialised. This section argues that the issuance of Brady bonds resulted in a diversification of market participants and the emergence of a new investor class (holdouts) eager to profit. 14

The Holdout Strategy
Upon an event of default, a sovereign debtor will lack the resources to pay all of its debts on their original terms and will seek to negotiate with creditors to restructure its debt obligations 29 through an exchange offer. 15 This presents an opportunity for private creditors (specialised hedge funds) to profit. They purchase distressed debt well below par value, and by refusing to participate in the renegotiation process, attempt to recover the full face value of the debt. It is by virtue of enforcing the (original) terms of the loan and 'holding out' that the importunate creditor is able to entrap the sovereign debtor and force a web of complex repayments.
Holdouts therefore undermine the financial system by gutting creditor rights and imperilling the willingness of investors to lend money to developing countries: this creates a distinctive coordination problem (the 'collective action' dilemma). 16 Historically, (the enforceability of) sovereign debt contracts were overlooked given the principle of absolute legal immunity which protected sovereign debtors from legal action without their consent. The breakdown of absolute sovereign immunity has contributed to a rise in protracted holdout litigation. This was evidenced in the landmark case of Republic of Argentina v Weltover. 17 Here, the US Supreme Court held that sovereign debtors may be sued by private players within the market if conducting 'commercial activity'. 18 The Court made a critical distinction positing that when a foreign government acts as a private player -as controversy over the interpretative basis of the pari passu clause and its application as a weapon to disrupt the orderly restructuring of sovereign debt. 15 Buchheit, 'The Sovereign Debt Restructuring Process' (n 6). 16 Robin Wigglesworth, 'Lee Buchheit: The Crisis Veteran on the Sovereign Debt Frontline' Financial Times (1 July 2019) <https://ftalphaville.ft.com/2019/07/02/1562040034000/-My-companions-on-the-trip-who-hadindulged-in-breakfast-lost-everything-but-their-regrets-/> accessed 10 April 2020. caused great concern to participants in sovereign bond markets and formed the basis for the recommendation and implementation of a more robust contractual framework for sovereign bonds. 40

The Securitisation of Sovereign Debts
The body of this paper, having explored the contextual backdrop and holdout behaviour -the latter provoked by the securitisation of Brady bonds and the inefficient nature of unanimous consent clauses, will now evaluate the market-based solutions available to the sovereign debtor and provide judgment as to whether they meaningfully curtail the holdout problem.

C. THE PARI PASSU CLAUSE -A SUBSTANTIVE ANALYSIS
One of the most heated debates surrounding the law of debt restructuring concerns the shifting atextual interpretation of the pari passu clause ('by equal step' 41 ). The purpose of this Section is to diagnose the legal aspects of debt reimbursement vis-à-vis recalcitrant creditors. This includes an evaluation of the extent to which litigation (Elliott Associates 42 and NML 43 ) has equipped holdouts with a new judicial remedy, and how this is counterbalanced by both White Hawthorn 44 and the revised pari passu clause. It will also explore the controversial 'rateable' interpretation of the pari passu clause. It argues that the reformed pari passu clause, by virtue of abating an obligation to effect rateable payments, goes a long way in mitigating the holdout threat.
In a corporate restructuring, most jurisdictions provide for an orderly restructuring of debt obligations and ranking system of priorities once a company has entered liquidation. The pari passu principle is a fundamental legal rule in corporate insolvency. It enables the unsecured creditors to equally share the proceeds of the putatively insolvent company that are available for residual distribution. As Street CJ put with characteristic lucidity in Kinsela v Russell Kinsela Ltd 45 : 'Where a company is insolvent the interests of the creditors intrude.
They become prospectively entitled, through liquidation, to displace the power of the shareholders and directors to deal with the company's assets.' 46 However, in a sovereign debt restructuring, the pari passu principle is a contractual clause found in cross-border debt instruments. The purpose of the clause in this context is to maintain parity of treatment among creditors insofar as providing a warranty that on a liquidation or a forced distribution of assets by reason of insolvency, unsecured creditors will be entitled to a pro rata payment. who face a greater risk of default and will have to accept a greater haircut in the event of default. 49

Elliott Associates
Elliott Associates 50 is fundamental to our understanding of the development of the holdout problem. 51 This ruling was controversial in that it unleashed the 'rateable' payment interpretation and provided holdouts with an additional legal basis to enforce their contractual (pari passu) rights. 52 The facts are as follows: the decrease in export prices of mining products and the 1982-  62 The Court stated that whilst an intention to sue on a claim promised does not offend the NY Law, to constitute an offense the primary purpose of the purchase must be to enable the creditor to bring a suit. In other words, the intent to bring a suit must therefore not be merely incidental and contingent. 63 The Second Circuit Court held that Elliott did not violate the NY Law given its motivation to bring a suit against Nacion and Peru was subordinate to its intention to be paid in full for the purchased debt. 64 Elliott was therefore awarded a judgment of $55 million against Peru. 65

c) Post-Judgment Reaction: Brussels Court of Appeal
In the aftermath of the judgment, Elliott moved to block the payment on the bonds in the Surely it was a matter of time before a case unveiled (as opposed to create) 83 the pari passu weapon.

The Pari Passu Controversy: Does NML v Argentina Hold Its Worth?
Given the Belgian Court's questionable judicial decision on the pari passu clause in Elliott Associates, 84  In addition, they contend that the 'rateable interpretation' strengthens the hands of rogue holdout creditors, allowing them to go beyond the sovereign debtor and attack other creditors who might have received payments from the sovereign. 111 This undermines any efforts to restructure sovereign debt in the future. 112 Keeping the provision in sovereign bond documentation therefore plays into the hands of those 'whose sole interest is to maximize their profit at the expense of others and who will create the maximum of disruption to achieve their ends'. 113 However, Cohen sides with Judge Griesa's interpretation, advocating for the plain reading of the pari passu clause. 114 He notes that the simple promise of equality, understood by the original investors in the sovereign debt, is understood by today's investors and is recognised by the courts that have been asked to enforce pari passu's plain language. 115 Furthermore, he contends that the plain-meaning interpretation of pari passu provisions conforms with common sense and business realities; 116 given the lack of judicially supervised insolvency proceedings for sovereigns, the pari passu clause, provides protection to creditors and serves as a mechanism allowing for the functional subordination of sovereign debt. 117 Cohen's pro-creditor position cannot simply use the lack of a bankruptcy regime as a pretext for granting holdouts a weapon to disrupt future sovereign debt restructurings and encourage holdout creditors to litigate for full payment. 118 Instead, this paper argues along different lines: the pari passu quandary in NML 119 is further eroded by White Hawthorne. 120 Here, the District Court deployed an important limiting principle to its interpretation of the pari passu clause, in finding that payment to some creditors but not others does not on its own violate the pari passu clause. leverage, potentially dampening the restructuring process. 136 Nevertheless, it is argued that the early Brussels decisions may be viewed as more complex than the critics let on, flying in the face of the prevailing understanding of the pari passu clause in sovereign debt and the market practices that had developed around it. 137 Whilst Cohen's loose constructionist interpretation of the pari passu clause is persuasive, there is less risk that English courts, faced with similar facts to NML, 138 would adopt the 'payment' interpretation; White Hawthorne 139 has dealt a serious blow to creditors who would seek to follow in the hedge funds' footsteps and rouse a dormant equal treatment provision to stymie a sovereign's restructuring efforts in hopes of a windfall. 140 It is correct to say that that the Elliott Associates 141 and NML 142 decisions are problematic: the pari passu clause does not require actual uniformity of treatment and should be understood to be interpreted narrowly. Overall, the revised pari passu clause succeeds in curtailing the rateable payment threat so as to discourage excessive litigation posed by recalcitrant creditors.

D. THE COLLECTIVE ACTION DILEMMA
Having established the dilemmas caused by the application of the pari passu clause in fuelling holdout behaviour, this paper will now discuss the debtors' response to the holdout problem in a specific European context, and then move onto an analysis about the particular features of the revised CACs -and its efficacy in mitigating recalcitrant leverage.
The international system lacks an effective legal framework for the predictable and orderly restructuring of sovereign debt: this is conducive to holdout behaviour and litigation.  CACs therefore seek to provide a more orderly framework for restructuring debt by binding non-consenting recalcitrant creditors with the consent of a qualified majority of creditors. 146

Euro CACs
A practical problem facing European countries such as Italy, is how best to restructure their debt obligations. Depending on the composition of their debt stock and its governing law, the debate here concerns whether European sovereigns can replicate the Greek example and use the local law advantage tool to facilitate an eventual restructuring of their bonds.
Emerging market sovereigns issue bonds governed by a foreign regime such as the law of New York. In the same accord, European sovereigns have been able to issue bonds governed by the issuer's own law. In the event of a crisis, the latter is able to pass legislation to have retrospective effect on the debt instrument and facilitate a restructuring of their bonds. This is what is termed the 'local law' advantage and is important in the discussion as it provides another tool sovereign debtors can use to mitigate the holdout problem.
To contextualise this discussion, the salient facts of the Greek restructuring are outlined. undertaken to ensure that the restructuring would not be undermined by a holdout minority. 152 By addressing this central concern, Greece provided a solution to the longstanding problem cited by the G-10 of ensuring that there were effective means for creditors and debtors to recontract without a minority of debt-holders obstructing the process. 153 Nevertheless, the use of legislative sovereignty must be cautioned given that it undermines the fundamental premise that contracts will be enforced as written. 154 Thus, utilising the sovereign's unique ability to change the rules governing its own commitments is considered fundamental to the successful restructuring of debt -and an advantage over emerging market sovereigns whose bonds are governed by foreign law.
It logically follows that when confronted with a particularly malaise debt crisis in a Having established another means by which the sovereign debtor is able to fend off holdout creditors by relying on their own legislatures to ultimately facilitate a future restructuring of debt instruments, this paper will now examine how the technical features underpinning CACs enables the debtor to mitigate holdout activism. Specifically, this Section addresses how aggregated CACs add value to new international sovereign bond issuances: it examines the bondholder voting mechanisms 171 and then considers the extent to which the enhanced CACs provide for a more efficient restructuring of sovereign debt. To argue that the reformed CACs militate against holdout leverage by providing a wider relief menu and granting flexibility to the sovereign debtor is over-simplistic. Rather, this paper argues that (single-limb) CACs are the most potent form of restructuring for a sovereign who is seeking a comprehensive restructuring to restore its solvency after a payment default (where the holdout risk is largest). 172

Revised CACs -added value?
The holdout risk triggered a need for contractual solutions to address the problem of non-  However, whilst series-by-series voting is viewed as a viable solution to addressing the holdout problem, such mechanism is not without limitations. This is because AG Capital can still obtain a formidable blocking position in Series A, preventing it from undergoing a successful restructuring. This is a justifiable concern for the sovereign debtors as it exacerbates the holdout problem and disrupts the restructuring process further. It also undermines intercreditor equity: AG Capital's influence (by obtaining a blocking position) will also affect the ability of the 3/4 bondholders to agree a consensual restructuring. As such, series-by-series

E. REFORM -A WAY FORWARD?
Having discussed the role of contractual terms in framing the enforcement of creditor rights (rendered the more potent in the absence of an international legal framework to deal with a universe of claims from different types of creditors), this Section examines market participants' reform proposals and provides independent judgment as to how best to fill this area of law. 201 The current decentralised system for restructuring sovereign debt lacks the statutory tools needed to address market dislocations. Notwithstanding the recent contractual reforms, the present system still fails to comprehensively resolve debt crises and equitably enforce creditor rights. 202 The current framework relies upon a complex set of negotiations that include many creditors, with different interests, often under the backdrop of complex national legal regimes; this is deeply problematic and leads to ex-ante and ex-post inefficiencies, and inequities both among creditors and between the debtor and its creditors. 203 In addressing these problems, market participants have promulgated a variety of solutions that include: the introduction of new contractual provisions into new external debt contracts; the development of a code of conduct for a sovereign to follow during a debt restructuring; and the creation of a new statutory regime to provide bankruptcy-style protection for a sovereign. 204 This paper advocates for a dual-pronged approach based on a Model Law system. The first prong consists of formalising the norms in the twinned UN Resolution(s) and ensuring the proper resolution of sovereign debt crises moving forward. 205 It would do so by building incremental steps towards the development of norms; this would create a legal framework that places itself suitably between the 'soft' and 'hard' law approaches. The (proposed) regime would be predicated on national governments internalising the 'Model Law' in their jurisdiction via legislation. 206 Whilst this approach relies on uniform enactment -given that the claims of holdout creditors would be governed by the law of a jurisdiction that enacts the Model Law, this route would serve to both enforce creditor rights, which is desirable from the perspective of efficient debt markets, and avoid the holdout creditor problem, which is desirable from the perspective of an efficient resolution of debt crises. 207 Guzman and Stiglitz partly concur, positing that whilst CACs are insufficient to address the deficiencies of the current system, 208 a soft law approach based upon the UN Principles 209 would create a regime that would promote further cooperation and creditor coordination. The recognition of these principles, they argue, would contribute to the speedy and orderly resolution of debt.
However, it is argued that the UN Principles, 210 though persuasive, lack the granularity that is desirable to ensure legal certainty. 211 Rather than confront states immediately with a legal regime akin to the SDRM, states should progressively be led toward stronger legal rules. 212 This would mitigate any sovereignty considerations (a key drawback for the SDRM) and would be a more effective way of restructuring sovereign debt than a purely financial framework of preventing an unbounded accumulation of debts. 213 What makes the dual-pronged approach distinctly attractive is the potential for these norms to have (enforcement) teeth; initially, this can only be done if the norms are broad enough so as to provide states with much needed flexibility to adopt specific measures in resolving debt crises. 214 This would set the foundation for more concrete 'hard law' debt restructuring measures in the future. 215 The second prong comprises of a Sovereign Debt Forum. 216 This would bring together leading pioneers in this area of law under one umbrella, lobbying both relevant participants in markets and the official sector for meaningful change, and provide expert legal assistance on request. This is attractive in practice; by compiling lessons from past sovereign debt treatments to continually refine existing approaches to sovereign debt treatment, it would help to make sovereigns' and creditors' processes more predictable, credible and more likely to succeed, thereby increasing the incentive to deal with debt problems expeditiously. 217 Given the IMF's recent discontinuation of annual progress reports, creating a forum that continues to enrich the repository of sovereign debt data seems a plausible one. 218 It is clear that incremental reform is the order of the day: an institutional setup can only be achieved through the lens of soft law progression. This is central to the codification idea and would represent a significant advancement towards a multilateral normative framework. 219 In the event that the treaty-based approach fails, the soft law approach of a knowledge-based Forum would (at least) act as a backstop in promoting further collaboration and build incremental steps towards devising a reliable debt restructuring framework.

F. CONCLUSION
The history of corporate bonds suggests that if sovereign defaults are sufficiently painful and protracted, procedures to create greater order will eventually be developed. 220 The adoption of the revised pari passu and CACs with robust aggregation features are two such tools, aiming to address market dislocations that beset sovereign debt restructurings. 221 This paper has explored how the contractual provisions in sovereign bond contracts have sought to fill the restructuring void. It has examined how they provide much needed flexibility to sovereigns wishing to restructure their debts while at the same time providing robust protection to noteholders through the procedures and majorities required in order to restructure those debts. 222 It has also proven that consent and cooperation are more important than ever -unlike in corporate debt restructurings, which take their shape through a formal bankruptcy process.
The controversial interpretation of the pari passu clause, engendered by holdout litigation underlines the chasm and complex enigma surrounding the precise scope of the clause -with the rateable payment interpretation being analogous to 'the green-eyed monster which doth mock/The meat it feeds on'. 223 Such interpretation has, however, been contemporarily