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10 Int'l Fin. L. Rev. 11 (1991)
The Pari Passu Clause Sub Specie Aeternitatis

handle is hein.journals/intfinr10 and id is 551 raw text is: The paripassu clause sub specie aeternitatis What does aparipassu clause really mean in the context of loans to sovereign borrowers? Lee C Buchheit of Cleary Gottlieb Steen & Hamilton, New York explains There is nothing like a dollop of Latin to give the legal porridge just the right consistency. And no banker worth his or her praecipuum would ever dream of sending out a Eurodollar loan agreement which did not include something called a pari passu clause. The fact that no one seems quite sure what the clause really means, at least in the context of a loan to a sovereign borrower, has not stunted its popularity among drafters of loan agreements and debt restructuring agreements. The clause In most loan agreements or debt restructuring agreements, the pari passu clause is mercifully short. A typical paripassu representation in a sovereign loan agreement might read: Paripassu. The obligations of the Borrower under this Agreement rank at least pari passu in right of payment with all other External Indebtedness of the Borrower. This representation is frequently accompanied by a covenant, in substantially identical language but in the future tense, by which the borrower promises that it will maintain the pari passu ranking of the loan with the borrower's other external indebtedness in the future. One sometimes encounters an inquisitive borrower who asks why this little breeze off the Tiber has ruffled through the pages of his loan agreement. This is when the fun starts. 'It means you can't pay back somebody else's loan if you're not then current on your payments under this loan', is how some bankers may explain it. 'It means you can't give a preference to some other creditor that you are not at the same time giving to us', will be the interpreta- tion offered by others. 'Don't worry, it's standard bumf', the honest few will say as they quickly flip the page. In the context of a loan to a corporate borrower, the lenders' request for a pari passu warranty is understandable. In the event of a bankruptcy or compulsory distribu- tion of the borrower's assets, the lenders do not wish to be surprised by the appearance of other creditors holding claims against the debtor's estate that rank senior to their own. In most jurisdictions, of course, a debtor cannot subordinate a prior loan without the express consent of the creditor concerned. One does encounter situations in some coun- tries, however, in which certain creditors (for example, domestic creditors) are given a preference in the bankruptcy of a local company. In addition, many bankruptcy regim- es specify that certain types of claims (such as tax claims or employee claims for wages) will be given a priority in bankruptcy by operation of law. It is not usually thought necessary to qualify the pari passu clause in respect of this latter type of claim because the clause, by its terms, typically speaks only to the ranking of the loan in relation to other Indebtedness or External Indebtedness (as defined) of the borrower. Claims which enjoy a statutory preference in bankruptcy such as taxes and employee wages are often not picked up by a standard definition of Indebtedness or Exter- nal Indebtedness. A separate issue relates to the relevance of the pari passu clause in the context of the borrower's secured indebtedness. Secured creditors will, of course, enjoy a preference in the bankruptcy of a corporate borrower. But it is not always clear whether the phrase'... ranksparipassu in priority of payment' is intended to refer both to legally senior obligations of the kind described above as well as obligations which enjoy a practical preference by virtue of the pledge of collateral security. Some lawyers (including the au- thor) believe that the conventional pari passu clause should not be read as covering collateral security. It is for this reason that the clause is often preceded in the text of a loan agreement by a 'no liens' representa- tion (confirming that the borrower has not previously given security interests in its assets except for those identified in a schedule to the agreement), and followed by a negative pledge covenant (by which the .borrower undertakes to give equal and ratable security to the lender should it grant a security interest in the future to some other creditor). This view is not shared by all practitioners in the field. To remove any doubt in the mind of the reader of the clause on this point, many pari passu representatives expressly limit themselves to con- firming the ranking of the loan in terms of the borrower's unsecured indebtedness. Sovereign loans What makes sense in the context of a loan to a corporate borrower does not always make sense, or at least make the same sense, in the context of a loan to a sovereign borrower. Sovereigns are not subject to domestic bankruptcy regimes nor is it likely that a sovereign's assets can be marshalled and distributed to creditors without the sovereign's consent. Accordingly, when a sovereign promises in a loan agree- ment that the loan will rank pari passu with all of the sovereign's other external indebtedness, the lender is not being told anything about where it will stand in a queue of bankruptcy creditors. In the absence of this explanation for the presence of the clause, a goodly number of bankers International Financial Law Review December 1991 11

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