English law-governed bonds
A significant percentage of Greek bonds governed by English law have not been tendered into the exchange offer. One reason that many holders of these bonds have elected not to participate in the exchange is that these bonds have more extensive remedies than the Greek law-governed bonds (and were not subject to the amendments effected by the Greek Bondholder Law). The English law-governed bonds contain a negative pledge and a pari passu clause, and, in certain of those bonds, events of default that include a cross-default triggered by a default by the Greek government on “external indebtedness” in excess of a certain threshold. In addition, English law-governed bonds issued after 2004 contain a collective action clause (CAC), which permits holders of a specified percentage of the principal amount of bonds to declare a default and accelerate the maturity date of the bonds upon the occurrence of an event of default.
With respect to the pari passu clause, some courts have interpreted this language to require debtors not yet in bankruptcy to pay debts to all creditors pari passu.[vii] Although this interpretation has been disputed, it may provide a contractual basis for asserting a right to payment on the bonds.
Upon the occurrence of an “event of default,” as defined under the governing documents of the English law bonds, bondholders have the right, subject to the CAC, to declare a default, accelerate the maturity date of the bonds, and seek to enforce their right to payment through enforcement proceeding brought in English courts, under English law.
The English law-governed bonds that we have examined include some or all of the following events of default:
- failure to pay interest or principal in respect of the bonds which remains uncured by payment thereof within 30 days from the due date for such payment
- failure to perform any other covenant, condition or provision of the bonds which continues for 30 days after written notice thereof
- any government order, decree or enactment which prevents the observation and performance of the obligations of the bond
- external indebtedness in an amount equal to or exceeding US$25 million (or its equivalent) is accelerated so that it becomes due and payable prior to the stated maturity thereof as a result of a default thereunder, and such acceleration has not been rescinded or annulled; or any payment obligation under such indebtedness is not paid as and when due (including any applicable grace period) and
- general moratorium is declared by Greece or the Bank of Greece in respect of its external indebtedness; or Greece or the Bank of Greece announces its inability to pay its external indebtedness as it matures
In bond documents executed after 2004, the right of the holders of the English law-governed bonds to accelerate the maturity date of the bonds upon the occurrence of an Event of Default is conditioned upon compliance with the requirements of the CAC. In the case of the English law-governed bond documents that we have reviewed, the CACs require that the bondholders who wish to declare a default hold at least 25 percent of the aggregate outstanding principal amount of the issue. Those bondholders may then enforce their remedies by accelerating the bonds, and, if the bonds are not paid in full, bringing an action in court to enforce payment, and seeking attachment of assets of Greece in order to secure payment following a favorable judgment.
Those bondholders who have elected not to participate in the exchange offer have certain rights and remedies to obtain payment on their bonds, above and beyond the payments offered under the terms of the exchange. However, realizing those rights is likely to be difficult, time-consuming and expensive, in terms of legal fees.
Nonetheless, there are certain remedies available to the holders of English law-governed bonds who have chosen not to participate in the exchange. These holders have the option to accelerate their bonds, provided they can satisfy the specified percentage in the applicable CAC. Once the bonds have been accelerated, it is unlikely that the Greek government will be able to pay the accelerated bonds. The affected holders may then bring legal action against the Greek government to enforce their right to payment, either in London or in US federal court, subject to their ability to establish an exception to immunity under the Foreign Sovereign Immunities Act (FSIA).
In order for any bondholder to bring an action against the Greek government in the courts of the United States, they will have to overcome the protections afforded to Greece by the FSIA, which provides a foreign state immunity from suit in American courts. In order to overcome the FSIA protections, bondholders will need to illustrate (A) that Greece has explicitly or implicitly waived its immunity; or (B) that the action is based upon a commercial activity carried on in the US by the foreign state, or upon an act performed in the US in connection with a commercial activity of the foreign state elsewhere, or upon an act outside the territory of the US in connection with a commercial activity of the foreign state elsewhere that causes a direct effect in the US.[viii] Upon the determination that a US court has jurisdiction over Greece, a breach of contract claim may be brought by dissenting bondholders upon a Greek default or an unfavorable exchange offer.
[vii] A decision issued by the Court of Appeals of Brussels, in Elliott Associates., L.P., General Docket No. 2000/QR/92, introduced a novel interpretation of the meaning of the pari passu language. Elliott brought suit against the Government of Peru and a Peruvian bank arising from Elliott’s ownership of Peruvian debt after the Peruvian government had defaulted on its bond debt and attempted to restructure its debt. Elliot refused to accept the restructuring and based its claim for payment on a unique interpretation of the language of the pari passu clause in the governing bond documents – that, as a holder of Peruvian bonds, Elliot was entitled to a pro rata payment any time the government made payments to other creditors. The court determined that an issuer of debt governed by a pari passu clause is restricted from making any payment to any unsecured creditor without making a pro rata payment to all other creditors of the same class. In support of its judgment, the court explained that since the pari passu language in question required equal treatment of creditors in bankruptcy, such language necessarily required equal treatment of creditors whenever payment to any such creditor was made. However, holdouts have had limited success in replicating the success represented by the Elliott decision. See C. Berry and K. Blake, “Pari Passu Means What Now?, Corporate Restructuring and Bankruptcy,” New York Law Journal (March 6, 2006).
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[vii] A decision issued by the Court of Appeals of Brussels, in Elliott Associates., L.P., General Docket No. 2000/QR/92, introduced a novel interpretation of the meaning of the pari passu language. Elliott brought suit against the Government of Peru and a Peruvian bank arising from Elliott’s ownership of Peruvian debt after the Peruvian government had defaulted on its bond debt and attempted to restructure its debt. Elliot refused to accept the restructuring and based its claim for payment on a unique interpretation of the language of the pari passu clause in the governing bond documents – that, as a holder of Peruvian bonds, Elliot was entitled to a pro rata payment any time the government made payments to other creditors. The court determined that an issuer of debt governed by a pari passu clause is restricted from making any payment to any unsecured creditor without making a pro rata payment to all other creditors of the same class. In support of its judgment, the court explained that since the pari passu language in question required equal treatment of creditors in bankruptcy, such language necessarily required equal treatment of creditors whenever payment to any such creditor was made. However, holdouts have had limited success in replicating the success represented by the Elliott decision. See C. Berry and K. Blake, “Pari Passu Means What Now?, Corporate Restructuring and Bankruptcy,” New York Law Journal (March 6, 2006).
[viii] 28 U.S.C. § 1605(a).
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