Clauses & Controversies

The Penalty Doctrine in Contract Law We've never been fans of the contract law rule against penalties. Why can't parties (sophisticated ones at least) agree to suffer a penalty in the event of breach? We’d ordinarily avoid this topic, because the doctrine makes little sense and the issue doesn’t come up much in the sovereign debt world. But recently, a couple of sovereign restructurings (Ghana and Zambia) have used “Loss Reinstatement Provisions.” At least on their face, these provisions seem vulnerable to challenge under the penalty doctrine, since, if the sovereign defaults on the restructured deal, they impose a loss that seems untethered to the injury creditors have suffered. Would these new clauses be enforced if challenged? The contracts in question are both under English law, which we don't know much about. But that does not stop us from speculating and arguing. Producer: Leanna Doty

A New Competition For Law (and Jurisdiction)? Jurisdictions famously compete for businesses to use their corporate law. Less discussed is the competition for having one’s law chosen to govern contracts. But it happens. Sovereign debt lawyers in England and New York can, if they have a few drinks in them, can be quite entertaining in their sniping at each other about whether English or New York law is better for sovereign issuers. And the sovereigns for their part, seem to only care about what they have done in the past, regardless of what the lawyers say or what court decisions come down (remember pari passu and Judge Griesa in New York – nothing changed). But recently, as a result of the attempts of a few members of the New York legislature to try and mess with sovereign restructuring framework (“improve”, some would say – but not us), a couple of issuers have put in place provisions that allow them to choose to switch governing law (but not jurisdiction?) mid stream, in the event that New York actually passes some daft legislation. We think this is all great fun to talk about. Angry emails about how we should take these matters more seriously should all be sent to the address of Hamilton Bank in Nevis. Producer: Leanna Doty

An Execution Sale is Not a Receivership. (Right?) Creditors of Venezuela and PDVSA, its state oil company, have forced an execution sale of PDVSA's only US asset – which happens to be the ultimate parent company of CITGO. The federal judge overseeing the process has tried to keep things orderly, but the inter-creditor fighting is getting juicy. Some lower priority creditors have filed new lawsuits in an apparent attempt to jump the queue. Now the special master overseeing the execution sale process wants the court to enjoin these lawsuits. Which strikes as us a reach – almost as if the execution sale process is some kind of receivership. So we asked Nate Oman, who has written about the potential use of receiverships to solve sovereign debt problems, to help us figure out what is going on. Producer: Leanna Doty

Hamilton Bank v. Sri Lanka: What the $@#$ ? Accusations that Hamilton Bank is a giant fraudster stealing depositor funds, bizarro requests from Hamilton to the court that other creditors be constrained in using their contract rights against it, an amicus intervention in the case to say nothing at all . . . and on and on. This case gets more and more bizarre, which makes us suspect that whatever is going on under the surface is even weirder than the (already weird) stuff that is visible to outsiders like us. What no one is discussing, though, is the “unconditional rights” provision in the trust indenture document that arguably gives minority bondholders protection against any attempt to do a cram down. Producer: Leanna Doty

Zambia’s Restructuring: A Post-Mortem Zambia’s recently concluded restructuring seemed to drag on forever, debilitated by conflicts among the various creditor groups. Why did these different groups think the others were being unreasonable in their demands? And what can we learn from what happened? Our guest is one of the keenest observers in the sovereign debt world, who followed this restructuring at the ground level, Theo Maret. Producer: Leanna Doty

The Champerty Show Ah, Champerty. Perpetual runner-up, to the doctrine of consideration, in the Stupidest Legal Rule pageant. Why do directly (e.g., via the abuse of process claim) what you can do clumsily and indirectly (by limiting an injured party’s access to finance)? But what do we know? Actually, not much. We do know that Venezuela/PDVSA won a very interesting Champerty case in the Southern District of New York. And while we know very little about Champerty, we know enough to know we don’t like the doctrine very much, even if the outcome seems defensible. Producer: Leanna Doty

IMF Rescues Pakistan From the Brink of Default (Again) Pakistan looks to be in the process of finalizing yet another IMF program. Yet again, it has been rescued from the brink of default with a bailout justified by some heroic assumptions about how a state of sustainability will magically materialize. Why? Our guest, Zohra Ahmed, of Boston University Law School, has a theory: that these bailouts (that ultimately hurt Pakistan because true economic reform never happens) are the price of consent. Specifically, consent by Pakistan to cooperate with US military interests. We discuss with Zohra both her theory and the evidence for it. Producer: Leanna Doty

A Better Way to Freeze (and Seize?) Russian Assets? Ever since Russia invaded Ukraine in 2022, there has been talk of what international law doctrines might be utilized to induce Russia to back off. One of those doctrines that has been whispered about is now, thanks to a wonderful new article by our guest, international law guru and Yale Law professor, Oona Hathaway, is that of Countermeasures. Oona and her co authors not only explain the law of countermeasures, but argue that these legal principles naturally extend into a doctrine of “collective countermeasures”. We ask Oona about these doctrines and their scope, particularly in the context of Russia and Ukraine. She argues that the doctrine, properly understood and applied, is (and should be) narrow. To quote Spider Man (maybe), “With Great Power Comes Great Responsibility”. Producer: Leanna Doty

Cambodia’s Debts to the US: How “Dirty” Are They? Roughly a half century ago, in the 1970s, the US infamously bombed Cambodia. Less known is that the US, through a “Food for Peace” program, made a series of loans to the somewhat dodgy government of General Lon Nol. The loans were made, at least in part, to assist Cambodians displaced by the bombings. Fast forward a few decades, the US government periodically asks for the debts to be paid back, with interest. Cambodia responds: Seriously, you want to get repaid for lending money to an awful government (that you helped prop up after a coup) to pay for bombs that you dropped in violation of all sorts of laws? The real story is a bit more complex than the soundbite version. Our guest, Professor Randle DeFalco of Widener University Law School helps us begin to unpack the story of these debts. Producer: Leanna Doty

Ukraine's Preliminary Debt Restructuring Deal Ukraine reportedly has reached terms with a subset of its bondholders, agreeing to restructure the country's roughly $24 billion in bond debt. What to make of the deal? It seems (to our view) to be premised on the IMF's entirely unrealistic assumptions about Ukraine's future debt repayment capacity. The reports we have seen about deal terms also don't explain what will happen to some important parts of the debt stock – including that of state-owned energy company Ukrenergo. Joseph Cotterill of the Financial Times joins us to explain the basic parameters of the deal, the underlying assumptions, and whether another restructuring of private debt is in the cards. And while we have Joseph, we also ask some questions about recent developments in litigation arising out of Mozambique's "tuna bonds" debacle. Producer: Leanna Doty

Tortious Interference and Inter-Creditor Duties Creditors in sovereign debt restructurings often complain about other creditors. And creditors often try to limit what other creditors get (at least indirectly, via most favored nations clauses, comparability of treatment, etc.). Can these efforts sometimes create a risk of liability? Does that risk even extend to official creditors? In the recent Zambian restructuring negotiations, rumor has it that the doctrine of tortious interference with contract was invoked when commercial creditors felt that official creditors were expecting them to make unrealistic sacrifices. Andrew Wilkinson (Weil, which advised the Zambia External Bondholder Steering Committee) joins us to talk about the restructuring of Zambia's debt and the question of inter-creditor duties. Producer: Leanna Doty

El Salvador’s Warrants: Bukele’s Folly? El Salvador has issued a new bond, using part of the proceeds to buy back some bonds that mature in the relatively near term. The issuance includes a detachable warrant that pays up to an additional 4% if El Salvador does not get an IMF program in place soon (or achieve a higher credit rating). The issuance has been characterized as a way to convince investors that El Salvador really is serious about striking an IMF deal. But the whole thing strikes us as loony tunes. Which is it? We ask EM guru Ben Heller. Producer: Leanna Doty

The Latest in the Argentine GDP Warrant Saga: Drafting Goof or Sneaky Drafting? There are so many intriguing aspects of the latest installment of the Argentine GDP Warrant Saga. This time, from Judge Preska in the SDNY, Argentina scores a big, and for us, totally unexpected victory. Argentina’s lawyers, at a very late stage, discovered a magic bullet that no one seems to have realized was there. Mark doesn’t like to use the term “contractual landmine”, but he does here. Mitu applauds. Producer: Leanna Doty

Lessons from the 1980s Debt Crisis The 1980s debt crisis began in Mexico and engulfed countries around the world, leading, via the Brady Plan, to the revival of the bond markets. Beyond that, we confess to relatively little knowledge about this fundamental episode in sovereign debt history. For so many of the leading lights of the contemporary sovereign debt world, the Latin American debt crisis was where they cut their teeth. The lessons they took from that era shaped the choices they made over the succeeding decades. Our guest is Jerome Sgard (SciencePo), who joins us to talk about his book, The Debt Crisis of the 1980s, which taps into new archival material and draws on interviews with many of the key participants. We ask Jerome about this key decade in the evolution of the modern sovereign debt architecture. Producer: Leanna Doty

A Way to Use Frozen Russian Assets to Help Ukraine? There has been much chatter lately about a proposal from Lee Buchheit, Daleep Singh and Hugo Dixon to address concerns in Western nations about using frozen Russian assets to get Ukraine much needed war financing. One might ask why these nations are so concerned about confiscating Russian assets when they have already frozen the assets, seemingly in perpetuity. But apparently, the difference matters quite a lot. Our guests, Ingrid Brunk and Paul Stephan, are two of the most thoughtful and careful thinkers about international law and they help us understand the virtues and pitfalls of this new, and very creative, proposal. Producer: Leanna Doty

Ukrenergo Confusion Rumor has it that holders of bonds issued by Ukrenergo, the state-owned corporation that runs Ukraine's electricity distribution system, expect to get better treatment in a debt restructuring, even though their bonds are guaranteed by the state and at least arguably can be forced to vote alongside holders of Ukrainian sovereign bonds (whose votes could swamp those of the Ukrenergo investors). Do the documents for the Ukrenergo bonds allow this? Or is there some other explanation for why holders of the corporate bonds expect better treatment. We are ... confused. Do not expect clarity. Producer: Leanna Doty

Who Benefits from Lifting Sanctions on Buying Venezuelan Bonds? Banning U.S. parties from buying Venezuelan bonds was probably a bad idea. But was it a good idea to lift the ban last fall? Investors apparently sold the Biden administration on the idea that lifting the ban would yield big benefits: bonds had migrated into the hands of parties acting as proxies for U.S. adversaries like Russia. Lifting the ban would cause the bonds to migrate back to U.S. investors, giving them (and, indirectly, the U.S. government) a seat at the table when a restructuring eventually happens. That was the story, anyway. But does it make sense? Or were investors selling the Biden administration a bill of goods, advocating for a policy change that would enrich them without doing squat to change the geopolitics of Venezuelan debt? Kejal Vyas (Wall Street Journal) has covered the machinations behind the policy shift, and he enlightens us about all things Venezuela. Producer: Leanna Doty

The Last Sovereign Bond in New York Due to litigation over the PDVSA 2020 bond, all future issues of sovereign bonds in New York have been canceled, effective immediately. (PDVSA is quasi-sovereign, but whatever...) You may have heard that New York’s highest court has ruled that investors cannot enforce sovereign bonds, period. Well, maybe that's not quite what it held – okay, not even remotely – but it is how some in the market are reacting. In fact, the New York Court of Appeals did nothing unusual. It held that Venezuelan law decides whether the collateral pledge backing the PDVSA 2020 bonds is valid but that, even if invalid, New York law will decide whether and how this affects investors. Some are complaining that this ignores the contractual choice of law provision designating New York's law as governing. But if investors are surprised, they shouldn't be, and there is nothing unique or strange about New York's conflicts law. Anyway, no one has said the bond is unsecured. No need for all the bedwetting. Producer: Leanna Doty

Something Black in the Lentils at Ukrenegro A few weeks ago, there was an announcement that some of the creditors of the Ukrainian electric company, Ukrenegro, wanted their debt restructuring talks to be separate from any broader Ukrainian debt restructuring. And the prices of the Ukrenegro bonds (backed by a sovereign guarantee) shot up. This intrigued us. Why did the market suddenly see new value in these bonds, simply because of an announcement? Our old friend, Chris Spink, one of the best sovereign debt reporters in the business, talks with us about what might be going on. We can't help but speculate… Producer: Leanna Doty

Back to the Future (Again) -- Russian Frozen Assets Episode In recent months, there has been much talk about what to do with frozen Russian assets and, in particular, whether they can be repurposed to aid Ukraine in its fight against the Russian invasion. This is not the first time that large amounts of Russian assets have been frozen though, with heated debates about whether to expropriate the frozen funds. In this podcast we talk to Professor Lauge Poulsen of UCL about one of these prior freezings, from the early 1900s. Indeed, the 1918 default of Soviet Russia on investors in Tsarist Russian bonds is still one of the largest ever sovereign defaults and it (along with other expropriations) then resulted in widespread freezing of Russian assets overseas. Lauge and his co author, Eileen Denza, have a fascinating article about the negotiations between the UK Foreign Office and the Soviets over these frozen assets and the ultimate resolution of all of the various claims and counterclaims (a process that took close to three quarters of a century). The article, “Settling Russia’s Imperial and Baltic Debts” appears in the American Journal of International Law. Producer: Leanna Doty