As participants in an increasingly global economy, U.S. corporations and investors are increasingly identifying opportunities to invest in foreign debt securities, including debt securities issued by foreign governments. But such investments come with an added layer of risk: When a sovereign nation defaults, investors in its debt securities are often left without recourse. Unlike an ordinary corporate debtor, a sovereign cannot be forced into a bankruptcy proceeding to determine the order in which creditors will be paid. Rather, the sovereign itself can decide which debtholders to pay (if any). Adding insult to injury, the sovereign may seek to restructure its debt to meet its needs, issuing new debt in exchange for the defaulted debt on terms far less generous than those originally agreed to by the debtholder.
However, recent litigation in the case NML Capital, Ltd. v. Republic of Argentina suggests that U.S. courts are increasingly utilizing the tools at the judiciary’s disposal to protect the rights of U.S. investors in foreign sovereign debt. The case arises out of Argentina’s sale of dollar-denominated bonds (the FAA Bonds) in 1994. Following years of economic turmoil, Argentina defaulted on the FAA Bonds in 2001 and ceased making principal and interest payments. Argentina subsequently offered to exchange the FAA Bonds for new “Exchange Bonds.” However, Argentina’s exchange offer came at a price: Holders of the FAA Bonds who elected to participate in the exchange offer would receive Exchange Bonds with a face value of approximately twenty-five cents for each dollar of FAA Bonds exchanged. Despite that huge haircut, 91 percent of the holders of the FAA Bonds ultimately tendered them in exchange for the Exchange Bonds.