This is the story of the pari passu clause, a provision
that appears in most cross-border credit instruments. The clause
itself is short - usually a single sentence occupying no more than
three or four lines of text. With that brevity, however, comes a
measure of opacity.
For several decades, lenders and borrowers in the international
capital markets have, by their behaviour, demonstrated a collective
understanding of the import of the clause. But it is difficult to
corroborate that understanding based solely on the text of the
provision. Inevitably, there was a risk that the oracular nature of
the clause would tempt someone to speculate about alternative
meanings. That risk has recently materialized, with potentially
serious consequences for both lenders and borrowers.
The clause
Here is a typical formulation of the pari passu clause in
a modern cross-border credit instrument:
"The notes rank, and will rank, pari passu in right of
payment...