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Looks Can Be Deceiving: Holdout Litigation Under the Foreign Sovereign Immunities Act

By Saloni Kantaria
November 16, 2009
Historically, sovereign lending has been dominated by a small group of large banks and financial institutions. The group of investors holding sovereign debt has become more diverse and includes commercial banks of all sizes, investment banks, pension funds, mutual funds, hedge funds, nonfinance companies, and retail investors. In the late 1980’s and early 1990’s, a secondary market developed for distressed sovereign debt because banks sought to remove rescheduled sovereign debt from their books and did so by selling this debt at significantly discounted prices to the secondary market. However, the secondary market for sovereign debt began to attract investors having no intention of making equity investments in the  debtor countries. These investors, known as “vulture creditors,” specialize in strategic purchase of debt on the secondary market and typically purchase sovereign debt that is trading at a deep discount as a result of the sovereign’s financial distress. The objective of the vulture creditors  is to seek short-term gains, either through the restructuring process or by holding out of the restricting process until the debtors and majority creditors negotiate an offer of additional payment. In such a situation, the vulture creditor typically “free rides” by holding out for better terms already agreed to by other creditors in a restructuring process. If this is unsuccessful, the vulture creditor will seek to collect the full face value of its claim from the sovereign by means of litigation. The term “holdout litigation” typically characterizes this situation, where a majority of creditors accept debt restructuring but a minority chooses to sue for full repayment...