What to Do About Pari Passu

Abstract

The pari passu clause was designed as a contractual promise to maintain the legal ranking of an instrument at a level equal (not subordinate) to the borrower’s other senior indebtedness in other debt instruments. It was never the intention of pari passu covenants, which in their current form began appearing in syndicated commercial bank loans in the 1970s, to compel borrowers to pay all of their obligations on a ratable basis. If future judicial interpretations of the NML decision conclude that it stands for the proposition that equally ranking debt must be paid ratably, it is likely that pari passu clauses will begin to infiltrate purely domestic debt instruments (where they do not now generally appear).