Argentina: Redefining The Gears Of Default And Restructuring

A lot has been happening of late in the matter of Argentine bonds. The bottom line is: Argentina continues to resist the prospect of having to pay the holdover bondholders. Since it continues its losing streak in the litigation on that subject, it is going to attempt to put its transactions outside the realm of the U.S. courts with … yet another exchange offer.

I have no idea how all this will turn out, my previous efforts at prediction have been off the mark, but it still smells as if the rules of the game in EM debt will have changed in an important respect when all of this is over.

The Story So Far
As our readers will recall, NML Capital, holding bonds issued by Argentina prior to its 2001 default, has a court order entitling it to equal treatment with the holders of bonds Argentina issued after the default, in its two rounds of restructuring. The restructurings, in 2005 and 2010, created the so-called Exchange Bondholders. Argentina has no intention of complying with this, and has made that abundantly clear.

The issue, then, is one of remedy. How can the hold-out bondholders get money out of the Argentine treasury if Argentina as a matter of policy doesn’t want to pay it?

Here is where the Bank of New York Mellon enters the picture. BNY Mellon is the trustee of the Exchange Bonds. Mellon is concerned that it would be risking contempt proceedings if it continues to perform its function as an intermediary: that is, if it enables Argentina to pay the Exchange bondholders. Mellon has been trying to get the courts to tell it that this isn’t so, that it can continue doing business as if the NML litigation didn’t exist.

Thus far, it has singularly failed to get that assurance. The appeals court sent the matter back to the district court last year, in part to reconsider that point. Judge Griesa in his reconsideration didn’t give Mellon what it wanted at all. He explained more explicitly that by the “ratable payment” requirement of the original order he had intended that every time Argentina pays a percentage on the Exchange Bonds, it must pay the FAA bondholders the same percentage of what is due at that moment on the older bonds.

Judge Griesa also wrote that by automatic operation of Federal Rule of Civil Procedure 65(d), an injunction binding Argentina also binds anyone “in active concert or participation” therewith, which would seem to leave Mellon exposed, at a minimum to some very risky future litigation.

So the defendants went again to the appeals court.

This March, the appeals court invited Argentina to propose “the precise terms of any alternative payment formula and schedule.” It looked like an offer of compromise, and Argentina rebuffed it.

The latest developments
So we have come to the late summer of 2013 and things have gotten stranger. On August 23d, Friday, a three-judge panel of the Second Circuit ruled on the latest appeal. Argentina gained nothing from this appeal: Bank of New York gained nothing. The appellate judges, their efforts at brokering a compromise spurned, have decided to stand by Judge Griesa.

Further, they did so unanimously. The only hint of division within the panel was a footnote saying that Judge Rosemary Pooler disagreed with her two colleagues on a quite minor procedural matter. [All you really need to know is that the point was small enough that Pooler agreed that her difference of opinion would be confined to that footnote.]

The only element of the decision that may console the defendants is that it has stayed Argentina’s obligation to make ratable payments pending review by the U.S. Supreme Court.

The appeals court’s opinion pooh-poohed any concern that “the outcome of this case threatens to steer bond issuers away from the New York marketplace.” Wild speculation, the judges said. And soon after the opinion was issued, Argentina illustrated why the courts’ approach might do exactly that.

The new swap plan

On August 28, President Cristina Fernandez announced a new bond swap plan. Argentina will offer to swap its outstanding bonds, apparently either of the FAA or of the exchange bondholder vintage, with newly issued bonds that will not have the New York or U.S. law connections the older issuances did.

This is an obvious attempt at a workaround. As Felix Salmon has put it, “given the choice between working within the U.S. legal system and blatantly working against it, the country seems to have decided that it wants to do both at once.” Salmon also believes the exchange offer will find takers. The idea of getting under Argentine law and thus out of the 10-year-long controversy in New York will have appeal.

Fernandez’ Economy Minister, Hernán Lorenzino, has been explicit on this point. Speaking at an Argentine Senate hearing, he said that the purpose of the measure is to allow Argentina to keep paying the holders of the restructured bonds, while continuing to coax the holdouts to accept the same terms.

Blame the lock laws

Another intriguing wrinkle; the new offer as Fernandez lays it out will be open-ended (that is, there will be no offer-expires-by date). Thus, there will be no basis for the sort of “lock laws” that Argentina enacted in 2005 after the first bond exchange. Fernandez and Lorenzino see this as a concession.

In a manner it is a concession, although the holdout plaintiffs will understandably regard it as a small one. It is not a concession to them precisely, but to some of the amici who have appeared in their case in its various stages. Some of these friends of the district and appellate courts have contended that the real violation of the pari passu clause in the original issuing documentation was neither the 2001 default itself nor the bond exchange programs of 2005/2010. The real problem (suggest such amici) is the lock law legislation.

Argentina’s proposal keeps this idea in play, and the U.S. Supreme Court may eventually adopt that view of the case itself. That would give a win to NML, but would do so on a sufficiently narrow ground as to redefine, not to threaten, the broad EM sovereign bonds market.