EMTA Panels in New York, London and Buenos Aires Explore Argentine Debt Litigation
Special Seminar: Recent Legal Developments in Argentine Debt (New York) - January 7, 2013
Special Seminar: Recent Legal Developments in Argentine Debt (London) - February 12, 2013
Special Seminar: An Overview of Argentine Debt Litigation and its Market Implications (Buenos Aires) - February 25, 2013
Update (3/1/2013)
EMTA SEMINAR: RECENT LEGAL DEVELOPMENTS IN ARGENTINE DEBT
Monday, January 7, 2013
Sponsored by Bank of America Merrill Lynch
One Bryant Park, 2nd Floor Auditorium
(42nd St. and 6th Ave.)
New York City
This event will cover recent US court decisions regarding Argentine debt;
and the evolving definition of the pari passu clause and its implications for
the fixed income marketplace.
1:30 p.m. – Registration
1:45 p.m. – Panel Discussion
Overview of Recent Legal Developments
James Kerr (Davis Polk & Wardwell) – Moderator
Anna Gelpern (American University)
Timothy DeSieno (Bingham McCutchen)
Paul Keenan (Greenberg Traurig)
Henry Weisburg (Shearman & Sterling)
3:00 p.m. - Panel Discussion
Litigant and Academic/Political Discussion
James Glassman (SEC Investor Advisory Board) - Moderator
Charles Blitzer (Blitzer Consulting)
Joseph Alexander (The Clearing House Association)
Robert Cohen (Dechert)
Sean O'Shea (O'Shea Partners)
4:15 p.m. – Panel Discussion
Market Reaction: Implications for the Market
Alberto Ades (Bank of America Merrill Lynch) – Moderator
Sebastian Vargas (Barclays)
Hans Humes (Greylock Capital Management)
Ben Heller (Hutchin Hill)
Vladimir Werning (JPMorgan)
5:30 p.m. – Cocktail Reception
Additional support provided by Barclays, Bingham McCutchen and JPMorgan.
This Seminar is part of a continuing series of panels and presentations that
EMTA is pleased to sponsor on various topics of interest to Emerging Markets
investors and other market participants, andis part of EMTA’s Legal &
Compliance Seminars*.
*CLE Credit Available for NY attorneys. This seminar is non-transitional and
appropriate for experienced attorneys only. Please click here
for details on EMTA’s Financial Hardship Policy.
Registration fee for EMTA Members: US$75 /US$495 for non-members
EMTA held its Special Seminar “Recent Legal Developments in Argentine Debt” on January 7, 2013 at the midtown offices of host and sponsor, Bank of America Merrill Lynch, with an unprecedented three-panel format of market analysts, academics and lawyers. Fifteen panelists explored many of the issues relating to the ongoing litigation in the New York federal courts between Argentina and its “hold-out” creditors to a standing room-only crowd of 300 market participants.
Describing the Argentine debt litigation as the “Super Bowl of sovereign defaults”, James Glassman (SEC Investor Advisory Board and moderator of the second panel) raised an appropriate analogy; there were, indeed, as many players and as many unfolding on-field strategies in the Argentine debt litigation as were on the football field on Super Bowl Sunday. And, yes, it appeared to be the biggest game in memory in sovereign debt restructuring -- for many reasons. Glassman noted that Argentina has defaulted six times since 1920, “is the reason that the “Club of Paris” [Paris Club] was set up in 1956”, had earned the opprobrium of the IMF, and quite simply, has “done everything wrong”. Would its behavior be mimicked by other countries? he asked. The stakes seemed, indeed, Super Bowl - high, from many angles.
BACKGROUND AND NEXT STEPS IN THE LITIGATION. Litigator Henry Weisburg (Shearman & Sterling) kicked off the first panel discussion with some critical “north-south” orientation for the audience. Laying the groundwork for the three ensuing panels, Weisburg identified the players populating the litigation landscape, which included the hedge fund plaintiffs, the defendant Argentina, the non-party appellants and the “interveners”, as well as 12 different “amici” (or friends of the court). Of the amici, roughly half supported affirmance and half supported reversal of the District Court holding by the 2d Circuit. Weisburg informed the audience that they would hear, over the next several hours, discussion of the US Foreign Sovereign Immunities Act (“FSIA”); the 5th Amendment “takings” and due process clauses of the US Constitution; sovereign restructuring policy issues; the potential impact of the case on New York law-governed contracts; New York as one of the primary commercial centers; equitable relief and injunction concerns; effect on the international payment systems; and, of course, the now-notorious “pari passu” clause.
Turning to the possible “next steps” in the litigation, Weisburg suggested that, following the arguments that are scheduled for February 27 in the 2d Circuit, some determinative outcome might be anticipated as early as May or June, 2013.
While Weisburg thought the 2d Circuit is likely the last stop, James Kerr (Davis Polk & Wardwell) believed that a request by the US (as opposed to any of the other amici) for a re-hearing on the interpretation of the pari passu clause would increase the likelihood that the 2d Circuit would hear that argument. Weisburg commented that the FSIA argument seems the best candidate, among the various issues, for a writ of certiorari to the US Supreme Court, and that the pari passu interpretation could, in theory (but was unlikely to), be taken up by the 2d Circuit.
MARKET REACTION? Alberto Ades (Bank of America Merrill Lynch), moderator of the third panel, dismissed the notion that the case would have lasting market implications because it is unlikely that other countries would “behave like Argentina”; in addition, the insertion of “CACs” (collective action clauses) into new bond issues would have a salutary effect, overall. Ben Heller (Hutchin Hill) seemed to agree that the Argentine case will have limited impact (after all, he stated, it included a “contumacious and vicious debtor and an ornery judge”, so it is unlikely that an investor will decide to hold out based on the prospect of an equitable remedy), but was sanguine about Argentina’s prospects for carrying the day, albeit “spawning more litigation”, before the story is all told. Echoing Anna Gelpern (American University) on the first panel, Heller lamented that ”one cannot constrain sovereigns, only other sovereigns can.”
Hans Humes (Greylock Capital Management) agreed with Heller and Timothy DeSieno (Bingham McCutchen) on the impact the case would have on sovereign restructurings, but stated that “Argentina has caused incredible damage to the asset class and created collateral damage to our legal system.” Sebastian Vargas (Barclays) foresaw domestic pressures in Argentina that will eventually drive a need for external financing, despite the government’s substantial efforts to sustain itself from domestic sources, but he echoed Heller’s comment that there will be more pain to come. Many on the third panel lamented in one way or another, the disregard, willful and politically motivated, by Argentina of international legal and other norms, with Heller confirming that “[t]hey are playing to a domestic audience” and Ades positing that “economic logic has not been the driver of Argentine policy.” Humes thought there had been some quiet signaling to Argentina on the part of the plaintiffs and predicted that, if Argentina were willing to open a discrete negotiation with the hold-outs, a return to the capital markets would be possible. Heller noted that the restructuring process was not fair even if it could be claimed that the result was, and that Argentina was not concerned about CDS triggers. He viewed CDS as the “flammable pajamas of derivatives”, a defective and flawed product.
At Ades’s prompting, the third panel debated Argentina’s reactions to a Court decision that will likely be adverse to it. All conceded that a rocky road lay ahead. Vargas saw extended legal maneuvering as the likely response of the current Argentine administration, but the possibility of a more pragmatic stance by a future administration. Heller concurred with Vargas, agreeing that Argentina would continue to “work the angles” and would continue to dispute the Court’s holdings.
Vladimir Werning (JP Morgan), taking a moment to play devil’s advocate, commented that the restructuring haircut was possibly not as inappropriate as the market claimed generally, if one took into consideration factors like the debt burden, the stagnant economy at the time of the exchange package and the political imperatives then and now. Ironically, said Werning, the exchange was more onerous for domestic investors than for foreign investors. However, Werning criticized the government for its “backward looking” stance, which focused on “fairness”, and both Vargas and Werning were cautious about Argentine debt at current levels. Vargas believed that external debt could trade at lower levels “before we see the light at the end of the tunnel”, and Werning affirmed his underweight recommendation because “negotiation is much more difficult than the market is currently thinking.” Vargas noted that Barclays raised its recommendation from underweight to market weight after the 2d Circuit ruling, “but one has to have a strong opinion to go overweight.” Both Werning and Vargas felt that a continuing underweight recommendation on Argentine debt was still appropriate.
THE PARI PASSU CLAUSE. The scope of the pari passu clause was addressed on October 26, 2012 by Judge Griesa of the Southern District of New York in a decision that favored the plaintiffs. On appeal, the 2d Circuit remanded the case to Judge Griesa for clarification on application of the Order to make “pro rata payments” to both the exchange bondholders and the plaintiffs, as well as impact on third party intermediaries.
Whether the pari passu story is now completely told and its fate has been settled as a legal matter, or whether there is more to tell, was the subject of some debate. As noted above, Weisburg believed that a rehearing on the meaning of the pari passu clause by the 2d Circuit was highly unlikely, as was the possibility of certification1. Kerr thought that the filing of an amicus brief by the United States Solicitor General changed the prospects for a rehearing on the topic, notwithstanding the technicality of a lack of a formal signature on the brief by the Solicitor General.
DeSieno had previously noted on the first panel the 2d Circuit’s conclusion that the hold-out creditors had been effectively subordinated by virtue of Argentina’s own actions, notably the “Lock Law”, which made it illegal for Argentina to make payments to the hold-out creditors. Humes, from the market perspective, predicted that “pari passu” would stand, and that the 2d Circuit would affirm the District’s Court’s ruling.
Gelpern commented that “it [the pari passu argument] has been a battle of the narratives, not a legal battle.” Judge Griesa’s exasperation with Argentina refusing to pay the hold-outs (“never”), the plaintiffs’ plea (“we’re not rogues, just creditors”) and the multitude of parties submitting briefs all contribute to this battle of nerves. She viewed the case as “an unlikely conflation of two sets of contract provisions”: CACs, which can facilitate bond restructuring by reducing the number of hold-outs and pari passu, which (under the latest interpretation) can help hold-outs enforce their debt. Gelpern asked “because hold-outs are here to stay, the question before and after CACs is the same – should hold-outs (however many) have the capacity to target performing debt and market infrastructure using the pari passu clause?”
However, lest anyone believe that Argentina’s bondholders are of a monolithic mindset, Sean O’Shea (O’ Shea Partners), representing the exchange bondholders, and Robert Cohen (Dechert), representing the hold-out creditors, amply demonstrated that these two groups do not see eye to eye on either the meaning of the pari passu clause or its handling by the 2d Circuit. This was among the sharpest exchanges on any of the panels, with Cohen taking the position that there never had been any settled understanding of the pari passu clause, and that the 2d Circuit had made a determination that Argentina, by its actions, had effectively ranked the debt of the hold-outs lower than the debt of the exchange bondholders. Not so, said Sean O’Shea, concerned that the 2d Circuit decision on the meaning of the pari passu clause had damaged the interests of the exchange bondholders, denying them due process, as well as amounts owed to them under the terms of the exchange bonds. In requiring “ratable payments,” O’Shea stated, the 2d Circuit had effectively denied the exchange bondholders amounts that the Argentine government owed to them under the exchange bonds by requiring ratable payments to be made to the hold-out creditors. Would rational creditors now conclude that it makes no sense to tender their bonds into any exchange if the price of doing so is not only the discount of the exchange itself, but also the further potential risk of having to share those later payments under the exchange bonds with hold-out creditors?
Cohen discounted the precedential value of the Court’s interpretation of the pari passu clause (he noted that the pari passu clause in the Argentine bond documents was, quite simply, worded differently than in other sovereign debt instruments, and also that not all sovereign debt documents even contain this clause) and disputed that the clause had ever had a clear or settled meaning under the law. Cohen also felt that actions taken by Argentina, such as the adoption of the “Lock Law”, led to “effective subordination” of the hold-out creditors. He further expressed the view that the legal risk of the pari passu clause being interpreted in just the way that it was by the Court could easily have been anticipated by other creditors and the exchange bondholders who knowingly assumed this risk when they tendered their bonds.
On the question of payment generally, Cohen claimed that Argentina can easily pay both its exchange bondholders and plaintiff hold-outs; Blitzer agreed that this was not a case of inability to pay, but rather unwillingness to pay. Some panelists thought that the appropriate “check” on Argentina for this willing failure to pay should be a limited or expensive access to the private debt markets, and not a court–imposed loss.
EQUITABLE REMEDIES AND SPECIFIC PERFORMANCE. On November 21, 2012, Griesa issued an injunctive order, restraining all intermediaries from making or facilitating payments by Argentina to the exchange bondholders without its making simultaneous, ratable payments to the hold-out bondholders, thus alternately pleasing the plaintiffs, and troubling some others, with a somewhat unexpected application of an equitable relief remedy and prompting an immediate appeal to the 2d Circuit.
To Weisburg, the 2d Circuit’s job on appeal would be to determine what remedy is appropriate for the breach of the pari passu clause (and not whether the clause had, in fact, been breached). Kerr called the 2d Circuit decision a “game changer” in that it made equitable remedies available to sovereign creditors “in unclear circumstances”. While Argentina was the “perfect bad boy”, noted Kerr, the 2d Circuit has taken the unprecedented step of facilitating access to Argentina’s offshore properties through equitable remedies, like the injunction, while passing over the more traditional roadmap and construct of attachment provided in Section 1609 of the FSIA. Kerr felt that Judge Griesa’s directing payment into escrow was effectively a sequestration of property that couldn’t be accomplished directly through the FSIA. He predicted that, if Judge Griesa’s ruling was not reversed, there may be specific performance of payment provisions in the future.
Joseph Alexander of the Clearing House Association (having filed two sets of amicus briefs in this case) focused on the concerns of the intermediaries that may be affected by the injunction. What, indeed, is the breadth of the impact of the Court’s order, fretted Alexander, noting that Federal Rules of Procedure 65(d) makes “aiding and abetting” the violation of an injunctive order a crime. Both Alexander and Kerr discussed the impact of the decision on the indenture trustee, the payment system participants and the efficiency of the funds transfer network generally, with Alexander giving specific examples of the onus placed upon the clearing house due to the injunction; Cohen dismissed these concerns in light of the Court’s offer to make necessary clarifications to the intermediaries.
AND CREDITORS’ RIGHTS GENERALLY? Tracing through some notable Emerging Market corporate restructurings, Paul Keenan (Greenburg Traurig) saw gains in creditors’ rights generally in both the corporate and sovereign contexts over the last two decades, citing court holdings that elevated, in his view, “contract over comity”. Keenan mentioned several well-known Latin American corporate restructuring cases, Mexico’s AHMSA, Argentina’s Multicanal, Brazil’s Globopar and most notably, Mexico’s Vitro (which, like Argentina, “did everything wrong”) and identified these cases as representing a promising trend toward the strengthening of creditors’ rights. DeSieno also included the Assenagon decision in the United Kingdom relating to Irish Bonds as part of a triumvirate (together with Argentina and Vitro) of recent creditor “wins”. Keenan also questioned whether there would be a re-awakening of the Sovereign Debt Restructuring Mechanism (“SDRM”).
THE MEANING OF CACS. When asked about the impact of CACs on the potential precedential value of the case, Anna Gelpern noted that sovereign debt, as a practical matter, “is unenforceable,” and that any enforcement will necessarily be indirect, and implemented through the engagement of third parties, such as the clearing houses. For her, the over-arching question was “how much of the financial and legal system should be drafted in the project of making sovereign debt slightly more enforceable.” Gelpern acknowledged that there may be narrow opportunities for some sophisticated creditors, but added that most other creditors could not withstand the cost and time to fight for enforcement of their debt. Gelpern further dismissed the value of CACs in the near term as being mostly irrelevant to debt enforcement (but noted Greece as an example of a successful use of majority amendment by a sovereign in domestic debt). She recognized that at present CACs provide a good roadmap to empower hold-out creditors: holders of more than half of Greece’s foreign law bonds with CACs voted against the deal, held out and got paid.
To Gelpern, “CACs are not bankruptcy”, and should not be confused with bankruptcy; Gelpern thought that CACs may help improve participation in a restructuring, but they do not eliminate hold-outs, and giving any hold-outs a remedy that relies on collateral damage is consequential. Gelpern’s view was that CACs are not faulty, but are a red herring in this case, and generally irrelevant to the core pari passu debate. Whether all new bond issues include CACs is not as important as what part of any sovereign’s debt outstanding includes CACs, and how hard it is for any individual bond to drop out of a restructuring. Aggregation of CACs is rare: it was first used by Uruguay in their 2003 restructuring, and even there individual issues could drop out of an aggregated vote. She used Greece as a partial example of a successful majority vote that did not allow single issues to drop out; Greece passed a law amending all outstanding domestic-law bonds and effectively enabled an all across-the-board CAC-style vote. This was in contrast to the failed votes in Greece’s foreign-law bonds, which had traditional CACs from the start.
WHAT LASTING IMPACT? On the second panel, Moderator Glassman asked the panelists to consider the legacy of the case and the significance of the 2d Circuit decision for debt restructurings in the future; will it make restructurings more or less likely? Charles Blitzer (Blitzer Consulting) pointed out that, historically in bond restructurings, participation typically is less than 100% (though rarely less than 90%). He also noted that there are two classes of non-participants: “hold-outs” who object to the terms of the offer, and, more commonly, small holders who seemingly do not know about the exchange offer. In about half the cases, non-participants have tended to get paid on time and in full, while in other cases countries have engaged in various “mop-up” operations. In a later panel, Humes agreed with Blitzer that, except when there are CACs, some level of non-participation is an “inevitable component of restructurings”. However, Humes later argued that the Argentine situation was unique and unlikely to be repeated, but accused Argentina’s government of hypocrisy, “crying about international norms when a ship is seized in Ghana, but they don’t follow them otherwise.”
Blitzer further noted that, out of the last 15 sovereign bond restructurings, only three countries have failed to reach accomodations with actual hold-outs: Argentina, Ecuador and Dominica. Only Argentina and Ecuador have failed to attempt to negotiate with hold-outs, and Argentina is the only country which has refused to comply with court-ordered payments to hold-outs. As a result, Blitzer concluded that the risk of “contagion” among sovereigns was slight, noting that recently Belize had explicitly stated it would not “act like Argentina.” Blitzer expressed his disappointment with Argentina as a “rogue state” that does not honor its judgments and does not follow IIF Principles.
Kerr questioned whether the case led to a “business as usual” approach by investors or whether the litigation was, in fact, a tortious interference with contract, but DeSieno dismissed the notion that this case held great legal significance or that it would stand as a meaningful precedent as the fact pattern was so specific to the Argentina experience. DeSieno disagreed that any decision would be likely to destroy debt restructurings “as we know it” in the domestic or sovereign context. “The hold-out game is as old as the restructuring game,” with creditors assessing their options with a cost/benefit analysis. When asked by his clients if the pari passu argument is a good enough reason to hold out, DeSieno reported that he has responded that, while this case may lead to some precedent, the case will be known more for a “recipe of what [a sovereign] should never do to get [it]self in this situation.".
Following the program, attendees were invited to a cocktail reception by host Bank of America Merrill Lynch.
Additional sponsors of the event included Barclays, Bingham McCutchen and JPMorgan.
1 And, in fact, after the panel presentation, the 2d Circuit did deny recertification to the plaintiffs in its Order on January 10, 2013.
EMTA SEMINAR: RECENT LEGAL DEVELOPMENTS IN ARGENTINE DEBT
Tuesday, February 12, 2013
Sponsored by Bank of America Merrill Lynch
2 King Edward Street, King Edward Hall
London
This event will consist of three panel discussions that will focus on
recent US court decisions regarding Argentine debt, the evolving definition of
the pari passu clause and its implications for the fixed income marketplace.
1:30 p.m. – Registration
1:45 p.m. – Panel Discussion
Overview of Recent Legal Developments
James Kerr (Davis Polk & Wardwell) – Moderator
Yannis Manuelides (Allen & Overy)
Deborah Zandstra (Clifford Chance)
Henry Weisburg (Shearman & Sterling)
3:00 p.m. - Panel Discussion
Litigant and Academic/Political Discussion
James Glassman (SEC Investor Advisory Board) – Moderator
Charles Blitzer (Blitzer Consulting)
Steven Froot (Boies, Schiller and Flexner)
Robert Cohen (Dechert)
Timothy Nelson (Skadden, Arps, Slate, Meagher & Flom)
4:15 p.m. – Panel Discussion
Market Reaction: Implications for the Market
Alberto Ades (Bank of America Merrill Lynch) – Moderator
Guillermo Mondino (Citi)
Hans Humes (Greylock Capital Management)
Vladimir Werning (JPMorgan)
5:30 p.m. – Cocktail Reception
Additional support provided by Allen & Overy, Citi, JPMorgan and
Puente.
This Seminar is part of a continuing series of panels and presentations that
EMTA is pleased to sponsor on various topics of interest to Emerging Markets
investors and other market participants.*
*CLE Credit Available for NY attorneys. This seminar is non-transitional and
appropriate for experienced attorneys only. Please click here
for details on EMTA’s Financial Hardship Policy.
Registration fee for EMTA Members: US$75 /US$495 for non-members
EMTA held its Special Seminar “Recent Legal Developments in Argentine Debt” on February 12, 2013 at the London offices of host and sponsor, Bank of America Merrill Lynch. This time our 200 guests were regaled with three panels, composed of academics, market analysts and lawyers (thirteen in all), who explored a variety of issues relating to the litigation between Argentina and its “hold-out” creditors, as well as cases arising in the UK.
Several speakers repeated points they had previously discussed at EMTA’s Special Seminar on Argentine Debt held in New York City on January 7, 2013. In addition, a variety of new viewpoints were expressed, which are summarized below.
Jim Kerr (Davis Polk & Wardwell) reprised his role as moderator of the event’s legal panel and facilitated the discussion of the tension between the two provisions in the FSIA – while sovereigns were subject to the same obligations and rights as players in the private capital markets, there were limits to enforcement of a sovereigns’ debt obligations if the property that plaintiffs wish to attach to satisfy their judgments is outside the US. He restated his position for the UK audience – one should not be able to use the specific performance equitable remedy in this context to remedy a possible contractual breach and subsequent problems with enforcement.
Henry Weisburg (Shearman & Sterling) again provided background information on deadlines, as well as on how the court system works in the US and how the Argentine cases work in particular. All cases against Argentina were heard first by Judge Griesa, whose opinions were then reviewed by the 2d Circuit. 2d Circuit decisions are binding on courts within that Circuit, but not within the ten other Circuit Courts. Currently, the 2d Circuit panel is composed of three judges (although Argentina requested for the pari passu topic to be heard en banc by all thirteen judges). He referenced paragraphs 2(a) and 2(e) in the November 21, 2012 District Court injunction as being the ones at issue – specifically, what the ratable portion is that Argentina should pay and which participants will be bound by the injunction. He also spoke briefly about Rule 65 of the Federal Rules of Civil Procedure Code (Rule 65) relating to the content and scope of injunctions and affected parties.
Yannis Manuelides (Allen & Overy) imparted his view on the import of the pari passu clause -- how it’s beneficial for both debtors and creditors (who want to understand where their debt ranks), how it may work differently in the sovereign context where there is no bankruptcy proceeding and how ratable payments may be problematic if there are no carve-outs for the IMF and other public sector creditors.
Deborah Zandstra (Clifford Chance) posited that it’s unlikely that a UK court would follow the NY court’s decision to impose the injunction on third parties; it’s more likely that plaintiffs would be left with the task of enforcing their judgment against defendants. She used Kensington v. Congo as an example, where the judge refused to grant an injunction to disrupt the payment stream and refused to coerce third parties to do so. Similar to Anna Gelpern’s claim on the NY panel, Zandstra deemed any court’s confidence in CACs as “naïve” since many sovereign bonds don’t include CACs, much debt is issued under domestic law, and aggregation further complicates the issue of cram-downs. Therefore, CACs are not a panacea for the hold-out problem. She concluded by pointing to the IIF Principles as a better guide, supportive of voluntary restructurings, based on good faith contractual negotiations, with the public/private sector dialogue in the background as an informational tool.
James Glassman (SEC Investor Advisory Board) moderated the litigant and academic/political panel, but suggested renaming it “Likely Effects of the Argentine Adventure – Is the Case Sui Generis or Does it Have Broader Implications?” Predictably, the Argentine proponents argued that the case had broad implications, whereas those on the plaintiffs’ side argued that the specific fact pattern will not likely give rise to any precedential effects on future cases. Glassman was also intrigued by the US’ seemingly contradictory positions of opposing loans to Argentina, while at the same time opting to offer an amicus view in favor of Argentina.
Robert Cohen (Dechert), representing the plaintiffs, stated that the District Court correctly looked at Argentina’s pattern of behavior over time (including the imposition of the Lock Law) and concluded that it amounted to a violation of the pari passu clause. Rule 65 automatically binds people who help make payments, so the injunction’s reach to intermediaries is not unprecedented or unwarranted, and, like bankruptcy in the domestic context, the court’s decree of ratable payments in this sovereign context has merit and is based on valid legislative arguments.
Timothy Nelson (Skadden, Arps, Slate, Meagher & Flom) noted that his firm had filed an amicus brief on behalf of Argentine financial institution Puente Hermanos, which broadly supported Argentina’s position. He commented that Argentina’s financial community had genuine concerns about the 2d Circuit’s pari passu decision, and that in general the community wanted to see the overall debt issue resolved – while acknowledging the problems in dealing with Argentina’s body politic on this issue. He indicated that many in the Argentine financial community have fears about the general macro-economic impact on Argentina of the “ratable payment” order issued by Judge Griesa in November 2012. He posited that, while the Lock Law might have triggered a breach of the pari passu clause in the “hold-out” bonds, the issue of how that breach was remedied is a separate matter, and that the imposition of the “ratable payment” formula, requiring simultaneous payment by Argentina of all accelerated hold-out debt, may not be an appropriate sound remedy. He also thought that the FSIA and “takings” arguments, respectively, were sufficiently constitutional in nature to attract the Supreme Court’s attention to this case.
Steven Froot (Boies, Schiller and Flexner), counsel for the exchange bondholders, also agreed with Sean O’Shea, a panelist in New York, who represents the same group, that, if the unprecedented crafting of equitable relief results in the hold-outs being paid 100%, then no firms would ever willingly participate at a haircut in a future exchange offer and the ability to restructure debt would come to an end. He also took issue with the notion that all bonds have CACs and that, therefore, the hold-out problem was not widespread. And, he raised the possibility that, due to Argentina’s numerous cases and arbitrations under ICSID (the International Centre for Settlement of Investment Disputes), it might not be able to pay the plaintiffs in the current suit, let alone the exchange bondholders. Froot noted that Argentina’s reserves were intended for other purposes and the Republic might have no choice but to default on its post-exchange debt.
Glassman took issue with Froot’s characterization of Argentina’s ability to pay and reminded him that O’Shea described the problem as Argentina not having sufficient funds to pay the plaintiffs and also the exchange bondholders 100% of what they were owed before the exchange offer. Froot explained that their thinking had evolved since the New York panel discussion. Nelson agreed with Froot that it would be unfair for Argentina to pay hold-outs 300% (taking acceleration into account) vs. only 3% of what the exchange bondholders were originally owed. Glassman pressed further: “why are the exchange bondholders hung up on what the hold-outs get?” Froot responded that his clients believed that the hold-outs should get paid, but there simply wouldn’t be sufficient funds to pay both them and his clients, and a myriad of other litigants (including former litigants represented by Cohen that might now use the pari passu clause as a possible remedy for breach of payment obligations), which only magnifies the problems Argentina faces before deciding to default.
Charles Blitzer (Blitzer Consulting) noted that, if Argentina loses and their costs of funding increases even further, then that was a positive message to be imparted to countries contemplating similar “rogue” behavior. He encouraged Argentina to pay its “non-participants” and move on. In Blitzer’s view, the key to a successful restructuring is negotiation, improved management of the economy and an exchange offer that was broadly consistent with a nation’s ability to pay.
Alberto Ades (Bank of America Merrill Lynch), moderating the event’s market panel, echoed Weisburg’s earlier prediction that the injunction would not be stayed, but the calculation of the ratable payments would be stayed, thus enabling Argentina not to be in technical default, but possibly in contempt of court.
Guillermo Mondino (Citi) discussed three possible scenarios: (1) the court rules against Argentina, but the injunction is stayed (he viewed this as the “muddling through” scenario), (2) the stay is lifted and Argentina is forced to think of what it would do with its upcoming March and June payments (he believed a moratorium was likely until a final court decision was made, thus triggering CDS contracts and other market dynamics) and (3) the injunction does not affect any intermediaries and Argentina would be in contempt of court for not abiding by it (there are very few contempt of court cases against a sovereign, so the end game is unpredictable, and it makes it more difficult for Argentina to ask the Supreme Court for a hearing while in contempt; moreover, Argentina might declare the court to be rogue!). He proclaimed that Argentina is “unafraid of the long-term consequences of its short-term decisions.”
In response to Ades’ query of what makes Argentina different from other sovereigns, Vladimir Werning (JP Morgan) responded that the government’s narrative was still focused on crisis, trying to resolve past injustices instead of moving forward. He predicted that it might try a technical default or re-routing of payments, in addition to appealing the case (assuming escrow, which was a “non-starter” and a heavy drain on cash flow, was not a requirement for an appeal). Ades suggested that Argentina would be better off if it made a rational calculation by paying its plaintiffs and moving on to access the private capital markets. Werning replied that Argentina was not tempted by, or interested in, attracting more outside capital, in fact it wanted to divest itself of foreign debt so that its creditors wouldn’t have a voice in its economic decisions. He continued to be pessimistic and retained the underweight recommendation on Argentina that he previously reaffirmed at the January EMTA conference.
In response to Ades’ query of “how it would all play out”, Hans Humes (Greylock Capital Management) responded that any scenario would be complicated and problematic, given Argentina’s current administration and proclivities. He emphatically stated that the exchange bondholders do not represent his interests, and that he was willing to suffer mark-to-market damage to get Argentina to finally negotiate (after years of being rebuffed as the Chairman of the Argentina Bondholders Committee) with its creditors (who might accept bonds instead of cash). He scolded the US Treasury for filing an amicus brief (although he noted that there may be a split in the government’s views on how to handle Argentina) and failing to provide Argentina with consequences for its actions, thus further enabling their rogue behavior. Finally, he concluded by stating that the current trustee system was broken, whereby trustees were paid by the creditors, but were, in fact, agents of the debtor.
Following the program, attendees were invited to a cocktail reception by host Bank of America Merrill Lynch.
Additional sponsors of the event included Allen & Overy, Citi, JPMorgan and Puente.
EMTA SEMINAR: AN OVERVIEW OF ARGENTINE DEBT LITIGATION AND ITS MARKET IMPLICATIONTS
Monday, February 25, 2013
Sponsored by TPCG Group
Alvear Palace Hotel
Ayacucho 2071-CABA
Emperatriz Meeting Room
Buenos Aires
This EMTA Special Seminar will feature discussions on the US court
litigation over contested payments to Argentina’s “hold-out” creditors, the
many New York and Argentine legal issues, recent developments in those cases,
the upcoming hearing by the Court of Appeals for the Second Circuit of New
York, the evolving definition of the “pari passu” clause, immediate and
long-term implications for trading and investment in the Argentine debt
markets, including a Brazilian perspective.
2:30 p.m. – Registration
2:45 p.m. – Panel Discussion
Marcos Buscaglia (Bank of America Merrill Lynch)
Bruce Wolfson (Bingham McCutchen LLP)
Javier Errecondo (Errecondo, Gonzalez y Funes Abogados)
Murillo de Aragão (GlobalSource Partners and Arko Advice)
Diego Ferro (Greylock Capital Management)
Antonia Stolper (Shearman & Sterling)
5:00 p.m. – Cocktail Reception
Additional Support Provided by Bingham McCutchen LLP.
This Special Seminar is part of a continuing series of panels and
presentations that EMTA is pleased to sponsor on various topics of interest to
Emerging Markets investors and other market participants.
Attendance is complimentary for EMTA Members / US$295 for
non-members.
Sponsor and host, Francisco Alvarez de la Viesca of TPCG Sociedad de Bolsa, welcomed the audience to the EMTA Special Seminar “An Overview of Argentine Debt Litigation and its Market Implications” held at the Alvear Palace Hotel in Buenos Aires on February 25, 2013. The third in EMTA’s trifecta of panel presentations on the Argentine debt litigation, this seminar was calibrated to the interests and perspectives, specifically, of the Argentine investor and market, with over 200 market participants attending the event.
Panelists included Marcos Buscaglia of Bank of American Merrill Lynch, Murillo de Aragao of Global Source / Arko Advice, Javier Errecondo of Errecondo, Gonzales y Funes Abogados, Bruce Wolfson of Bingham McCutchen, Diego Ferro of Greylock Capital Management and Antonia Stolper of Shearman & Sterling. Moderated by Wolfson, the combined business and legal panel proceeded in Spanish (with simultaneous English translation) and considered many issues, including ones not raised at the earlier panels in New York and London.
Turning first to an overview of the litigation and the US legal issues, Stolper summarized the cases, courts, parties and current status, emphasizing the most important issues as being the pari passu clause, the FSIA, the injunctive order and UCC 4A, and expressed the Shearman & Sterling perspective that the interpretation of the pari passu clause in the contract had been definitively settled and would not be revisited during the hearing of the 2d Circuit in New York on February 27. She commented that the only outstanding issue to be addressed, in the firm’s view, would be the determination of what the injunctive order requires and to whom it would be extended.
Addressing policy issues, Ferro expressed the viewpoint that having New York law be respected was critical for it to retain its status as a primary global financial center, noting that the largest problem of all was the potential for a negative impact on the international payment system. Ferro dismissed the importance of the holdout problem “in the grander scheme” and focused on the payment system issues.
Ferro, whose firm, Greylock Capital Management, tendered its Argentine debt in 2010, commented that being a hold-out creditor could be seen by some as a good strategy; however he reminded the audience that these investors had been receiving legal bills, instead of the coupons being collected by those who tendered. “It’s your choice,” he summarized. Wolfson raised the public policy question of how the interests of sanctity of contract and the obligation of a country to attend to the needs of its citizens could be balanced and how that balancing act had played out in this particular case.
Turning to Errecondo, Moderator Wolfson asked about the legal landscape in Argentina, which was a topic not previously discussed on the New York or London panels. Errecondo noted that in 2001, at the time of the default by Argentina, local law provided that foreign judgments against the sovereign for payment claims under defaulted bonds were enforceable against Argentina, subject to public policy considerations. However, according to Errecondo, this right of enforcement did not give the creditor the right to enforce the judgment directly against the assets of Argentina. Instead, creditors were allowed to commence enforcement proceedings by first requesting that the Government include a provision for payment of such claim in the annual budget approved by Congress. Errecondo noted that the law also provides that provision for payment in the Federal budget in this manner might be “deferred” (or rolled over) from one budget to the next (and that the law is unclear on how many times this may occur). Only if the Argentine Congress fails to provide for the payment of a judgment as described above would the creditor then be entitled to request the enforcement of the judgment directly against Argentine assets.
Notwithstanding the above-described principle under Argentine law of honoring the enforcement of foreign judgments, Errecondo noted that in the case of In re: Brunicardi v. Banco Central, the principle of deferral on the payment of domestic foreign debt in the context of a situation of economic constraint for Argentina was upheld. In the Brunicardi case, the Court relied on a number of foreign judicial precedents, and in particular, on a principle of international law that allows a sovereign state to unilaterally reschedule the payment terms of bonds in extraordinary situations.
In January 2001, the Argentine Congress passed the so-called “Public Emergency Law,” declared a default on the sovereign financial debt and abandoned one-to-one convertibility of the peso into dollars. This law authorized the Executive Branch of the Argentine Government to restructure its foreign debt. The Argentine Congress included a deferral of payment provision under external bonds in the 2002 federal budget, and then for each year thereafter until the 2013 federal budget. This, in effect, has continuously rolled over the payment obligation from 2002. Errecondo noted that these deferral mechanisms were scheduled to apply until the restructuring process of “all” the foreign debt is completed. Errecondo thought that this implied that all hold-out debt should be somehow restructured. He believed that these deferral laws were arguably more important than the more notorious “Lock Law”.
Errecondo explained further that the Lock Law was passed in 2004 to enhance the acceptance of the 2005 Exchange Offer, providing that Argentina was prohibited from extending the Exchange Offer to hold-out creditors after the exchange was completed and also from making any payment to such hold-outs.
Errecondo noted that the validity of the deferral laws, which, in essence, prevent the enforcement of foreign judgments on payment claims under the defaulted debt, was also tested in the case of In re Clariden Corp. v. Ministry of Economy, where a holder of the 2007 Global Bonds was not allowed to enforce a New York judgment to pay all unpaid amounts because deferral laws (as in the Brunicardi case above) were seen by the Court as a determination in the interests of the public policy of Argentina. Errecondo noted that the Clariden case is under review by the National Supreme Court, but that he expected it would be ratified. Nevertheless, he continued, the Court may run out of tolerance for the indefinite rollovers of these payment obligations, but it was not likely that the Court would make a more aggressive award than what was offered in the exchange.
Asked to give an international perspective on the legal overhang, de Aragao (who became the first EMTA panelist to speak at events in three different languages!) noted that, since the inception of Mercosur, the Brazilian and Argentine economies had become increasingly economically integrated (with Argentina absorbing 20% of Brazil’s exports and most of its industrial products). De Aragao affirmed Brasilia’s political support for Buenos Aires, but suggested that a settlement between the parties to resolve the uncertainly and negativity would be in Argentina’s best interest. De Aragao delivered a clear message that the uncertainly and negativity of the ongoing litigation was of increasing concern to Brazilian investors and would likely have the effect of discouraging
Brazilian FDI into Argentina, which in recent years, had totaled $15 billion. De Aragao specified that companies such as Itau BBA, Petrobras and Vale were among the many Brazilian companies operating in Argentina, and could reduce further investments in the country if the uncertainty continued, as could investments by Brazilian airlines and pharmaceutical companies.
Wolfson then guided the panel to a discussion of the market implications of the litigation and how the market was evaluating this litigation. Stolper described the potential outcomes of the hearing scheduled for February 27 in the 2d Circuit, noting that, on the issue of the application of the injunction, the 2d Circuit “might blink” in the face of what Stolper described as a level of “glibness” in Griesa’s treatment of the payment system issues.
Buscaglia predicted a technical default situation could have severe effects for Argentina, including potential significant drops in deposits and a hoarding of dollars (which would leave the banking system), a reduction in intercompany lending, deposits and trade credits, and a potential negative effect on Argentina’s GDP of an estimated 5% in the months following such an event. He noted that local analysts disagree with this view and believe that a technical default would shave about 1% of GDP on an annual basis.
Ferro also speculated on the likelihood of a negative court outcome for Argentina, but disagreed that Argentina would permit a technical default to happen, noting that Argentina”‘has options” and would examine the Greek and Ecuadorian cases to avoid triggering a CDS default. Ferro contrasted the very particular Argentine situation with its “three atypical stakeholders: Elliott, Argentina and Cleary” to the situations in both Greece and Belize, finding notable differences among the three involving, in the case of the recently announced Belize restructuring, a functioning creditor committee and a “reasonable package” for investors that discouraged hold-outs (“because they see the deal makes sense”). Ferro stressed transparency in debt negotiations as key to ensuring maximum bondholder participation.
Guiding the panel to a close, Wolfson asked each panelist to speculate on a possible way forward for Argentina and NML. Buscaglia discussed the possibility of a payment window being made available in Argentina to exchange bondholders, while observing that few would have the resources to collect such payments. Such an outcome would also contract Argentina’s investor base, he added.
Ferro and Buscaglia speculated on the possibility of an exchange for Euro bondholders, “but there is no path for an organized exchange, so how many people will accept a disorganized exchange?” asked Ferro.
Errecondo returned to the possibility of local payment in U.S. dollars to those investors who tender their bonds in Argentina, reiterating that, if an investor came to Argentina, he could get paid and payment would be supported by, and enforceable within, the local legal infrastructure. He underscored, however, that “we need a permanent solution.”
Buscaglia discussed the possibility of a payment window being made available in Argentina to exchange bondholders, but added that such an outcome would also contract Argentina’s investor base.
Buscaglia added that if the case is somehow delayed to the end of 2014, there is some basis for optimism as Argentina could then offer better terms for the hold-outs, while Wolfson noted that pride remained an issue, and for any of this to work, the “Government had to win something.” Wolfson doubted that an alternative payment system could work, and that creditors would be willing to accept a new coupon-payment mechanism.
The “$64,000 Question” in Stolper’s view was what would happen if an NML victory led to “me, too” litigation claims. Stolper noted that, undoubtedly, others would seek judgments, while acknowledging this could prove complicated as other jurisdictions (e.g. Germany, etc.) became involved.
Following the discussion, panelists took a wide variety of questions from audience members regarding possible contempt of court procedures, court timeframes and possible Supreme Court and 2d Circuit stays.
After the panel discussion, the attendees retired to a cocktail party hosted by TPCG in the coral-colored Salon Emperatriz at the Alvear Palace Hotel.
The seminar was also supported by Bingham McCutchen.
Since the EMTA panel discussions, the 2d Circuit held a hearing on February 27 to permit oral arguments by the plaintiffs, defendant, Bank of New York and exchange bondholders. The time allotted to each of the parties was extended and a standing-room-only crowd of interested parties (including journalists) were privy to the three-judge panel’s questions and comments. The next day, February 28, the 2d Circuit denied Argentina’s request for a panel rehearing (although some commentators still think that an en banc (all 13 judges) rehearing on the pari passu clause’s interpretation is still possible). And, on February 29, the Court requested that Argentina provide it prior to, but no later than, March 29, with a plan for repaying the plaintiffs, delineating “the precise terms of any alternative payment formula and schedule to which it is prepared to commit. The Court direct[ed] that, among the terms specified, Argentina indicate: (1) how and when it proposes to make current those debt obligations on the original bonds that have gone unpaid over the last 11 years; (2) the rate at which it proposes to repay debt obligations on the original bonds going forward; and (3) what assurances, if any, it can provide that the official government action necessary to implement its proposal will be taken, and the timetable for such action.” An alternative payment plan could include re-opening the 2005 and 2010 exchanges to the plaintiffs.
Click Here for the audio recording of the proceedings.
Click Here for the February 28 Order.
Most commentators do not view the February 28 Order as affecting the upcoming March 31 interest payment on the 2038 Global Par Bonds to the exchange bondholders. The following upcoming payment is due on June 2 on the 2031 Global Par Bonds, and many commentators think that the 2d Circuit is likely to deliver its decision by that time. Meanwhile, rumors abound on what Argentina’s alternatives are (including a possible exchange of New York-law governed debt into local markets, Argentine-law instruments).
EMTA will continue to closely monitor developments in the on-going litigation against Argentina, and its members are encouraged to visit the Litigation area of EMTA’s website for the recent materials. As a reminder, EMTA continues to collect and post legal materials regarding EM sovereigns involved in disputes with creditors.
For more information, please contact Aviva Werner at awerner@emta.org or Leslie Payton Jacobs at lpjacobs@emta.org.