As the Financial Times put it, “[s]ince last week’s US Appeals Court ruling went against Argentina, there’s been a lot of comment about how the country could try changing the trustee or payments structure of the bonds which came out of its 2005-2010 restructuring.” (Attachment G.) It is clear that Argentina now is in the process of trying to render the Equal Treatment Orders ineffective and will employ and exploit any delay tactics necessary to evade this Court…
That was Dechert LLP, picking up the quill this week on behalf of Elliott Associates and betraying terrible taste in its finance blog reading. Dechert has asked Judge Griesa to get cracking on a clarification of how much Argentina should pay bond holdouts, like Elliott, alongside holders of its restructured debt.
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Update – And we were so taken with the details of this payment formula, we should really have noted first — Griesa’s called a hearing for after 11am today (Friday, 9 November). A very important section of this letter argues that a stay on the judgements against Argentina should immediately no longer apply. That should be the issue to be decided today, and it is huge.
Argentina clearly thinks the stay does still apply, because it said after the Second Circuit ruling that there was “no immediate impact on debt payments”. Well it would say that. A number of restructured bond payments come due early in December. Because Argentina is not too happy about paying the holdouts alongside the restructured, dissolving the stay could be a big problem for making those payments. Hence the fear of a technical default or credit event in the coming weeks. Ellliott for its part thinks it would be “severely prejudiced” if the stay holds and Argentina pays these bonds as it has done before.
So no pressure or anything… And now back to your regularly scheduled payment formula post.
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Of course the Second Circuit asked for this payment clarification last month in the ruling which, affirming a decision by Griesa earlier this year, blew away Argentina’s grounds for not paying holdouts with surprising strength. While the debate continues about how unique the grounds are to Argentina, this boon to creditors in itself shook the world of sovereign debt restructuring. (Who sets the rules – creditors or debtors? That’s the question, and it now runs through Athens and Belize City as much as through Buenos Aires, so it matters.)
The payment formula(s)
Dechert’s request, then, isn’t over a mere technicality. It goes right back to that question, because it’s trying to ensure the “payment formula” should be taken to mean that Argentina pays holdouts’ claims in full, as and when it pays out on the restructured debt, and not anything less. It would reinforce this sense of a big victory for creditor rights.
In other words, the payment formula would not mean that, as the Second Circuit pondered when it made the request for clarification, “a… payment to the exchange bondholders represented 1% of the principal and interest outstanding on the restructured debt, then Argentina must pay plaintiffs 1% of the amount owed to them”.
And it would be even further from the idea that Argentina should now be paying holdouts amounts equivalent to what they would have got if they had joined the debt exchanges offered to bondholders during the last decade. This sum — roughly around 25 cents per dollar of original claim — is what Argentina is already (in a way) paying those bondholders who exchanged. That would be left-field; it would set off fireworks.
Anyway Elliott has had a go at rewriting the payment formula. From the letter to 500 Pearl Street:
The parties previously agreed–and therefore there can be no dispute–as to how the Ratable Payment formula is intended to operate: The payment required by the Ratable Payment formula is the total amount Argentina currently is obligated to pay under the plaintiffs’ bonds in these cases (“Plaintiffs’ Bonds”) (i.e., the full principal plus accrued and unpaid interest, including capitalized and prejudgment interest), multiplied by the proportion (in percentage terms) that Argentina pays under the Exchange Bonds of the amount it is obligated to pay on those bonds at that time (i.e., the payment due). Thus, when a payment is due under the Exchange Bonds, if Argentina pays 100% of the money it owes at the time under any of the Exchange Bonds, the Ratable Payment formula requires Argentina to pay all of what it owes under the Plaintiffs’ Bonds at that time, which is to say the full principal and accrued and unpaid interest. Argentina never before expressed any confusion on this point, and it should not be heard to do so now.Plaintiffs’ proposed order seeks to further clarify this aspect of the Injunctions by adding a new paragraph that defines the phrase “amount due under the terms of the Exchange Bonds” to reflect the amount due to be paid as of a specific date, rather than the amount of principal and interest outstanding on the restructured debt (as the Second Circuit speculated it might, Op. 11). For additional clarification, the proposed order uses as an illustration the approximately $3 billion payment Argentina is scheduled to make under the Exchange Bonds on December 15. Plaintiffs respectfully request that the Court resolve this aspect of the Second Circuit’s remand in accordance with the proposed order herein submitted.
To put this in a sentence or two, Elliott is saying this: if Argentina’s going to go round paying 100 per cent of whatever it owes to restructured creditors whenever that is due, then equal treatment means that Argentina’s going to pay 100 per cent of whatever it owes us at that time. As it just so happens, the terms of our bonds provide that 100 per cent is all the principal and all the interest, which is accelerated if the bonds are (as they have been) defaulted upon by Argentina.
The full proposed order text is in Attachment B1 in this document. It also goes on to say that if Argentina should decide (as if it’s ever done this) to pay its restructured creditors less than 100 per cent of whatever’s due… it cannot pay less than that less-than-100 per cent percentage in terms of the amount due under the holdout bonds.
So, a ballsy move as usual by Elliott. But again, with the simple aim of locking in payment in full.
Interesting, then, that Deutsche Bank analysts this week suggested a completely opposite interpretation:
Clearly the least contentious ruling would be one where the District Court demands the Republic to equalize the rights of holdouts to those that agreed to the restructuring deal. In the same vein, the Court could order Bank of New York to proceed with the implied payment formula as long as it is clearly demonstrated that BoNY is essentially a payment agent of the government. This would mean that the District Court is trying to recover the rights lost by the holdouts due to the Lock Law (an essential argument against Argentina) but without ignoring the rights gained by the majority of defaulted debt holders. Under this interpretation holdouts will simply be granted right to receive the restructuring deal as partial payment to their full claim against the Republic. Obviously this would not be a settlement for the holdouts, but the concession of equal treatment to the majority holders at least and the associated partial payment.Although legal opinions are divided and all rulings are actually possible, we believe that this third alternative (a restructuring deal for all), looks a bit more likely than others…The above notwithstanding, we believe there is a chance that Argentina would accept a “favorable” court ruling (restructuring for all), although it would be up for the economic team to convince President Cristina Fernandez de Kirchner of the great opportunity this could represent.
Well, to be a fly on the wall for that meeting in the presidential office.
That does bring up an interesting point, though, about how holdouts can receive payment from Argentina without it exciting follow-on claims from holders of the restructured debt. As we noted earlier, there is this “most favoured creditor” clause in the exchanged bonds. It gives holders rights to participate if “Argentina voluntarilymakes an offer to purchase or exchange or solicits consents to amend any Eligible Securities not tendered or accepted pursuant to the Offer,” before 2015. Emphasis ours. Orders handed down from US courts could possibly be considered involuntary for Argentina, covering its back here. This could be important down the line. But at the moment it’s thinking several steps ahead.
For now, we’re not sure that “restructuring for all” would be the least contentious ruling…
As Deutsche themselves note, one objection to it is that the original formula “makes no reference to how payments impact the value of the ongoing claim of the holdouts. If it is intended to be economically equivalent to the restructuring… then there would need to be some recognition that payments on restructured bonds represent interest and hence do not result in a reduction of the claim.”
On our reading of the proposed rejigged order, it does look like it’s trying keep everything open and not narrowed down to interest. It determines any amount paid to restructured bondholders as “regardless of whether that amount represents interest, principal, some other remuneration due at that time, or some combination thereof.”
And there might also be a wider issue here.
As the Second Circuit said in last month’s ruling: “plaintiffs were completely within their rights to reject the 25-cents-on-the-dollar exchange offers. And because the [holdout debt] does not contain a collective action clause, Argentina has no right to force them to accept a restructuring, even one approved by a super-majority.”
In light of this, US courts might think twice about turning the payment formula into effectively a giant collective action clause. The Second Circuit did come across (somewhat enigmatically) as a big fan of CACs in its ruling, as Deutsche note. But is it that big a fan?
And those third parties
Finally, the Dechert letter to Judge Griesa also suggests an interpretation of how payments to holdouts should affect obligations of third parties which might be involved in payments on the restructured debt — another cause of concern for the Court of Appeals.
It looks pretty functionally straightforward: “those persons and entities who act as the Republic’s agents, or act in active concert or participation with the Republic or its agents, to assist the Republic in fulfilling its payment obligations under the Exchange Bonds” including but not limited to the current cast of financial characters who fill these roles, such as Bank of New York as trustee. That suggests preparation in case Argentina goes around altering that cast. Significantly, the proposed definition does not extend to “intermediary banks”, i.e. banks handling and transferring funds further down the line.
And Elliott would probably prefer courts to nail all this down before Argentina would make any effort to “offshore” whole payment structures altogether, such as the location of the trust used for payments. That might mean a whole set of other tedious litigation around the world if it were attempted. Though here is one last interesting piece of context, which we hadn’t realised. As Rodrigo Olivares-Caminal pointed out to us last week, Peru considered a familiar strategy in its own famous 2000 confrontation with holdouts.
This is from a 2012 Hofstra Law Review article by Rodrigo:
Peru attempted to create a trust to twice a year make the payment of interest due on the Brady bonds on its behalf in order to keep on servicing interest rates and avoid a disruption of the flow of funds. Shortly after, Peru desisted of implementing the trust structure because not only payments through the depository trust company were curtailed as a result of the attachment orders in different states in the United States but also through Euroclear. The only window that was left open—although temporarily—was to perform the payments through Clearstream. Performing the interest payments through Clearstream would have implied that only those bondholders holding an account with Clearstream would be paid or that bondholders not holding an account with Clearstream should open an account there (which implied an additional cost to Peru)…
Facing likely further litigation wherever it went, Peru dropped the idea, and soon settled with the holdout.
Elliott should know the story well. It was the holdout.
Related links:
Argentina’s (not so) unusual pari passu clause - Credit Slips
Argentina’s (not so) unusual pari passu clause - Credit Slips
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