Argentina Rejected by U.S. High Court on Defaulted Bonds
By Greg Stohr, Katia Porzecanski and Camila Russo Jun 16, 2014 8:04 PM GMT+0200
An exchange house in downtown Buenos Aires.
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The U.S. Supreme Court left intact rulings that may force Argentina to pay billions of dollars to holders of repudiated bonds, rejecting an appeal in a case that has blocked the country from international debt markets for more than a decade.
The rebuff is a victory for billionaire Paul Singer and other creditors who have refused to accept the government’s restructuring offers following the record sovereign default in 2001 and demanded full payment. Argentina’s restructured bonds plunged today on concern that the Supreme Court’s decision could push the country into another default.
The next scheduled payment on the restructured bonds, which is due on June 30, sets an informal deadline for the government to reach a settlement with the holdouts because a lower court ruled that it cannot pay one group of creditors without paying the other. Argentina, seeking to preserve dwindling central bank reserves, says it can’t afford to pay both sets of bondholders.
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“This is the end of the line for Argentina in terms of the judicial appeal process,” Richard Samp, chief counsel of the Washington Legal Foundation, which filed a brief in support of the holdouts, said on a conference call. “My guess is that any negotiation is going to have to be completed before the time of the next bond payment.”
The legal fight has put U.S. courts in the unusual position of shaping another country’s financial future. Lower court rulings have led Standard & Poor’s, Fitch and Moody’s to lower Argentina’s bond ratings. The Supreme Court justices turned away contentions that the lower courts misread bond agreements and violated the country’s sovereign immunity.
2001 Default
The dispute revolves around Argentina’s 2001 default on a record $95 billion in debt. The country offered to substitute lower-value bonds in 2005 and made a similar proposal in 2010. Owners tendered about 92 percent of the outstanding debt.
The Supreme Court also dealt Argentina a second blow today, ruling 7-1 that two banks must turn over information about the country’s assets worldwide. That case concerned efforts by Singer’s NML Capital to collect more than $1.5 billion in judgments it has won in U.S. court cases againstArgentina.
The hedge fund is seeking to use the legal process of discovery to get information from Bank of America Corp. and state-owned Banco de la Nacion Argentina about accounts held by Argentina and hundreds of its officials.
Argentina calls investors who have refused previous debt exchanges “vultures” because they bought many of the bonds post-default at a discount, angling to eventually collect a windfall.
‘Imminent Risk’
“America’s highest court has spoken,” NML said in an e-mailed statement. “Now it is time for Argentina to honor its commitments to its creditors, which would benefit both Argentina’s economy and its international standing.”
Lawyers for the defaulted bond holders today filed papers in the Court of Appeals saying that the previous orders “are now in full force and effect” as a result of the Supreme Court’s refusal to hear the case.
Carmine Boccuzzi, a lawyer who represents Argentina, didn’t immediately return a voicemail message seeking comment on the two rulings. The country had said in a May 27 filing that complying would create “a serious and imminent risk of default.”
Argentine stocks tumbled, with American depositary receipts of state oil producer YPF SA (YPF)plunging as much as 15 percent, while power distributor Empresa Distribuidora y Comercializadora Norte SA’s shares fell 18 percent.
Pari Passu
Notes due 2033 and sold under New York law, which have the interest payment due June 30, fell 7.7 cents on the dollar to 74 cents at 11:06 a.m. New York time, according to data compiled by Bloomberg. The extra yield investors demand to own Argentine debt over U.S. Treasuries widened 99 basis points to 836 basis points, the most in emerging markets, according to JPMorgan Chase & Co.
NML, an affiliate of Elliott Management Corp., had argued that an equal-treatment, or “pari passu,” clause in the bond agreement bars Argentina from treating the restructured securities more favorably than the defaulted bonds.
A federal trial judge agreed with that argument, as did the New York-based 2nd U.S. Circuit Court of Appeals in two rulings.
Argentina urged the Supreme Court to ask New York’s highest court whether that interpretation is correct under state law. The country also contended that the orders violate a federal sovereign-immunity law by dictating what the nation must do with property located outside the U.S.
Sonia Sotomayor
NML told the Supreme Court that Argentina has the resources to avert a default.
The appeals court rulings in the case were on hold while the Supreme Court decided whether to get involved.
Justice Sonia Sotomayor didn’t take part in the court’s action today, possibly because she was previously involved in the litigation as an appellate judge. As is the court’s usual practice, Sotomayor gave no reasons.
The court also rejected a related appeal pressed by holders of the restructured bonds. The appeal argued that the lower courts exceeded their powers and violated the bondholders’ constitutional rights.
Argentina has given mixed signals about its likely next step. In an appeals court hearing last year, the government’s attorneys said the Latin American country wouldn’t “voluntarily” obey the court orders.
Next Step
In its most recent Supreme Court brief, the country promised to comply with the orders, while saying the likely result would be a new default. Argentina says it lacks the resources to pay what ultimately could be $15 billion in holdout claims while also servicing the restructured bonds.
According to a memo leaked to an Argentine website last month, the country’s attorneys recommended a default and immediate restructuring in the event the Supreme Court rejected the appeal.
Argentina’s economy minister last week raised the prospect of negotiating with the holdouts, a step the country has previously rejected.
Settlement discussions might be complicated by a clause in the restructured bond contract. That provision bars Argentina from “voluntarily” offering the holdouts a better deal than the other bondholders receive. The clause expires in December, and some lawyers dispute whether it is binding in Argentina in any event.
The first case denied review today is Argentina v. NML Capital, 13-990. The second case rejected by the court, filed by owners of the restructured bonds, is Exchange Bondholder Group v. NML Capital, 13-991. The high court’s decision requiring the two banks to turn over information was Argentina v. NML Capital Ltd., 12-842.
To contact the reporters on this story: Greg Stohr in Washington at gstohr@bloomberg.net; Katia Porzecanski in New York at kporzecansk1@bloomberg.net; Camila Russo in Buenos Aires atcrusso15@bloomberg.net
To contact the editors responsible for this story: Patrick Oster at poster@bloomberg.net; Brendan Walsh at bwalsh8@bloomberg.net Laurie Asseo, Brendan Walsh
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