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Mittwoch, 30. Juli 2014

Rearranging the ISINs on the Titanic

Rearranging the ISINs on the Titanic

We are one day away from Argentina’s second default this century. Drama or farce?
Farce. For all the confusion that was on show in Judge Griesa’s hearing last week, about whether Argentina’s restructured local-law bonds should join the foreign-law debt within the pile of paper at risk…
At least holders of these bonds will be OK after all on Wednesday.
Only just this once, though. And they were let off for a reason which underlines tensions we’ve been noting in the pari passu saga between enhanced powers to enforce sovereign debt, and the complexity of international finance.
Let’s start with the letter that the Argentine law bonds’ payment agent, Citibank, sent to Judge Griesa just after last week’s hearing — in which one bone of contention was what counted as exchange, or restructured, bonds anyway.
Citibank points to a rather delicate issue with a rather important part of bond plumbing — International Securities Identification Numbers, without which clearing or processing payments is really quite tricky:
However, we have today been advised that bonds other than Exchange Bonds have been issued pursuant to the decrees that authorized issuance of the Exchange Bonds. Consequently, many Argentine law bonds issued pursuant to those decrees are not, in fact, Exchange Bonds, including $1.25 billion in discount bonds governed by Argentine law issued on April 30, 2014 in settlement of litigation with Repsol (the “Repsol Bonds”). The Repsol Bonds were issued pursuant to the 2004 Presidential Decree authorizing the issuance of Argentine Law Bonds as part of the 2005 Exchange Offer, and have characteristics identical to the Exchange Bonds,including the same International Securities Identification Number (“ISIN”) (ARARGE03E113), but the Repsol Bonds are not Exchange Bonds because they were not issued as part of the 2005 or 2010 Exchange Offers.
…Because these bonds are identical, they are fungible. Citibank Argentina is not able to determine which of the bonds it holds on any particular date for its customers are, or are not, Exchange Bonds. In addition, as customers trade the bonds on a daily basis, it would not be possible to maintain current information about their holdings. Therefore, if Citibank Argentina and the Argentine Law Bonds that are Exchange Bonds were held to be subject to the Amended February 23 Orders, Citibank Argentina would be unable to determine how much of any payment received from the Caja de Valores in respect of bonds with the specified ISINs would be attributable to Exchange Bonds. Citibank Argentina is similarly unable to determine how much of the approximately $85 million interest payment it received from the Caja de Valores on June 30, 2014 was payable on Exchange Bonds as opposed to bonds with the same ISINs that are not Exchange Bonds…
Oops.
Which caused some holdouts to hit the roof. In a letter sent earlier this week, they cried conspiracy:
Argentina could have issued bonds to Repsol with a different ISIN, as is common market practice when bonds with identical terms need to be distinguished from one another. For example, in the 2010 Exchange, Argentina issued certain bonds with the same terms as bonds that had been issued in the 2005 Exchange, but with a different ISIN for the 2010 bonds. In contrast, in 2014, Argentina and Repsol chose to use the same ISIN that had been used for Exchange Bonds issued in the 2005 Exchange – even though that would mean that the bonds issued to Repsol and the 2005 Exchange Bonds would be indistinguishable…
By issuing bonds to Repsol with the same ISIN, Argentina has attempted to create an excuse to exclude Exchange Bonds that would otherwise be subject to the Amended February 23 Orders. Argentina was prohibited from taking any action to evade the Orders, render them ineffective, or diminish the Court’s ability to supervise compliance with them. Were the Court to endorse Citibank’s argument, the Republic would have a blueprint to eviscerate those Orders — the Republic could simply issue new bonds with the same ISINs for all the Exchange Bonds.
Yet eviscerated (a little bit) the order has become. As Judge Griesa ruled on Monday (H/T Credit Slips):
The court does not wish to upset the settlement with Repsol.For this reason only, the court denies plaintiffs’ motion for partial reconsideration at this time. Citibank may make payment on the interest due on the Repsol bonds and on both the peso- and dollar-denominated exchange bonds described in the Citibank order.
However, the court will only allow this one-time payment on the dollar-denominated exchange bonds. After July 30, 2014, the court will rescind the Citibank order with regard to the dollar-denominated exchange bonds. To avoid future confusion, the parties are directed to devise a way to distinguish between the Repsol bonds and the exchange bonds before the next interest payment is due…
Given Argentina has so far refused to sit down with the holdouts for more than five minutes even with a sovereign default at stake, we suspect agreeing on correct ISIN usage may take some time.
Note of course that Judge Griesa reasonably would wish to avoid upsetting one of Argentina’s other debt settlements at this point — he is very keen to ensure that his own pari passu case leads to a settlement, one which would preferably avoid being upset by circumstances later on. Judge Griesa said as much last week (“…desirability of a settlement is always clear to a judge”).
But as default nears, it’s what happens to the rest of the restructured debt — including the RUFO bogeyman — that will affect how willing Argentina is to talk…

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