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Donnerstag, 21. August 2014

Escape from New York, pari passu edition

Escape from New York, pari passu edition

“I’m a little nervous,” the President of Argentina told the nation on Tuesday night.
We’ll bet.
President Cristina Fernandez de Kirchner had just sent a draft law to the Argentine congress.
This would offer restructured bondholders to route around New York law into Argentina’s domestic jurisdiction, set up local payment for them in the meantime, and in general, attempt to remodel bonds free of holdout lawsuits and a default that could last a long time.
And on Wednesday the market more or less retorted that it prefers to hold the defaulted paper anyway.
Prices for the restructured bonds dropped. This is, on its face, curious.
These bonds are not getting any coupon payments at all presently. The next lot is due September 30.
Default is limbo: the holdouts have lost their leverage over Argentina — but continue to be able to block any future payments that don’t include them. Settlement talks are ex-talks. Elliott might also eventually face restructured holders who accelerate and play it at its own holdout game, but then there’s already plenty of intercreditor venom in this case anyway.
By contrast, getting the restructured bonds out of US jurisdiction would, if it worked, at least hold some promise of payment on theoretically high-yielding debt. Acceleration meanwhile might lead to a restructuring offer which also involves swapping legal systems anyway.
And escaping New York would be a much bigger barrier to holdouts. Part of the genius of the pari passu strategy for enforcing sovereign debt was that other people’s bonds became the assets to enforce against, rather than chasing presidential planes (or warships) around the world. It’s not so genius if the bonds go AWOL too.
Therefore, the bet has to be that this can’t work, and/or that holdouts will be able to chase the bonds down anyway.
Click to enlarge the core article of the legislation above by the way — it authorise local-law jurisdiction. It’s also worth having the trust indenture for the restructured debt to one hand. The law would let Argentina remove the trustee, Bank of New York Mellon and replace it with a “National Trustee” based at home.
BNY has indeed sort of been whimpering in the corner of late, and not sending payments on to bondholders (Judge Griesa ordered the bank to keep money Argentina has sent). But bondholders have the right to appoint a new trustee which is in decent standing as a New York financial institution. In fact Argentina’s law says its provisions are “without prejudice” to this right, so there’s less to the law than meets the eye.
Also of some interest highlighted above, restructured bondholders can apparently join the swap one by one or together (1), obtaining local-law bonds (2) of equal value (3) to their old claims. If one by one, that’s interesting: anything not tendered would go on facing holdout risk.
Although any who did tender, would be about to find out how far restructured bondholders’ agents (lawyers, payments processors) are subject to Judge Griesa’s order for Argentina to pay holdouts. The order forbids third parties ‘aiding and abetting’ its violation by Argentina. Matt Levine points out that one problem here is that Argentina needs third parties to identify who even holds its bonds. Moreover, the penalty here could be contempt of court.
Of course, Argentina itself is already just one more strongly-worded full-page newspaper ad away from being ruled in contempt by Judge Griesa, so it may think it doesn’t have much left to lose. And your guess as to how Judge Griesa could sanction a foreign sovereign is as good as ours. (Meanwhile, President CFK, nervous or not, hasconsistently threatened a local-law swap for as long as there’s been a pari passu saga. She is at least consistent.)
There are other technical reasons for a restructured holder not to turn foreign-law into local-law paper — namely, it would leave international bond indices behind and be exposed to future capital controls. But those risks exist elsewhere. Only in Argentina would contempt risk rear its head. Maybe it shows how far enforcement of sovereign debt actually has changed following pari passu, when the sovereign is as slippery as Argentina has been.
After all, even if bonds were exchanged to obtain the payments the restructured creditors aren’t getting now — it’s not as if holdouts haven’t already been trying out ways to extend the pari passu injunction to any local-law bonds not paid in pesos.
Which may be part of why holders seem to prefer defaulted paper (and to wait for a settlement or for CFK to leave office). Meanwhile we’re a long way from the last time Argentina restructured its bonds, in 2010 — which would not have been possible without Judge Griesa. He overturned a blocking attempt by the holdouts.
How the wheel turns.

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