The Holders of a Majority in aggregate principal amount Outstanding of the Debt Securities of any Series may at any time remove the Trustee and appoint a successor trustee for the Debt Securities of such Series…– Argentine exchange bond trust indenture (2005)
I own Argentine bonds and I am not getting paid and that is wrong and a judge is mad and I am mad and Argentina wants to give me local-law bonds which I do not want and this pari passu thing is all terribly confusing and I just want my money. HELP.
Well, what do you mean by wanting your money?
Do you want the coupons you’re not getting right now (which you are contractually entitled to, after all)?
Or are you happy waiting for your money later on in some unspecified future, when Argentina has settled with Elliott and other holdouts and there’s no risk of them seizing it any more?
. . .
Anyway, did you read Wednesday’s FT?
Martin Wolf penned another column on Argentina’s pari passu predicament (including its now month-old default).
It covers why Martin backs Argentina (we’re not sure); how far the sovereign debt market can revise bond contracts on its own to prevent similar messes (maybe); and a totally sick burn against “vulture” funds.
And also, a plan by Adam Lerrick for restructured bondholders to extricate themselves from the default simply by voting to kick Bank of New York out as their trustee.
BNY would, under the plan, give way to another (probably Argentine) bank not subject to US jurisdiction. This bank then wouldn’t be bound by Judge Griesa’s order for payments to go through only with holdouts also being paid, thus allowing bondholders to get their coupons. Nor would there be the jiggery-pokery of swapping New York-law bonds for local-law.
That would be this plan (click for PDF):
Lerrick has a decade of experience with the terms of Argentine debt, having advised European retail bondholders in the restructuring of 2005. Some might kick themselves for not having thought of a few aspects of this plan.
Ironically — for a saga which showed how a dormant piece of dry boilerplate became a powerful weapon of enforcement against a sovereign debtor — it works using standard, boilerplate, trust indenture terms.
WAIT, WAIT — WHY HASN’T THIS BEEN THOUGHT OF BEFORE?
That is somewhat curious. Argentina (in one of its full-page screamathon newspaper ads against the holdouts over the last month) actually did drop a rather unsubtle hint to exchange bondholders as early as August 7:
Finally, may we remind the Bondholders that there are numerous rights and remedies available to them under the Trust Indenture in the event the Trustee breaches its obligations, in particular its obligation to transfer the payments made by the Republic of Argentina to the Bondholders. By way of example, Section 5.9.c of the Trust Indenture provides that the Holders of a Majority in aggregate principal amount Outstanding of the Debt Securities of any Series may at any time remove the Trustee and appoint a successor trustee…
But it has taken time for bondholder discussions to get going. This isn’t simply because some holders of the euro-denominated, English-law restructured debt are still busy suing over Judge Griesa’s order for BNY to keep their money.
Argentina also went and created confusion with its local-law swap idea. Again — unsubtle hint — the legislation which authorised the swap also laid out a process to provide bondholders with a Buenos Aires-based ‘national’ trustee, should anything unfortunate happen to BNY’s tenure. But most people ignored that and focused on the horribleness of locally-governed debt contracts and/or the risk it would all be blocked in US courts.
Again, that may be because they were thinking about how much risk holders should take to get coupons right now, versus waiting until (or if) Argentina settles.
THAT’S ALL VERY WELL, BUT SOVEREIGN BOND TRUST INDENTURES AND MODIFICATION TERMS ARE COMPLICATED DOCUMENTS. WHICH IS WHY I DIDN’T READ MINE. SURELY THERE’S A CATCH?
Why are you still shouting?
Sure, there’s one technical hitch. The trustee removal at the core of the Lerrick plan is a simple majority vote.
But actually, it would effectively need to be two-thirds of bondholders. That’s what’s required to waive this article in the indenture:
Section 5.8. Persons Eligible for Appointment as Trustee. The Trustee hereunder shall at all times be a Person that has a combined capital and surplus of at least U.S. $50,000,000, has a trustee, or representative office in the City of Buenos Aires, maintains such accounts in Argentina as may be necessary to carry out the obligations of the Trustee set forth in this Indenture, has its Corporate Trust Office in the Borough of Manhattan, the City of New York and is doing business in good standing under the laws of the United States or of any State or territory thereof or the District of Columbia that is authorized under such laws to exercise corporate trust powers (including all powers and related duties set forth in this Indenture), and subject to supervision or examination by federal, or state authority.
A trustee that has to be in “good standing” in New York will have to follow Judge Griesa’s orders.
This is how the plan says the higher threshold can be overcome (emphasis ours):
The 50.1% majority of all holders of a series of Exchange Bonds that appoints the new Trustee should ensure that the 66.7% bondholder meeting approval required to implement the necessary waivers for the Exchange Bonds is met. (If less than 75% of all bondholders vote at the meeting, the 50.1% majority will exceed the 66.7% meeting vote threshold required to enact the waivers.). In addition, it is in the direct interest of all Exchange Bondholders to agree to the waivers in order to protect their payments.
Sounds easy? Well again, it may depend on whether there are enough bondholders who want coupons now and think replacing BNY under their own steam is a relatively risk-free way to do it.
WOULD THE REPLACEMENT TRUSTEE ACTUALLY BE A GOOD TRUSTEE?
Ah yes, what does a good trustee do in sovereign debt?
In one sense, it’s very simple — to act as an initial doorway for money going from the debtor to the rest of the system (and from there to the ultimate beneficiaries); and then, in a default, to go into terminator mode and sue and enforce claims on behalf of bondholders in actions specified by the trust indenture. (Whether the trustee isobliged to do any of this is an interesting question, to which creditors of Ecuadoronce received a disconcerting answer. We’ll save it for another post.)
But in another sense, what the trustee does not do is whatever the sovereign debtor wants. Trustee structures in modern sovereign debt replace fiscal agents — which work for the issuer and have no duties to bondholders.
Would a local Argentine trustee be sufficiently removed from the government? Such a trustee would have (or would be assigned by the exchange bondholders who will be starting this show) enough expertise to carry out its payment duties. However, if bondholders didn’t like local-law bonds, they may not like this local risk.
Under the Lerrick plan, the local trustee is therefore expected to be a temporary installation — once the holdouts get a settlement with Argentina, everyone can go back to an international trustee by using the same replacement procedure. Between those two removals, bondholders also get paid, remember.
But here again is the question: is it worth replacing the trustee if you would just prefer to wait until that settlement anyway?
HMM. I STILL THINK THE HOLDOUTS WOULD TRY TO BLOCK THIS PLAN.
That would be in character. But they’d have to get through this:
Argentina will make payments under the Exchange Bonds to the new Trustee outside the US. The new Trustee will transfer the funds to the new paying agents that are also outside the US. Paying agents will pay the Holders of the Exchange Bonds through Euroclear and Clearstream.Funds in both Euroclear and Clearstream are protected from attachment under Belgian and Luxembourg law. The Depositaries of the Global Securities are the Holders of the Exchange Bonds. The Depositaries will transfer the funds to the beneficial owners of the Exchange Bonds through Euroclear and Clearstream.The most secure access to the Euroclear/Clearstream accounts of the new Trustee/paying agents for payments from the Republic to the Exchange Bondholders would be through the Argentine central bank account at the Bank for International Settlements. Alternatively, the Republic could make the bond payments by mailing checks drawn on the Argentine central bank directly to the Depositaries as the Holders of the Exchange Bonds (Section 2(a) of the Terms and Conditions of the Exchange Bonds)…Any risk that a US court will block US$ bond payments within Euroclear/Clearstream in the international clearing system at the New York Federal Reserve can be eliminated. US$ would not enter the payment process until after funds are in the hands of the US$ Exchange Bondholders.
Could holdouts do it? We’ve highlighted the role of Euroclear and Clearstream there. This is not least because both are shielded by Belgian and Luxembourg law, precisely to cover situations like these (following past pari passu lawsuits). Simultaneously though, they’ve been named in the existing injunction.
A federal judge in the US could still agree to impose an injunction (the Euro Bondholders have got caught up in one). But arguably, this would be a different prospect.
Any time Argentina attempts to make a payment just to restructured holders, for example, it may well go on being held in contempt by US courts. (What sanctions could flow from such contempt is a trickier question.) But if restructured bondholders controlled the trustee removal process and use of a new payment system, would the new trustee be ‘aiding and abetting’ Argentina’s violation of the pari passu embargo?
OK, BUT WHAT I REALLY DON’T WANT IS TO ACCEPT THE PLAN AND THEN BE HELD IN CONTEMPT BY US COURTS, WHICH WOULD SLIGHTLY ANNOY MY BOSS. WHAT STOPS THAT?
That risk is worth considering, given that exchange bondholders would be in the driving seat of trustee replacement. Therefore they might be sued by holdouts directly, if the alternative was letting payments on restructured bonds (the enforcement asset under pari passu) move outside the US altogether.
This isn’t very likely, not least because holdouts have never argued that the other creditors are bound by the injunction on Argentina and thus directly exposed to contempt. Nor did the Second Circuit Court of Appeals deviate from this in its rulinglast year:
They are creditors, and, as such, their interests are not plausibly affected by the injunctions because a creditor’s interest in getting paid is not cognizably affected by an order for a debtor to pay a different creditor.
Contempt is however something about which large holders of restructured bonds might be rather sensitive, given the consequences (and the fact that nothing ever seems to go as planned in this case).
So the plan contains a provision in case this principle is reversed:
To eliminate any legal and reputational risks of a contempt citation, the Exchange Bondholders will have the option of withdrawing their vote to replace the Trustee if a US court issues an order prohibiting the Exchange Bondholders from exercising their legal right to replace the Trustee.
I WILL THINK OVER THIS PLAN AFTER WATCHING SOME CAT VIDEOS, AND GET BACK TO YOU.
Yes, do.
But there is more to consider: beyond the injunction risk, the majorities needed for this plan, and exposure to Argentine local risks (the trustee).
On all of those counts, replacing the trustee and keeping the New York law bonds is a superior strategy to a local-law swap — that seems obvious. So if there has to be an interim workaround for Argentina’s defaulting on the restructured debt, the plan here comes out relatively well, and it wouldn’t be surprising to see it seriously considered by bondholders.
But does (and should) there have to be a workaround?
After all, the alternative is waiting for Argentina to talk to the holdouts — either after the RUFO bogeyman goes away at the end of this year, or later in 2015 after a new, less Kirchnerite, government has been elected. The restructured bondholders could get their past-due money and a massive price rally at that point because a settlement would allow new issuance and straightforward access to US dollars for Argentina. That may more than justify the wait and the default (and note the high prices of Argentine bonds, still, a month into the embargo). In fact, accepting either local-law bonds or local trustees from Argentina might reduce its incentive to talk and let it stall for yet more time.
There’s that view — or there’s the view that any payment is better than no payment (and the trustee plan looks forward to eventual settlement).
Either way, there is one lesson here. Sometimes it can actually be worth reading the trust indenture…
(With a stylistic hat-tip to Tracy Alloway)
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