June 18, 2014 2:26 pm
BNY Mellon stuck in global debt saga
This week’s decision from the Supreme Court means that Bank of New York Mellon, the trustee for the disputed Argentine bonds, remains stuck in the middle of a still unfolding debt saga.
The bank has been caught in the dispute ever since New York’s Judge Thomas Griesa ruled that Argentina could not pay the holders of the defaulted debt it restructured in 2005 and 2010 without also paying “holdouts” of the bonds.
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IN AMERICAS ECONOMY
As trustee for Argentina’s restructured bonds, BNY Mellon is charged with dispensing payments from the country to investors in the exchanged debt. That leaves it in the thorny position of having to comply with the US court order while still meeting its legal obligations as a trustee.
“In our role as trustee, BNY Mellon will comply with any court order by which it is deemed bound,” a spokesman for the bank said in a statement this week.
BNY Mellon’s uncomfortable position underscores the intermediary role played by the custody bank, as well as New York’s historic position as a global payment processing centre and hub for sovereign debt sales.
It raises the question of whether sovereign debt issuers will continue to choose to sell such bonds in New York, where they may be subject to stricter law set by the Argentine precedent, or decamp to the potentially friendlier issuing environs of London.
Some observers believe English law to be a better defence against debt exchange holdouts, citing a 2005 analysis by a lawyer’s committee established by the Bank of England. It says courts should not construe pari passu – meaning “equal footing” – to mean “equal payment” in bond contracts, the interpretation which the US courts have used against Argentina.
“That’s a dramatic leverage in the world of sovereign debt,” said Mitu Gulati, a law professor at Duke University. “We have to see whether the markets think this is a good thing or a bad thing.”
For months, market participants have speculated that Argentina may try to reroute payments around New York law, and possibly BNY Mellon. Argentina’s economy minister Axel Kicillof confirmed on Tuesday that the country was now looking to restructure debt held by foreign creditors under local law in order to avoid the US courts.
That still leaves BNY Mellon in a sticky spot; the bank could be exposed to lawsuits or contempt of court charges if it is deemed to be helping Argentina avoid the US order.
BNY Mellon has considered stepping down as trustee for the Argentine bonds but can only do so if it is able to find a replacement, people familiar with its thinking have said.
No other banks have yet offered to take over as trustee for the troublesome debt.
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