Argentina: The RUFO Crazy

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Argentina: The RUFO Crazy Posted: 23 Jul 2014 08:46 AM PDT Kudos to Joseph Cotterill at FTAlphaville for an excellent post on the obsession with the Rights-Upon-Future-Offers (RUFO) clause in Argentina's restructured bonds, which seems to be driving Argentina to a payment default on those very bonds. Judge Griesa is not buying it, though --  at a hearing on July 22, he again denied the Republic's request for a stay of his orders blocking restructured bond payments, unless Argentina pays the holdouts pro rata. He also deferred the hugely consequential decisions on paying creditors under English and Argentine-law bonds; that mess is for another post. RUFO is basically a close cousin of the pari passu monster. It is a promise by Argentina to the restructured bondholders that, should it give holdouts more favorable terms, the restructured bondholders would get the same. So if NML and friends get 100 cents plus exorbitant past-due interest on the defaulted 1994 bonds, the restructured bondholders get to claim the same for themselves. The ever-un-dramatic Argentine press has done the math, and came up with a $500 billion bill. Meanwhile, some distressed investors holding the restructured bonds are gleefully rattling the RUFO sabers (classier than a lottery ticket!) ... while concerned citizens in Argentina are threatening to sue government officials for saddling the state with $500 in new debt. Here is what it would take for a RUFO payday to materialize in New York: 1. Exchange bondholders would have to get 25% of their colleagues to vote in favor of suing on the RUFO clause and to indemnify Bank of New York Mellon as Trustee for the costs of the caper, so it can sue on their behalf (see Section 4.8 here--curiously, the 25% seems to key off the entire stock of debt issued under the indenture, not a single series--but that may be a drafting detour). 2. A federal court in the Southern District would have to decide that a settlement of outstanding litigation is in fact subject to the RUFO clause. For reasons previously rehearsed here and elsewhere, this is a strained interpretation. But you never know. 3. That same court would have to rule that a settlement that parks funds in escrow, so that it is not effective until the RUFO clause expires in December 2014, is still a violation of the RUFO clause. Ditto for any other workaround. At the July 22 hearing, Judge Griesa implied that RUFO issues can and should be addresed as part of structuring the settlement. 4. That same court would have to order specific performance of RUFO, or damages equal to holdout settlement terms, as a remedy for the violation. 5. That same court would have to value the restructured bondholders' recovery to date, including upfront payments and GDP warrants, using the right discount rates, at the appropriately small fraction of NML's recovery. 6. Argentina, faced with a $500 billion bill, would pay up some meaningful fraction thereof. This chain of events would require the very court system that gave us the pari passu injunction to declare that in retrospect, it was an insane thing to do (true dat, but for very different reasons) ... and to prove it by blowing up the very settlement its injunction was designed to promote ... using a strained interpretation of a novel contract clause. Argentina's brief basically says that RUFO claims would be baseless, but that you cannot count on the courts to be rational--an argument that must have endeared it even more to Judge Griesa. I buy that in Argentina, officials might face a higher risk of liability for exposing the state to the remote contingency of paying out under RUFO than for the certain damage from a payment default. This says more about politics in Argentina than the law in New York. In the end, this might all be a giant game of chicken. Regardless, it should make people think twice before agreeing to nuclear commitment devices like RUFO.