Sovereign debt expert Mark Weidemaier evaluates steps after RUFO clause expiry

Monday, December 29, 2014

‘Deal with holdouts will take time’

Sovereign debt expert Mark Weidemaier describes the conflict between Argentina and holdout creditors as a political battle.

By Fermín Koop
Herald Staff

Sovereign debt expert Mark Weidemaier evaluates steps after RUFO clause expiry

With only days to go before the Rights Upon Future Offers (RUFO) clause expires, expectations are high about what Argentina will do next and if an agreement with the “vulture” funds can be achieved or not.

In an interview with the Herald, Law Professor at the University of North Carolina (UNC) and soverign debt expert Mark Weidemaier said a deal can be achievable but he expects it will take time. Meanwhile, Weidemaier said the vulture funds will continue in their quest to seize Argentine assets abroad.

Can a deal be achieved between the government and the holdouts when the RUFO clause expires?

I don’t expect much to change in the short term. The signals coming from the government do not indicate a willingness to pay holdouts more than was offered in the earlier restructurings, and I don’t expect the holdouts to settle on those terms. I suspect a deal is achievable, but it will take time, especially as the government will want to settle with all of the remaining holdouts and not just those who have filed lawsuits.

What do you think it would be a reasonable solution for the government in this long-term conflict?

I wouldn’t presume to say what is reasonable for the government, but I think any settlement will have to give NML and the other plaintiffs a better deal than participants in the 2005 and 2010 restructurings received. How (and, I suppose, whether) the government achieves this will be the interesting question. With the RUFO clause out of the way, the government has much more flexibility. But it’s important to remember that all of the holdouts have the same contract rights. This means the government cannot simply make a payment to NML and its co-plaintiffs. It will want to make a more inclusive settlement offer to the holdouts as a group.

The government has said many times breaking the RUFO would have triggered many more payments to other bondholders. Do you agree with that argument?

There are a number of questions here, none of which have clear answers. First, could the government have structured a deal so as not to violate the RUFO clause? Probably. Second, if the government had violated the RUFO clause, could the affected bondholders have enforced their claims to greater payment? Probably not. Still, these questions would have been litigated in the same courts that created the pari passu injunction. If Argentina had guessed wrong, the government’s potential liability would have been enormous.

Many claims have been filed on the last few months by other bondholders who are also asking to be paid the same money as NML and Aurelius, raising the amount Argentina would have to pay. What effect will that have on the negotiation?

It has been clear from the start that Argentina would want an inclusive settlement that encompasses all holdout claims, so there may not be a major impact. But if we see bondholders who hold restructured debt start to accelerate and to demand a seat at the bargaining table, that will complicate negotiations considerably.

The holdouts recently won a case at the Appeals Court that granted them discovery rights on Argentine assets. How do you think they will now proceed and what assets will they look for?

The plaintiffs will look for all Argentine assets in the United States, although they ultimately can seize only assets that are used for a commercial activity. If Argentina complies with the discovery orders, it will have to disclose any assets in the US and it will be up to the courts to decide whether any can be seized.

Meanwhile, NML is still seeking a declaration that Argentina’s Central Bank is the government’s alter ego. If they end up obtaining that declaration, what implications could it have?

The declaration would potentially allow plaintiffs to collect on their judgments by seizing Central Bank assets. But there is a long way to go before that happens. Most or all of those assets are held outside the United States, and other countries would not necessarily give this effect to the US court’s judgment.

A group of European bondholders are still at court in London asking to be paid and seeking a ruling to avoid Griesa’s orders. Do you think they can obtain it?

I don’t feel that it would be appropriate for me to predict the outcome, but I’m sympathetic to their position. The US courts have still not given a satisfactory explanation for why institutions outside the United States should be subject to the injunction. And if the injunction did not have extra-territorial reach, euro bondholders could probably get paid.

How would you describe the lobbying actions of the holdouts?

Unsurprising. Just as the public posturing by Argentine officials is unsurprising. For both sides, this is a political battle and, for that matter, a public relations battle as much as a legal one.

Argentina is trying to move forward to create a new framework for sovereign debt restructuring at the United Nations. Do you agree such tool is needed?

A comprehensive, effective restructuring mechanism is a good thing, period. Debt markets operate better when there are clear and collectively-binding restructuring rules in place, and that isn’t the case right now for sovereign debt. But even if it were desirable to create a treaty-based restructuring mechanism, it isn’t politically feasible right now. The rulings in New York will absolutely impact future debt restructurings. In the short term, there will be uncertainty as to the scope of holdout creditor rights. Countries will still be able to restructure, but potential holdouts will have a stronger bargaining position, and negotiations may be more difficult and protracted. If that happens, the costs will be real, and in my view undesirable.

@ferminkoop