Singer-Proof Bond Contract Inspired by Argentina: Mexico Credit
Nov. 14 (Bloomberg) -- The odds that Mexico will find itself mired in a legal dispute with creditors over defaulted debt any time soon are low by almost any measure. Still, the country isn’t taking any chances.
This week, Mexico became the first nation to include a provision in bond contracts governed by New York law that would prevent holders with less than 25 percent of the nation’s total debt from blocking a restructuring. The advice came from the International Capital Market Association, which released its recommendations in August, after Argentina’s unwillingness to comply with a U.S. court order requiring it settle with holdout creditors from its default in 2001 led to a second non-payment.
“The biggest deal about Mexico is the fact that it’s a big, strong, leading issuer and that they’re doing it in New York -- which to some extent motivated this entire exercise,” Anna Gelpern, a fellow at the Peterson Institute for International Economics, said by phone from Washington. “Nobody has a problem with it because everyone says Mexico’s not going to default. It’s an issuer that has a terrific reputation.”
While Argentina hasn’t borrowed in international credit markets in more than 13 years, Mexico sold a record $9 billion of foreign-currency bonds this year as it capitalizes on investor demand following its decision to end its 76-year oil monopoly.
Mexico, rated 13 levels higher than Argentina by Moody’s Investors Service, registered to sell as much as $6.3 billion of notes, which contains the new provisions and would be governed by New York law, a Nov. 10 filing with U.S. Securities and Exchange Commission showed.
Mexico Yields
A spokeswoman for Mexico’s Finance Ministry declined to comment on the changes to the country’s debt contracts.
Jesica Rey, a spokeswoman for Argentina’s Economy Ministry, didn’t return messages seeking comment. Neither did Stephen Spruiell, a spokesman for billionaire Paul Singer’s Elliott Management Corp., one of the lead holdouts that successfully sued for full repayment in U.S. court.
Mexico’s dollar-denominated bonds yield 4.5 percent, below the emerging-market average of 5.3 percent and Argentina’s 9 percent. Credit-default swaps on Mexico’s debt imply a 6 percent chance of default in the next five years.
In its filing, Mexico added two types of so-called collective action clauses, which allow a qualified majority of investors to agree to changes in their debt contracts that bind all bondholders. While Mexico can already complete a swap with the approval of holders of 75 percent of each class of bonds, one of the new provisions lets Mexico ask for approval from owners of 75 percent of its total outstanding debt.
‘Focuses Everybody’
That change -- which also requires Mexico to provide all bondholders with the same options for new securities to swap into on the same terms -- creates a higher hurdle for a group of investors to reject the terms of an exchange.
In a series-by-series vote, a potential holdout could curtail a complete restructuring by purchasing more than 25 percent of a nation’s smallest bond issue.
“The hope is that it deflects attention away from inter-creditor issues and focuses everybody on the bilateral negotiations between debtors and creditors as a whole,” Ben Heller, a money manager at hedge fund Hutchin Hill Capital LP, said by telephone from Austin, Texas. “You’ll have some predictability into how a restructuring might work and assurance of the permanence and finality of a restructuring.”
Legal Battle
After Argentina halted payments on $95 billion of bonds in 2001, holders of about 92 percent of the debt agreed to take new securities at a loss of about 70 percent.
Some of the creditors who rejected the deals, including Singer’s NML Capital Ltd., sued instead and won full payment. In June, the U.S. Supreme Court upheld a lower court’s decision to block payments on Argentina’s restructured bonds until Singer is paid. The nation refused and defaulted a month later.
Mexico’s Finance Minister Luis Videgaray said in March the ruling threatened future sovereign restructurings. The nation supported Argentina’s bid for Supreme Court review.
In the Nov. 10 filing, Mexico excluded a provision that would require the nation to engage with an investor committee.
Hans Humes, who has helped negotiate restructurings in countries from Belize to Greece as chief executive officer at Greylock Capital Management LLC, said removing the so-called engagement clause is concerning because of the precedent it may set for other issuers.
‘Concerning’ Change
“The borrowers aren’t giving up anything in these CACs -- it really is a concession by creditors so at the very least you would expect that there would be a commitment to a dialogue if there’s trouble,” he said by phone from New York. “Mexico has been a good-faith actor the entire time, but because they’re seen as a template when they come out, it’s concerning that there’s no creditor-engagement language there.”
Mexico’s legal adviser is Cleary Gottlieb Steen & Hamilton LLP, the same law firm representing Argentina in its legal battle with Singer. Shannon Lynch, a firm spokeswoman, didn’t immediately return a voicemail seeking comment.
Hutchin Hill’s Heller said Mexico has encouraged investors to provide feedback regarding changes to its bond contract.
“Hopefully, creditors will read this document and push for changes that they think should be made, like putting in the creditor engagement clause in there,” he said.
Mexico has a history of setting precedents in the bond market. In 2003, it became the first country to sell bonds in a U.S. public offering that included collective action clauses, paving the way for Brazil and Uruguay to do the same less than two months later, according to Gelpern. Eventually, the entire sovereign debt market followed, she said.
“It’s an important and positive step that they improved the existing language,” Gerardo Rodriguez, a former deputy finance minister who’s now a manager at BlackRock Inc., said by telephone from London.
To contact the reporter on this story: Katia Porzecanski in New York atkporzecansk1@bloomberg.net
To contact the editors responsible for this story: Brendan Walsh atbwalsh8@bloomberg.net; Michael Tsang at mtsang1@bloomberg.net Robert Jameson, Lester Pimentel
Keine Kommentare:
Kommentar veröffentlichen