Says one of the attorneys representing argentina in US court

Saturday, June 6, 2015

‘Vulture funds’ will continue to rankle countries for a decade

By Ignacio Portes
Herald Staff

Countries will continue to struggle with the so-called “vulture funds” for at least a decade, according to one of the star attorneys of the law firm representing Argentina in its ongoing legal conflict in New York.

Reversing the situation created by District Judge Thomas Griesa’s decision to block the country’s debt payments will be “the judicial equivalent of tattoo. Something that seemed like a good idea at the time, but it will take many years later must be gradually and painfully removed,” Cleary Gottlieb Steen & Hamilton partner Lee Buchheit told a mostly Argentine audience during a conference organized by the Central Bank at the Alvear Hotel yesterday.

“How can it be changed? In our system it will take years. What must happen is that additional cases be brought in other contexts and the judiciary will have to either overturn or narrow the Argentine case to the specific facts of the Argentine situation,” he said.

As those who advise sovereigns are well aware of this situation, another measure is being taken to avoid conflicts similar to Argentina’s: new debt issues have changed the language of the “pari passu clause,” which Griesa interpreted as allowing such a ruling against Argentina. Additionally, collective action clauses (CACs) are being included, saying that only by owning 25 percent of defaulted bonds can a group of holdouts stay out of a debt restructuring process and keep fighting for a bigger payday.

But Buchheit still warned that “it will take a decade before the new bonds replace the old ones that are yet to mature.” Meanwhile, “sovereign debtors must find other ways of defanging holdout creditors so that they don’t threaten the ability of a country to carry through a debt restructuring that is essential.”

Buchheit, who has worked on around 20 sovereign debt restructurings and written extensive literature on the subject, said there used to be an equilibrium in sovereign debt restructurings between the power of each of the parts.

Countries had an advantage that private debt issuers don’t, as most of their assets can’t be seized due to sovereign immunities. But they also suffered from the big disadvantage of not being able to “cram down” an agreement on a resistant minority of bondholders if a big enough majority accepted the new terms, a process that businesses do regularly as part of private bankruptcies.

This meant that more than 600 sovereign debt restructurings (according to Domenico Lombardi, another expert who spoke during the panel) were carried out successfully since 1950, but Griesa changed the playing field drastically, with Europe already fearing this might have consequences if Greece defaults. A minority of Greek bonds do not have strong CACs to protect them from hostile holdouts, so a similar problem will remain a possibility in that and other cases until Griesa’s tattoo becomes a thing of the past.

@ignacioportes