Sponsored by Puente
One Bishops Square
London E1 6AD
This timely EMTA Special Seminar, which follows the recent decision on June 16 by the U.S. Supreme Court not to review the US Appellate Court decision in NML Capital and Aurelius Capital v. Argentina, will provide analysis and commentary by a panel of legal experts and market analysts on the way forward for Argentina and the EM market.
9:00 a.m. Registration
9:30 a.m. - 11:30 a.m. Panel Discussion
Yannis Manuelides (Allen & Overy) – Moderator
Stephen Fang (Aberdeen Asset Management)
Charles Blitzer (Blitzer Consulting)
Stuart Culverhouse (Exotix)
Alejo Costa (Puente)
Timothy G. Nelson (Skadden, Arps, Slate, Meagher & Flom LLP)
Breakfast will be provided
Additional support provided by Exotix and Skadden, Arps, Slate, Meagher & Flom.
This Special Seminar is part of a continuing series of panels and presentations that EMTA is pleased to sponsor on various topics of interest to Emerging Markets investors and other market participants, and is part of EMTA’s Legal & Compliance Seminars*.
*CLE credit will be available for NY attorneys. This seminar is non-transitional and appropriate for experienced attorneys only. Please click here for details on EMTA’s Financial Hardship Policy.
Registration fee for EMTA Members US$95 / US$695 for non-members / Credentialed Media Complimentary.
EMTA Panels in New York and London Discuss Legal Developments in Argentine Debt
These timely EMTA Special Seminars on June 19 and July 9 (coincidentally Independence Day in Argentina) in New York and London, respectively, closely followed the decisions on June 16 by the Supreme Court to deny a review of the US Appellate Court decision in NML Capital and Aurelius Capital v. Argentina (or request the view of the Solicitor General) in connection with the pari passu argument, as well as to decide in the discovery case that no provision in the Foreign Sovereign Immunities Act immunizes a foreign-sovereign judgment debtor from post-judgment discovery of information concerning its extraterritorial assets. A lively EMTA discussion ensued regarding next steps for Argentina and the impact of the Supreme Court “non-decision” on Argentine debt traded and its CDS implications if Argentina defaults on its existing debt obligations to 2005 and 2010 exchange bondholders. With the Second Circuit’s lifting of the stay on June 18, the implications and ramifications for Argentina and its creditors have grown exponentially, there were still many interesting topics to explore, and the panels of legal and other experts provided much sought-after commentary and analysis.
New York Panel
The “Argentina: Update on its Prospects for U.S. Supreme Court Review” Seminar in New York took place at EMTA’s offices, and lunch was served. Banco Mariva sponsored the event, with additional support from Bingham McCutchen, Nomura Securities International, Shearman & Sterling and Skadden, Arps, Slate, Meagher & Flom.
Arturo Porzecanski (American University) moderated the panel, which included Bruce Wolfson (Bingham McCutchen), Claudio Loser (Centennial Group), Javier Kulesz (Nomura Securities International), Henry Weisburg (Shearman & Sterling) and Timothy Nelson (Skadden, Arps, Slate, Meagher & Flom).
Mr. Weisburg provided some background on the case, including responses to questions concerning possible reconsideration of the denial of cert by the Supreme Court (which grounds are “limited to intervening circumstances of controlling effect” and thus “inconceivable”, the “doors are shut in the Supreme Court and Second Circuit and we’re coming to the end of the judicial chapter in this case”); status of the Second Circuit’s stay on ratable payments (the October anti-evasion Order was supplemented to make clear that payments in Argentina or a functionally equivalent plan would be an evasion of District Court Judge Thomas Griesa’s Order); and prospects for a new stay (depends on Argentina’s stance on negotiations with holdouts, which appears contradictory with announcements of preparedness for negotiations and then retractions).
Mr. Porzecanski asked the panelists the following questions relating to the significance of the Supreme Court decisions and Argentina’s public announcements:
Mr. Wolfson suggested that the focus on the pari passu clause was ill-conceived in that the court interpreted the clause in the context of the extraordinary Argentina case only, without attempting to have it apply as the law for all future cases. Also, restructurings after this decision do not seem to be an issue (and, as Mr. Kulesz pointed out, the recent Ecuador deal was a prime example), New York will not cease to be governing law for many restructurings and the pari passu clause is unlikely to change. Ratable payment in this context and in light of these facts and circumstances was the right equitable remedy.
Mr. Nelson disagreed, comparing the case to Bush v. Gore, where at the time it was unclear whether new law was intentionally being created, but, in fact, it was. He praised the holdouts (“kudos for their genius tactics”) and was surprised they got so far in their pari passu interpretation (“finance lawyers would likewise be surprised”), given that the clause was one of equal ranking, not similar payments of obligations, thus leading to the anomaly of having to pay holdouts the full $1.5 billion owed if exchange bondholders are only owed 3 cents. Any equitable remedy must be related to the contract language. He also stated that, while banks are not thrilled to be clearing houses for discovery purposes, the decision in the NML vs. Argentina discovery case is also not likely to have broader implications.
Weisburg viewed the ratable payment injunction remedy as “freakish” and a result of the money involved, time spent by the holdouts to collect and Argentina’s general attitude against paying the holdouts. “Exotic cases lead to exotic results”. He cautioned that different clauses will likely get different constructive interpretations in court, and this case will not “rock the world”. He was more concerned with the implications of the discovery case and its intrusiveness on sovereigns, which may result in a move to UK law-governed contracts.
Weisburg suggested that Argentina’s only possible recourse was not to make its June 30 payment to exchange bondholders if it did not want to pay the holdouts. If they make the June 30 payment, “they will get no sympathy from Griesa”. Wolfson suggested that Argentina’s strategy has relied on political and other support, but ultimately these are judicial determinations. Their “path of doing nothing” is not particularly optimistic for their future.
Wolfson posited that it is not unusual for sovereigns to make statements that they then find are not policy of the government. Mr. Loser viewed the current team as “totally disconnected from reality” and suffering from “magical realism”, thinking that what they announce is true reality just because they say it is. “They’re thinking in ways that have nothing to do with the markets or the legal system”. The local wit leads them to think they are more clever than the rest of the world. They have no sense of the rule of law, being taken by surprise by the discovery that law is a serious matter in the U.S., and they are completely disorganized. The Minister of Finance has no strategy, is merely improvising, while the Central Bank seems to have a good understanding of money matters, but is seldom heard. Argentina is being “short-sighted” and it must negotiate. While not an easy choice, it will become exceedingly more costly for Argentina if it delays negotiating much longer.
Kulesz viewed the Argentines as “playing poker, but everyone knows they have a weak hand”. A lesson in following “Kirshnerology” requires a “doubling of the bet even if you have a pair of twos in hand”. He wondered whether they are serious about defaulting or just threatening the market with measures and announcements as a way to better position themselves vis-à-vis the holdouts, as well as their domestic audience. This “macho” positioning will not work well for them because they should not be politicizing everything.
Kulesz believed that Cristina’s ultimate objective is to make it to the end of her term without a default or hyper-inflation (“she wants to make it to the finish line with both feet standing”), so that she remains a viable candidate for a comeback in 2019. If she manages to transfer power peacefully, it would be a feat that very few democratically elected presidents have accomplished in the last few decades. Similarly, holdouts also want a deal and need to put an end to their costly litigation. Their announced willingness to accept some of the payment due to them in bonds is a good sign. Both sides have incentives to reach a deal, and Griesa is not opposed to such a deal. Loser added that a cash payment of $1 billion or so is not a deal breaker for Argentina, since it’s a small portion of its GDP, and if Argentina could negotiate successfully with the Paris Club and Repsol, as it did, it should be able to do so with the holdouts too.
Wolfson stated that such a Plan B is very difficult to implement, so there’s a low probability of its occurrence, given the huge hurdles involved with intermediaries. But the more important question is: what is Argentina’s end game? Weisburg was skeptical that any jurisdiction-rigging plan could be accomplished in the short-term, especially if Euroclear, DTC and BONY were to be involved, since it’s unlikely that Argentina can garner their cooperation. Also, there’s the hurdle of obtaining the consent of 75% of every series of bondholders, and it would be a huge sacrifice for those bondholders to accept Argentine law in place of New York law. In addition, some investors are not permitted to hold Argentine-law debt or debt that is no longer included in an index. Nelson made clear that he was not advocating the evasion of any Orders. He viewed the more apropos analogy of what Argentina was doing to a game of chess in its end phase. Often governments work best in crisis mode, at their most vulnerable moments – even in the case of the U.S. government.
Weisburg suggested that bondholders with similar pari passu clauses in their contracts could try to collapse their cases into one case before Griesa and thus get the benefit of the ratable payment injunction and pari passu interpretative construction since he is likely to view those creditors with judgments the same as those with summary orders -- even though there’s a hypothetical distinction between those two types of creditors. It would also be in Argentina’s best interest to settle with all its creditors at once instead of on a piecemeal basis.
Nelson didn’t think it relevant to worry about a January 2015 problem when the clock is ticking now. Wolfson did not view the RUFO issue as a red herring since Argentina tried to get the Supreme Court to review the case two times to avoid paying the holdouts. Wolfson hoped that creative minds will find ways to negotiate. Weisburg did not think that the RUFO clause can be ignored.
Someone in the audience asked if the panelists were surprised that the Supreme Court did not grant cert.
Nelson stated that the pari passu clause was a matter of state law, and that the Supreme Court would not be interested in opining on the issue (although those odds would shift with the political overlay present in this case). The Solicitor General would likely be more interested in the discovery topic, but it was not asked for its opinion. Argentina’s “nine lives are up in the Supreme Court”. Porzecanski reminded the audience that the U.S. government submitted an amicus brief in the early stages of the case, so there may have been no need to hear from the Solicitor General (SG) again. Wolfson also clarified that the Second Circuit specifically stated that it was not interpreting the pari passu clause, so there was no issue for the Supreme Court to decide.
Nelson agreed that, if the Supreme Court would grant cert, it would not likely be resolving anything, and the SG’s opinion in prior Argentine matters was not too helpful.
Loser’s concluding remarks were that Elliott has the upper hand, “not being in battle for the principle, but rather for the maximization of profit”. A quick resolution with certainty was in everyone’s best interest, so the plaintiffs may be amenable to accept bonds. Argentina was in a fragile state, without the capacity to withstand this crisis much longer. The Argentine public is reacting negatively to events, and the country is in a much weaker position that it ever has been since 2001. Kulesz asked how long did Argentina have. Loser responded, “the problem with economists is that they predict well what will happen, but often times are not good at getting the timing right”.
The “Argentina: Post U.S. Supreme Court Review” Seminar in London took place at Allen & Overy’s offices, and breakfast was served. Puente sponsored the event, with additional support from Exotix and Skadden, Arps, Slate, Meagher & Flom.
Yannis Manuelides (Allen & Overy) moderated the panel, which included Stephen Fang (Aberdeen Asset Management), Charles Blitzer (Blitzer Consulting), Stuart Culverhouse (Exotix), Alejo Costa (Puente) and Timothy Nelson (Skadden, Arps, Slate, Meagher & Flom).
Mr. Manuelidis provided some background on the case, as well as other matters surrounding Argentina and its creditors. He referenced the Paris Club deal where Argentina agreed to resume payments and clear its debt in arrears over a five year period (other details were undisclosed) and the Repsol settlement (which was in dollar-denominated Argentine law bonds in an amount and on terms sufficient to permit Repsol to sell these bonds and end up with a cash payment of $5 billion).
He summarized the Argentina litigation, which reached a climax with two Supreme Court decisions on June 16, 2014: (1) On the discovery case, the Supreme Court held (7-1) that there is nothing in the Foreign Sovereign Immunities Act that prevents a U.S. court from ordering banks in the United States to disclose details of Argentine payments, account balances and other assets that might be recoverable outside the United States. This may offer NML an additional means to find and enforce against Argentine assets, though any enforcement measures will have to be taken in the courts of the location of any assets and (2) On the pari passu litigation, the Supreme Court declined to hear Argentina’s appeal against the lower courts’ judgment on the effect of a pari passu clause in Argentina’s bonds. Thus, the injunction issued by U.S. District Judge Thomas Griesa is still in effect, and, if Argentina pays on its restructured bonds, it must also pay in full NML and the other holdout creditors that are party to the case.
A payment on Argentina’s restructured bonds was due on June 30, 2014, and Argentina has a 30 day grace period before falling into default under its restructured bonds. As the clock ticks away, the drama unfolds: (1) Argentina announces that it wants to swap the restructured bonds into new Argentine law bonds, all cleared domestically. The court makes clear that this is a violation of the earlier rulings of the court and orders Argentina not to proceed with the swap. (2) Argentina asks for the stay on the injunction to be re-imposed. NML objects and the court agrees with NML. (3) Argentina then deposits $1 billion with the trustee of the restructured bonds to demonstrate its ability to pay and good faith towards the cooperative creditors. The court objects to this and orders Argentina to take the money back. (4) Argentina announces that it is prepared to negotiate and meet with the court appointed “special master” Daniel Pollack who is “to conduct and preside over settlement negotiations between and among the parties to the litigation”. At the same time it uses advertisements in major newspapers to lash out against the court and its Orders, which are “impossible to comply with” and “violate the sovereign immunity principle effective in the US”. (5) The euro-denominated investors of restructured bonds governed by English law apply to the court for an emergency motion to clarify “whether this Court has jurisdiction to order the return of the Euro Bond payment, which is currently being held by Bank of New York (Luxembourg) S.A. in Argentina”. Meanwhile, (6) The general debate grows with people like Martin Wolf discussing the debtors’ prison into which Argentina finds itself, while others continue to describe it as a unique case. (7) Both the official and private sectors work full speed ahead with proposals and considerations.
Manuelidis asked the panelists the following questions:
Mr. Blitzer responded that the market does not expect a default (“the market is more confident than anyone else”), while in the “real” world there is much more uncertainty. Argentina is sending mixed messages about its willingness to settle and any progress toward settlement is unclear. Mr. Fang felt that Argentina was willing to pay its exchange bondholders, so a settlement was likely, especially because the sovereign has said that it is able and willing to pay the exchange bondholders. Cristina doesn’t want to leave her country in a state of default (especially when her husband joined the administration during a default). The pari passu saga has dragged on too long and Argentine bonds are valued strongly (despite a CDS rally).
Mr. Culverhouse questioned what we mean by “settlement”. No one expects an actual agreement by the end of the grace period. At most, the market is hoping for sufficient grounds to exist by the end of such grace period for a settlement in good faith, with actual payment at a later stage. The majority of investors believe that settlement is the most likely scenario and achievable given the incentives (especially if bonds were offered and not only cash), with the alternative being much worse. A minority do think default is a real possibility. Market prices reflect that a deal is inevitable, although Culverhouse thinks that there’s more downside than priced into the bonds. He posits that, even if a default is likely, one needs to look at the recovery prospects. There are good reasons for a quick cure, but there may be stronger reasons for a prolonged settlement, and some investors have more tolerance for such a prolonged settlement.
Mr. Costa guessed a 75% probability of a solution down the road. The local color seemed to convey that the government made a political decision to settle and will stick to it. The market tolerance for risk is higher, so he didn’t expect a collapse of prices. A swap into local law bonds may result in a bigger contempt problem for Argentina.
Mr. Nelson was cautious about making any predictions, so instead he listed some of the relevant information to consider. Based on Judge Griesa’s June 27 statement, Griesa is treating the appointment of Special Master Pollack very seriously, and was also was bitterly disappointed with Argentina’s attempted payment to exchange bondholders, which he viewed as a negative step backward. However, Nelson thought that Griesa would be reluctant, at least initially, to broaden his equitable relief to plaintiffs other than those have currently obtained “pari passu” injunctions, as this possibly would deter the settlement process.
Manuelidis asked Nelson whether he thought Griesa would provide guidance to the trustees and Eurobondholders pending a decision by Pollack or whether Griesa was more likely to keep his statements ambiguous. Nelson reiterated that payment on the core US Dollar bonds cannot be made to the exchange bondholders, but that it might be difficult for the trustee to refund the “payment”, sitting in a Buenos Aires bank account, to the Republic (“it’s like asking for the toothpaste to be put back in the tube”), and for these reasons trustees and other banks have to behave very conservatively given the threat of a contempt order. Local law Argentine bonds payable in Buenos Aires have been argued (by Citibank) to be outside the definition of “external indebtedness” and, therefore, outside the scope of the pari passu clause, but the clearing systems are still requesting guidance or clarification before making any payments on those bonds. The exchange Eurobonds have been argued to be within the definition of “external indebtedness” and subject to intense motion practice even though their payments are also outside of the U.S. The terms of the trust indenture require “immediately available funds” for a payment to be valid, and this issue may not resolve itself in the 30 day grace period.
Blitzer questioned Argentina’s serious intent and willingness to reach a settlement quickly since (1) it’s been nearly a month since the Supreme Court refused to review the case, (2) the Finance Minister has made no effort to meet with the plaintiffs, (3) there is no Plan B or hiring of financial advisors to help Argentina out of its mess, (4) RUFO as a red herring is being used as a political tool to justify Argentina’s doing nothing until the clause expires and (5) Argentina’s behavior is consistent with the game of win/lose, rather than compromise. With the clock ticking and the structure and framework in place, little to no progress has resulted. With a lot of preconditions and no real progress, it’s difficult to request a stay. “I am hopeful, but it’s hard to be optimistic”.
Culverhouse viewed the negotiations as taking place in the newspapers, not between parties in the same room. What would it take to get Argentina to the table? Does RUFO have to be off the table (only as early as January 2015), is a stay a precondition? Frankly, Argentina was caught off-guard, needing time to re-group. It did not expect the Supreme Court to refuse to grant cert, it expected the IMF and other countries to come to its aid. Knowing this, Elliott would probably give Argentina more time to negotiate.
Costa remarked that the Argentines are very much concerned about RUFO (on advice of their counsel) and even if there was a 1% chance of RUFO being an issue, that was still a very high cost. A settlement would help the political situation in the country and no one wants a devaluation or increase in interest rates. He reminded the audience that Argentina can act quickly and unexpectedly. Fang felt that the market was optimistic about a settlement, claiming that Argentina will need to come back to the financial markets next year when it will have $14 billion to refinance. He hoped that lawyers and financial advisors would be working 24/7 to find a way around the RUFO issue.
Manuelidis questioned whether part of Argentina’s strategy is to bring the exchange bondholders into the discussion, and Blitzer responded that they were already part of it, expressing their desire for settlement and no default. Nelson stated that, according to Griesa, the attempted payment on June 26 to those bondholders ran afoul of the pari passu Order. Blitzer countered that they would probably not accelerate because of a perceived violation of the RUFO clause only to see their bond prices plummet. Culverhouse cautioned that investors are wary of uncertainty and the ambiguity of the term “voluntary” in the RUFO context was problematic (although this shouldn’t be a barrier to negotiation).
Nelson predicted that the exchange bondholders might argue that other holdouts post-judgment no longer hold the right to enforce the bonds specifically (because, they would argue, the terms and conditions of the bonds and rights under them are merged with the judgment); on this view, the post-judgment holdouts can exercise a panoply of judicial remedies in enforcing the judgments, but would not be entitled to the equitable relief of the Griesa court in enforcing the pari passu clause itself.
A discussion ensued on how a declaration of default by Argentina or acceleration by the exchange bondholders would not violate the pari passu clause, but the anti-evasion Order would be violated by any proposed restructuring. Any new stay would have to be under a new Order, requested for a very good reason.
There was a general agreement among the panelists that Argentina’s press statements were typically political, some patently false and should largely be discounted. “Governments typically don’t act rationally or with rational economic behavior”.
EMTA will continue to closely monitor developments in the on-going litigation against Argentina, and its members are encouraged to visit the Litigation area of EMTA’s website for the recent materials. As a reminder, EMTA continues to collect and post legal materials regarding EM sovereigns involved in disputes with creditors.
For more information, please contact Aviva Werner at firstname.lastname@example.org.