EMTA SPECIAL SEMINAR: ARGENTINA: WAY FORWARD
Wednesday, August 20, 2014
The Four Seasons Hotel
This EMTA Special Seminar will explore the way forward for Argentina, following developments in the US Courts, the expiration of the grace period for the Discount Bonds and ISDA’S determination that a Credit Event has occurred.
2:30 p.m. Registration
3:00 p.m. – 5:00 p.m. Panel Discussion
Fernando Alvarez de la Viesca (TPCG Valores S.A.) – Moderator
Daniel Artana (FIEL)
Joshua Rosner (Graham Fisher & Co.)
Daniel Marx (Quantum Finanzas)
Marco Schnabl (Skadden, Arps, Slate, Meagher & Flom LLP)
Guillermo Nielsen (Strategic Investments S.A.)
5:00 p.m. Cocktail Reception
Additional support provided by Skadden, Arps, Slate, Meagher & Flom.
Registration fee for EMTA Members is Complimentary / US$695 for non-members.
EMTA regrets that this event is not open to members of the press.
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*.
EMTA Hosted Panel on Argentine Case in Buenos Aires
This EMTA Special Seminar “Argentina: Way Forward” was held on August 20 in Buenos Aires, continuing the series on Argentina in New York and London by exploring the way forward for Argentina, following developments in the US Courts, the expiration of the grace period for the Discount Bonds and ISDA’s determination that a Credit Event has occurred. The event, sponsored by TPCG Valores S.A., took place at the Four Seasons Hotel, followed by a cocktail reception, and was closed to the press. Additional support was provided by Skadden, Arps, Slate, Meagher & Flom.
Fernando Alvarez de la Viesca (TPCG Valores S.A.) moderated the panel, which included Daniel Artana (FIEL), Joshua Rosner (Graham Fisher & Co.), Daniel Marx (Quantum Finanzas), Marco Schnabl (Skadden, Arps, Slate, Meagher & Flom LLP) and Guillermo Nielsen (Strategic Investments S.A.).
Mr. de la Viesca made his introductory remarks, which included the important announcement by President Kirchner that a fifty page draft resolution was before the Argentine Congress to pay the exchange bondholders locally. He promised the audience that the ramifications of this resolution would be discussed by the panel in depth, together with other legal questions, economics concerns and macro effects as the ever-evolving Argentine situation was unfolding. He also wanted to first give Mr. Rosner an opportunity to respond to allegations in the press that he was an alter ego of Paul Singer, the principal of NML. Rosner clarified that he has been acting independently since he left a sell-side firm in 2001, and that the views he expressed were his own, not on behalf of NML or any other entity.
Mr. Schnabl gave a brief synopsis of the current state of the litigation. He also provided his reflections on the draft resolution, which he viewed as potentially increasing the possibility of a contempt order from Judge Griesa exponentially. This “poker game” of attempting to get the BONY Mellon money into local hands will be the final test of whether the draft resolution will succeed. Implications for the clearing systems, fiduciaries and bondholders that agree to this scheme are unclear.
Rosner was not surprised by the draft resolution as the press and Kirchner had been hinting at such a mechanism for awhile, but he did caution that the resolution created a new round of holdouts that would ironically end up in the same US courts engaging the same pari passu clause. In addition, the fiduciary agents have to weigh the ramifications of changing the governing law from New York to Argentine law and whether they want to or can be involved in that endeavor, given the probable lawsuits they may face in doing so.
Mr. Nielsen viewed Argentina’s responses in the last ten days as (1) “an intention to apply the anti-terror act” to fiduciaries’ local branches and (2) “an improvised act” to settle the litigation through the Hague and not through the US courts. The payment collection domicile change to BA gained momentum after the US Supreme Court decided not to grant cert. However, some bondholders simply cannot hold local debt governed by local law, and this draft resolution has many such shortfalls. He also agreed that this may create “second generation holdouts” and may generate an acceleration of the par bonds if not paid by the end of October’s grace period. The government doesn’t have the capacity to stop this draft resolution by a more than 50% majority vote.
Mr. Marx was equally concerned with the payment mechanism delineated in the draft resolution, as well as the fact that Argentina compromised its dispute resolution procedures by resorting to other means to settle this difficult case. It is not clear if the exchange bonds will disappear (without repurchase or buy-back) or be placed in a trust structure with possible exit consents. We are “entering into uncontrolled events”. He was skeptical of acceleration, which he viewed as “destroying value” without much gain. The “race to destroy, rather than build, value” was not in anyone’s interest. Entering into litigation for a decade or more and being subject to an inevitable new exchange that may be worse than the bonds held today would be a mistake. He is also concerned that the fragile economic situation of the country will be put at risk as lines of credit will evaporate.
Argentina does not have excessive borrowing problems in its internal or external sectors; it resorts to the Central Bank for inflationary issues and to its main business partner, Brazil, that has its own deficit problems. Mr. Artana explained that the result is that Argentina is short US Dollars and long pesos; the draft resolution will not resolve these problems even if somehow there’s a successful exchange under Argentine law. Other panelists stated that disregarding New York law and the holdout problem, with further “me too” litigants, is not wise. It seems Argentina is “asking the firemen to add more gasoline to the fire, rather than put it out”. Hence, there will be more recession, high inflation and more pressure on the exchange rate. With more limited access to money and more social and economic problems up ahead, Argentine’s future is not too bright.
Rosner interjected that Argentina’s debt contracts with China may be triggered through cross default and acceleration clauses, thus further endangering the country’s stability and leading to “’89-‘90’s style repeat of devaluation and repudiation of debts”. de la Viesca stated that market prices were not decreasing so drastically, although volume was low, and Argentina’s way out may be through devaluation. Nielsen, while trying not to contribute to “a high suicide rate in the audience”, did state that the marketplace was fleeing (especially after the consortium of international banks deal did not succeed) and that he hopes the “end of illusion will lead to some solution”.
Marx commented that, while it would be rational for Argentina to construct value, different actors have differing capacities for rationality. For example, the litigators in this case miscalculated by not realizing they could not press Argentina. The lack of real money bondholders, the resiliency of Argentina to default and the perception that Argentina does not have a debt problem, needing relief (but rather a transient litigation problem) have all contributed to the way things have evolved.
Schnabl is cautiously optimistic, unsure of whether to be mid- or long-term optimistic. He questioned how different Argentina’s situation really is if they have payment or liquidity problems vs. just resolution of present issue problems. At some point, they are likely to need to borrow money or cut spending, which may lead to devaluation and/or inflation. This “natural cycle” every decade or so seems to be Argentina’s fate, so it’s unwise to blame the holdouts for “all the evils” of the present state of affairs.
Artana predicted problems ahead in the short-term, but was optimistic about Argentina’s future, especially life after 2016, regardless of who was in power.
Nielsen carved out the political dimension in his next remarks (with economic and legal as the other legs of the discussion) by stating that there was still much time ahead before the next administration, with the following six months as crucial indicators of the future. While the 2001 default created some casualties, it seems that the recent events have led to looting and other matters that may be more severe, with the impact of the “political dancing” to be measured in the future.
Responding to an audience question on the impact of a possible contempt order, Schnabl stated that there was no case law regarding contempt of a sovereign in a comparable context. Contempt orders are typically sanctioned by fines, but it’s unlikely that Argentina would succumb to those, advocating instead for penalties for tribunals such as Griesa’s. Of course, this may affect firms doing business with Argentina in the future as they wish to avoid likely sanctions and penalties for doing so. This is frankly the “Falklands” way of dealing with disputes. The contempt phase of the case may be tried in the US Supreme Court, having the higher effect of impacting the next administration to fix things. Nielsen echoed the sentiment that there was no precedent for this case and that there was a history of Argentina not having legal certainty in being able to obtain credit lines for the future. He viewed the compliance departments across bondholders as significantly contributing to the way restructurings on investments in Argentina will occur.
Responding to de la Viesca’s question regarding the likelihood of acceleration of the par bonds, Marx viewed this possibility as unlikely, although many aspects of this situation presented a special event that was out of control. Schnabl stated that the fiduciary may be obligated to accelerate, especially if no payment was forthcoming from Argentina, with the “irony being so big we cannot contain it in this room”. Nielsen thought that, because of Griesa’s ruling and the change in the structure and profile of the bondholders, acceleration was more likely as the incentives were higher. However, this ploy may not succeed in forcing Argentina to negotiate and he doesn’t see effective communication between Argentina and its bondholders. de la Viesca was concerned about the need to safeguard the trust fund of the bondholders, protect clients’ interests, as well as the asset value of the bonds, all during a possible devaluation.
Rosner suggested that discussing contempt and acceleration possibilities were irrelevant when the macroeconomics and domestic situations loomed large. As the ratio of debt to GDP increases, the difficulty of attracting new money increases and “the blue chip swap is difficult to effect”, the Argentine government will be forced to respond to promote further debt issuances. Marx agreed that “the commercial competitiveness of the economic pressures”, coupled with the trend toward holdings in US Dollars and decrease in pesos, will lead to some resolution (although, if it were purely an emotional response, it would increase the risks of a successful resolution considerably). Artana posited that a government decision had no upside potential risk and lots of downside risk, with implications for the job market and the possibility of a recession occurring. “We tend to underestimate the government’s ability to make mistakes”, although they still have tools they can use, such as interest rates, fiscal adjustment, financial controls, etc.