360 Madison Avenue, 17th Floor
(on 45th St. between Madison and 5th Aves.)
New York City
This EMTA Special Seminar will provide analysis and commentary by panels of market analysts and legal experts on the latest developments in Argentina and its lawsuits in the US and UK.
11:45 a.m. Registration
12:00 noon – 1:00 p.m. Market Panel Discussion
Fernando Alvarez de la Viesca (TPCG Group) – Moderator
Pablo Goldberg (Blackrock Financial)
Siobhan Morden (Jefferies LLC)
Elena Duggar (Moody's Investors Service)
Javier Kulesz (Nomura Securities International)
1:00 p.m. – 1:15 p.m. Break
1:15 p.m. – 2:15 p.m. Legal Panel Discussion
Arturo Porzecanski (American University) – Moderator
Matthew McGill (Gibson, Dunn & Crutcher LLP)
Henry Weisburg (Shearman & Sterling)
Timothy G. Nelson (Skadden, Arps, Slate, Meagher & Flom LLP)
Lunch will be provided
Additional support provided by Jefferies, Moody's, Nomura Securities, Shearman & Sterling and Skadden, Arps.
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 / Credential Media Complimentary.
Argentina Update Panels with Market and Legal Perspectives
A discussion of the latest developments in Argentina and its lawsuits in the US and UK took place at EMTA’s offices in NYC on May 1, 2015. TPCG sponsored the event, with additional support from Jefferies, Moody’s, Nomura, Shearman & Sterling and Skadden, Arps.
Fernando Alvarez de la Viesca (TPCG Group) moderated the market perspective panel and other panelists included Pablo Goldberg (Blackrock Financial), Siobhan Morden (Jefferies LLC), Elena Duggar (Moody’s Investors Service) and Javier Kulesz (Nomura Securities International).
In response to Alvarez de la Viesca’s questions regarding political scenarios, what to expect of each of the leading candidates, and how things will change generally at the beginning of next year, Kulesz predicted with a 55% certainty that Scioli will be the next President, increasing to 75% if there’s a second round of elections. With 30% of the population supporting a Peronist candidate no matter what and another 30% voting the opposite, the remaining 40% was critical. The state of the FX market and China swap was also crucial to the election results, and he said that the country was stable, with consumption showing recovery and inflation not getting worse. However, Scioli will find it difficult to change policy in as radical a way as Argentina needs, with the market developing complacency about what to expect in Argentina.
Morden was positive on Scioli, who had a “decent economics team and a good track record as an executive [in the province of BA]”. She suggested that the way to fix Argentina’s economics problem was to reduce subsidies, which was more difficult to accomplish without additional supporters. She questioned Scioli’s political commitment and used Brazil as an interesting comparison of a country with the party infrastructure to make necessary adjustments.
Goldberg posited that it was “all about timing”, how long it would take the new administration to change what’s needed, with market and social conditions at play and a significant amount of external shocks that could occur to affect Argentina. If change is too quick, it may lead to problems.
Responding to the macro challenges and risks before and after the election, the context and timing of curing the default, the impact on reserves and the tradeoff of financing or fixing the macro imbalances, Morden claimed the main focus was on hard currency, with Argentina muddling through to try to prevent a decrease in gross FX reserves. The market can forgive huge macro imbalances if they are temporary, credit relations are normalized and there is a modest degree of change at least. Sourcing through China will keep the reserves stable. Argentina can either fix its problems (with a high political cost and gradual macro fix) or finance its problems. There is a nationalist campaign against paying out the holdouts. Argentine prices have held relatively high because of the small number of investors involved who think the default will be cured. However, she thinks the interim stability engendered by this sentiment is only temporary. The threat of acceleration by exchange bondholders was more imminent now. If Cristina’s successor does not deal with these challenges, the backlash will be severe.
Goldberg felt that Argentina was opening the restrictions to access money that was coming into the market, while the market was hopeful that a significant amount of supply will be available. What occurs in Brazil and with oil prices is relevant, and a significant investment in oil will be viewed as a positive. He doesn’t see much political cost of a deal with holdouts if spun correctly.
Kulesz stated that Scioli knew the well-diagnosed challenges, but may not have much leeway to adjust policy if Cristina’s supporters make waves, and will have difficulty dealing with the “hot potato” of the holdouts.
Turning to investment strategies and the following questions posed by the moderator: What can surprise the markets? Are sovereign USD Argentine law bonds at risk? What are the risks of supply? How can an increase in supply impact holdout litigations and what repercussions will it have for the rest of the creditors? How will investors react? How to trade Argentina considering these risks? What are the bond strategies for convergence trades? Can and will Argentina issue debt before the elections as we’ve seen with the Bonars 24?
Goldberg stated that the market underestimated the amount of supply, with debt servicing at $9 billion in interest and amortizations in the next year. With $2 billion of holdout debt, $10 billion of “me, too” debt, $3-5 billion of distressed bondholders coming back into the market and $5 billion of pent-up demand, there is over $30 billion of new supply for real money managers. Some of the bonds are in indexes, while others aren’t, so many will have to be governed by New York law and be subject to Judge Griesa’s orders. “It’s a question of timing, the longer it takes to resolve [the litigation], the higher the hurdles through compliance and credit to buy those bonds”.
Morden posits that whether this supply can be absorbed also relates to price, with modern regime change as essential, but macro change to fix imbalances also a necessity. She views Kicillof being part of the team as a negative, as would Scioli being squeezed out by a leftist regime. She felt it difficult to assess the legal risks of the Bonar ‘24’s being considered external indebtedness subject to Judge Griesa’s injunction, but based on her reading of the last transcript of the hearings it probably wasn’t a big risk since there didn’t appear to be a commitment on the judge’s part to include them.
Kulesz understands that in order to create stability the Central Bank is issuing dollar Lebacs to the financial sector at relatively high rates. A positive market surprise would be if Massa strikes a deal with Scioli and the opposition becomes united to run against Scioli. He too thinks the inclusion of Kicillof would be a negative. The risk that the Bonar ‘24s would be viewed as external debt is low (although not zero).
Duggar responded to the following broader Issues: What is the fallout from debt litigation in Argentina for other sovereigns? What are the direct implications from the discovery and pari passu case rulings? What is the impact of the IMF lending framework reform? What are the implications from a sovereign rating perspective of the recent ICMA modifications to sovereign bond contracts (CACs and pari passu clauses)?
She doesn’t think there will be much of a direct impact of a precedent-setting nature for other countries because the pari passu court ruling seemed to focus on Argentina’s unique set of circumstances and behavior. However, the discovery case may affect the sovereign debt restructuring framework more as bondholders may be permitted to seek information relating to a sovereign’s foreign assets and global financial transactions (not just the US ones). The ease of obtaining this information, together with possible improved recoveries, will have broader implications for other sovereigns.
The indirect fallout from the pari passu case relates to two reforms – IMF’s lending reform proposals (which provide for extension of maturities if the sovereign has lost market access and the IMF considers the debt sustainable but not with high probability, and upfront debt reduction if the IMF considers the sovereign debt unsustainable) and ICMA’s modifications to CACs (by introducing aggregate CACs, requiring a majority vote across all series of bonds) and pari passu (stripping out the ratable payment interpretation to eliminate the Argentina-style litigation) clauses. The devil will be in the details of the final IMF proposals later this year. With respect to the ICMA clauses (supported by the IMF and IIF), an increasing number of new bond issuances contain such clauses, but the modified clauses are unlikely to impact significantly the occurrences of default, where the vast majority of cases hinge on capacity, not willingness, to pay, nor will there be many instances of recovery impacts (as litigation is lengthy, costly and risky). So, there will be no ratings impact of these modified clauses, with few exceptions.
Arturo Porzecanski (American University) moderated the legal panel, and other panelists included Matthew McGill (Gibson, Dunn & Crutcher LLP), Henry Weisburg (Shearman & Sterling) and Timothy G. Nelson (Skadden, Arps, Slate, Meagher & Flom LLP).
After Porzecanski summarized the main concern of the market panel (namely, “will the Boden 2015 bond get paid?”, Weisburg provided a summary of the Pari Passu and Discovery decisions handed down by the U.S. Supreme Court last year, and the importance of their ramifications for the future. He reminded the audience that the 2014 injunction enforcing Section 1(c) of the 1994 Fiscal Agency Agreement (FAA), following the denial of certiorari by the Supreme Court in June 2014, only extended to exchange bondholders, and judges generally are not prone to extend their orders beyond what they’re asked to do in the relevant filings. Argentina chose not to pay the holdout creditors, and thus its payments intended for exchange bondholders were blocked; a Special Master was appointed to mediate, but it was to no avail; Argentina was held in contempt in September; and Bank of New York was removed by Argentina in its role as trustee. Weisburg also summarized the decision under the Discovery case as stripping a post-judgment sovereign of its alleged protections under the Foreign Sovereign Immunities Act (FSIA) in connection with discovery requests.
At present, the issue raised by Citibank was whether USD-denominated Argentine law bonds fell within the injunction. Judge Griesa held that they do because (1) the bonds were offered on the basis of the 2005 and 2010 prospectuses and (2) he was enforcing the FAA in that these bonds were considered “external indebtedness” (i.e., they were not in the local currency and were offered to investors outside Argentina).
Meanwhile, the “me, too” litigants (reportedly, 525 plaintiffs holding more than $5 billion of unrestructured debt, 495 of which already have judgments in their favor) asked Judge Griesa for pari passu ratable-payment injunctive relief, and those cases were ripe for a decision. The archaic Merger Doctrine will probably be raised by Argentina as a defense against these “me, too” plaintiffs, as it provides that all rights under the FAA (including presumably any clauses within it, such as the pari passu clause) have been extinguished and merge with the judgments these plaintiffs have acquired through their previous lawsuits.
In response to Porzecanski’s question -- what are the legal and other implications of Argentina’s recent reopening of its Bonar 2024 bonds, by which the government raised about $1.4 billion at a yield of almost 9%, with about 85% of total allegedly provided by foreign investors? – Nelson found it difficult to provide predictions, but recognized the possibility that plaintiffs would attempt to investigate the issuance through their discovery rights. However, he also observed that the Supreme Court did not address whether the use of a subpoena to obtain worldwide discovery of assets outside the US was proper. He observed also that the March 2015 order by Judge Griesa concerning the scope of the pari passu injunction presented some important issues for custodians and other market participants concerning who may be viewed as acting in concert with Argentina.
Weisburg clarified that the injunction did not bar fund-raising, though it deals with payments, and he didn’t think the sale of securities like the Bonar 2024 would be barred by the injunction or the pari passu clause.
McGill, who represents NML, explained that the Court of Appeals offered wide-ranging discovery powers (not meant to be punitive) against Argentina and third parties to ascertain where Argentina’s global assets may be attached. He disagreed with Weisburg and thought that the Bonar ’24 reopening did fall within the “external indebtedness” definition in the FAA, and was thus subject to the injunction because the bonds were not offered exclusively in Argentina and were not “domestic” for indebtedness purposes. Even if the intermediaries are the ones offering the Bonars outside Argentina, the definition of “external indebtedness” was not intended to exclude billion-dollar global offerings.
Porzecanski asked the following questions: In light of this 2024 reopening and related holdout-creditor countermoves, does the repayment or refinancing of the $6 billion-plus in Boden 2015s which mature in October look more or less feasible now, at least from a legal point of view? And, even if there is an attempt to swap the Boden 15s for the Bonar 24s, how feasible is that, given that the 15s are held all over the world?
Weisburg stated that the issue of whether a certain debt was considered “external indebtedness” or not was purely a factual question, and he thought that the timing was rather short to litigate the issue before October, especially in light of Judge Griesa’s proclivities to take time off during the summer.
Nelson was not prepared to make predictions as regards those particular bonds, but observed that there was still an argument that the bonds payable in pesos, in Argentina, are not presently subject to the injunction.
In response to Porzecanski’s query -- Given that investors seem to be pricing-in a resolution of the Argentina holdout and default problems, what is your assessment of the status and prospects for and integration of the “me, too” litigation and for the arbitration cases pending before ICSID (at least 50,000 Italian retail bondholders are involved), including on the part of holdout bondholders? – McGill delineated two tracks: (1) “Me, too” pari passu litigants are independent of the settlement discussions since most of the legal motions have already been decided. The Merger Doctrine had applied in contract law, but he doubted that this is a situation of injunctions being stayed for years since the pari passu issue was resolved by the Second Circuit twice. (2) Regarding the settlement path, the Rufo clause was raised last year as a hurdle by Argentina, but, now that the clause has expired, it is necessary that all holdout debt be included in the injunction. However, Argentina has not disclosed information on who all those creditors are. The Special Master can resolve all these claims, the “me, toos” can be included, but it may be best for Judge Griesa just to resolve the causes of action brought by the original plaintiffs, at least for now.
Nelson posited that having the “me, toos” join the injunctive order might increase the risks associated with the order, in that it broadens the pool of bondholders who might seek to use the injunction against third parties. He observed that the Merger Doctrine operates such that, if a contractual debt is reduced to judgment, then the contractual obligations are merged into the judgment; if applicable here, this is an argument against the grant of the pari passu relief to judgment creditors.
Nelson also observed that there is the potential for certain Italian bondholders to obtain an ICSID award this year, in the arbitration proceedings brought under the Italy-Argentina investment treaty. ICSID awards, however, are generally issued as money awards, not as injunctive relief. Thus, while ICSID awards can be enforced as final judgments in member states, including the United States, it is difficult to say whether one additional money judgment will significantly change the current picture in New York.
And regarding Porzecanski’s final question -- What are your reflections on the application of discovery powers since they were authorized last year against Argentina, both from a legal and a practical point of view? – Weisburg claimed that any judgment creditor was entitled to those discovery powers against financial institutions (regardless of the Supreme Court’s decision), and that the discovery mostly focused on those financial institutions, not Argentina. Nelson agreed that, regardless of the legal debate, from a commercial perspective, this is what judgment creditors do, and it’s a fact of life. McGill, on the other hand, emphasized that the Supreme Court decision regarding discovery against Argentina was very important, with the possible next step being sanctions for failure to provide information, and maybe even the next frontier cause of action brought on the grounds that government-owned banks and of companies which are not providing information are thereby the “alter egos” of Argentina.