EMTA Special Seminar: A New Argentina? (UK) - Jan. 11
EMTA SPECIAL SEMINAR: A NEW ARGENTINA?
Monday, January 11, 2016
One Bishops Square
London E1 6AD
This EMTA Special Seminar will address Argentina's economic prospects following the country's recent election, as well as discuss the recent legal developments.
Lunch will be provided.
11:45 a.m. Registration
12:00 noon – 1:30 p.m. Panel Discussion
Yannis Manuelides (Allen & Overy) – Moderator
Edwin Gutierrez (Aberdeen Asset Management)
Sergio Trigo Paz (Blackrock)
Alejo Costa (Puente)
Antonia Stolper (Shearman & Sterling)
Additional support provided by Shearman & Sterling.
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.
EMTA Argentina Post-Election Update Held in London
Following Argentina’s long-awaited elections, EMTA’s first 2016 event on January 11 was a Special Seminar focusing on that country’s economic prospects, as well as a discussion of the current litigation. Puente sponsored the event, which Allen & Overy hosted at its offices in London, and Shearman & Sterling provided additional support.
Yannis Manuelides (Allen & Overy) moderated with the following panelists: Edwin Gutierrez (Aberdeen Asset Management), Sergio Trigo Paz (Blackrock), Alejo Costa (Puente) and Antonia Stolper (Shearman & Sterling).
Manuelides remarked that it’s clear that all parties want to move fast in resolving Argentina’s situation and that all accept there would be immediate costs. The economic, political and litigation discussion and its impact on the future of the country were the topics that the panel addressed.
Costa listed the FX, monetary, fiscal and litigation/hold-out issues as the challenges Argentina faces as it seeks to borrow money abroad. While some FX restrictions still remain, there is a significant level of qualified confidence in the new Administration. The Brazil situation was not minor for Argentina as a collapse in Brazil would adversely affect its neighbor. Macri may also face problems in passing a budget through Congress.
Paz commented that, as an investor, he (and others) viewed the situation was complicated, and that he was grappling with whether this was an idiosyncratic trade not necessarily attractive in the short term at 7%, and what other comparable investments would yield. He also wondered whether any new bonds would have sufficient holders. His most attractive trade was the currency with a 35% upside, assuming one could muddle through the complications. With any hold-out resolution voted on by Congress, one could expect increased pressure on Macri; if the Peronistas saw the possibility of a successful result, they may want to participate and not derail the process, but there was a need for proper brokering and “massaging” in this situation. He worried about the $1.5 billion floating rate notes (FRN’s) that might be subject to negotiation and wondered what might derail that process. On the other hand, he thought the US was becoming more supportive (even trying to make Argentina a success story) and that might spill over into other LatAm countries as Argentina was becoming less “left”. And, in fact, the international community was also becoming more supportive, with the IDB approving a $4.5 billion loan quickly.
Gutierrez viewed the symbolism in reaching a deal with the hold-outs was crucial, as the damage done to the confidence of the investor community needed urgent repair. He declared the current Cabinet the best one could hope for, the “who’s who” of economic consultants, with much talent and capacity to diagnose and implement solutions. While there was a considerable amount of euphoria when Macri was elected, and he seems to actually be making changes, he has to contend with the fragile majority, plagued with still powerful opposition. “If the economy doesn’t move soon [and if growth is not high], the honeymoon period will disappear and the Peronists will rise [and take to the streets]”. By political necessity, Macri must do as much as possible early on (including expenditure cuts). There were commodity price risks and fracking was seen as attractive (although not at the current oil price levels).
Stolper provided a summary of the 4 main buckets of lawsuits still outstanding:
(1) NML and Aurelius’ ratable payment argument, where cert was denied by the Supreme Court and the stay was lifted,
(2) the Argentine law bonds, with Citibank as the custodian where payment was made initially but then was swept into the injunction (case is on appeal and a hearing date was set for oral argument by the exchange bondholders),
(3) the “me-too” litigation, which is larger than (1) although NML and Aurelius are also part of (3), and where the issue was how to calculate damages and who owned the bonds during the requisite period in question (summary judgment was granted, ratable payment was applied, with Argentina appealing the decision and its brief due at the end of February and the Court of Appeals deciding possibly at the mid to end of the Summer) and
(4) BONAR 2024 bondholder action filed in 2014 to amend the pleadings to obtain the same ratable payment relief as in (1), with much litigation surrounding the discovery argument (where the Supreme Court ruled two years ago that there was no limit to plaintiffs’ discovery request around the globe, except for military and diplomatic assets) and Judge Griesa at a December 17 hearing exhibited profound frustration at the whole process and attempted to appoint the same Special Master as in (1), but Pollack refused.
In addition, there was still outstanding the ICSID ruling with Italian bondholders, litigation in the UK, where plaintiffs were granted permission to gain access to Argentina’s property, and a sideline litigation regarding funds sitting with the US and UK Trustees.
Stolper presented the Shearman & Sterling view that Griesa would respect any deal made with the lead NML and Aurelius plaintiffs and would do everything in his power to facilitate it (although they are not the lead plaintiffs in the class action), and since the ratable payment decision is an equitable remedy, he would be loathe to provide the injunction (even though the contractual pari passu clause remains viable). However, this will all take some time to sort out as the “brutal reconciliation process” commences. Who owns what bonds will be an issue and for the (3) litigation there will be a process of reconciling judgments with the bonds themselves since there can’t be double-counting. What the principal is worth and what the multiplier on past due interest will be are also considerations as broker dealers and their custodians all around the globe work through this claims process. For the class action, there will be a process of sorting through bond by bond with each plaintiff and providing a global settlement. And, as for the closing it will be take some time to decide what kind of new bonds will be issued, as the “Super-CACs” bonds would be a high value for Argentina to adopt, while non-NY law governed bonds will not have the ratable payment “club”. There also may be hold-outs to the hold-out settlement process, but, in Shearman & Sterling’s view, Griesa would not extend the ratable payment injunction to them. The government may need cash, while hold-outs may not need cash as much as viable bonds.
Paz posited three variables if a commercial deal is viable and the stay is obtained quickly:
(1) Time – who can and cannot afford to wait (with Argentina not being able to wait as it needs to normalize the payment system, access new funding and get the economy going),
(2) Money – there could be lots of litigation on the FRNs (who gave these bonds to Elliott, the bonds should be paying more because of the default – there is likely to be a trade-off and negotiation) and
(3) Congress – what needs to go to them for approval (negotiated deal? new bond terms?).
He lists the following three scenarios playing out in the hold-out resolution:
(1) A commercial agreement, which could take days to be drafted, but would need to be ratified by congress. Reaching a deal will depend on how the parties agree on the economics of the assets held by the hold-outs that are not part of current ruling.
(2) Seeking congressional approval, which could take months, to pay hold-outs and reopen another global exchange offer.
(3) Going back to the 2001 default and restructuring all Argentine debt, which could take a year, but surprisingly does not need congressional approval.
Paz believes that time is not on the side of Argentina, as an earlier resolution will normalize the payment system and provide it with access to capital markets and FDI. However, the current team wants to make things right (i.e., get congress on board), and will only strike a deal that maximizes the interests of the country.
Paz’s assessment is that, based on a sequencing, if there is no commercial deal in sight in the coming days, probabilities will shift quickly to the second and third scenarios depending on how congress responds to it.
Gutierrez thought many holders are looking for PDI recovery (which will likely be subject to a haircut), while he was more interested in the currency play, with its lessened legal complications.
Costa stated that at the end of the day it was a political issue and that the Administration and governors would need to convince the senators to pass resolutions approving the negotiation and type of bonds issued. There is a need for financial engineering that Congress would accept and understand (possibly par bonds with lower coupons and a haircut, and discount bonds with higher coupons). Congress is unlikely to provide a blank check, they will have certain requirements. While it will be easier to issue local law bonds, investors will likely feel safer with foreign law bonds. While previous Administrations were skillful in prior campaigns against the vulture funds, this new Administration needs cash for infrastructure projects and needs to return to the financial markets.