Argentina Sovereign Debt: Inside the judicial labyrinth
and how we may leave it, but not yet (c)
Eugenio A Bruno
Director TIG Americas
Partner - Garrido Law Firm
April 11, 2013
A) The Most Relevant Current
Judicial Decisions
B) First Need: Do You Really
Understand The Pari Passu Discussion? A Need to Fully Understand It. Of Course,
If You Do, Please Skip It.
C) Second need: sorry but I
don’t think you know how the existing Argentine indenture limitations (Most
Favoured Creditor and Rights Upon Future Offers) work. If I am wrong don’t read
these paragraphs, sorry again.
D) The Upcoming Judicial
Decisions – Long/short continuum of possibilities
A) The Most Relevant Current Judicial Decisions
The First Griesa Ruling: “The First Silence Bomb”
On December 7 2011,
New York federal district judge Thomas Griesa granted summary judgment to NML (a
fund managed by Elliot asset management) against the Republic of Argentina finding
that Argentina had violated the pari
passu clause, which according to judge Griesa, required Argentina as issuer
of certain bonds hold by NML that remain unpaid since 2001 (“Defaulted Bonds”),
to rank its obligations to pay those bonds at least equally with other Argentine´s
debt obligations, particularly the bonds that the republic keeps current, which
are those bonds issued under the debt restructurings that took place in 2005
and 2010 (“Exchange Bonds”). According to judge Griesa, when Argentina pays the
Exchange Bonds it must also pay the Defaulted Bonds.
The Second
Griesa Ruling: “The Second and More Serious Silence Bomb” (but with a payment formula difficult to understand...)
On February 12, 2012, Judge Griesa issued a
complementary ruling of his previous decision.
The Third
Griesa Ruling: “No time for the bomb to explode, just yet”
On March 5, 2012, Judge Griesa issued an additional
ruling staying the execution of his two prior orders, pending appeal.
The First Court
of Appeal Ruling: “The bomb exploded” (“Debt markets: how came and what this is
all about?”)
On October 26 2012, the Court of Appeals for the Second Circuit of New York confirmed Judge Griesa's ruling on the interpretation of the pari passu clause and rejected Argentina’s arguments.
The appeal tribunal
understood that an equal treatment provision in the bonds prohibits Argentina
from discriminating against the plaintiffs’ Defaulted Bonds in favor of the
Exchange Bonds and that Argentina violated that provision by ranking its
payment obligations on the Defaulted Bonds below its obligations to the holders
of the Exchange Bonds.
The Court of Appeals
stated: “The primary issues on appeal are whether Argentina violated the pari passu clause, and if so, whether
the remedy the district court ordered was appropriate”. It then cited extracts
from key documentation used by Argentina in the debt exchanges. In particular,
the court quoted certain risk factors described by Argentina in the exchange
offering prospectuses:
Eligible Securities that are in default and that are not tendered may
remain in default indefinitely and, if you elect to litigate, Argentina intends
to oppose such attempts to collect on its defaulted debt ...
Eligible Securities in default that are not exchanged pursuant to the
Invitation may remain in default indefinitely. In light of its financial and
legal constraints, Argentina does not expect to resume payments on any Eligible
Securities in default that remain outstanding following the expiration of the
Invitation. Argentina has opposed vigorously, and intends to continue to
oppose, attempts by holders who did not participate in its prior exchange
offers to collect on its defaulted debt through
... litigation ...
and other legal proceedings against Argentina. Argentina remains subject
to significant legal constraints regarding its defaulted debt. … Consequently,
if you elect not to tender your Eligible Securities in default pursuant to the
Invitation there can be no assurance that you will receive any future payments
or be able to collect through litigation in respect of your Eligible Securities
in default.
“It is illegal to lowering two unsubordinated debts”
The
court held that an equal treatment provision in the bonds barred Argentina from
discriminating against the plaintiffs’ bonds in favor of bonds issued in
connection with the restructurings and that Argentina violated that provision
by ranking its payment obligations on the defaulted debt below its obligations
to the holders of its restructured debt.
The
court then held that Argentina ‘lowered the rank’ of plaintiffs’ bonds in two
ways:
·
“when
it made payments currently due under the exchange bonds, while persisting in
its refusal to satisfy its payment obligations currently due under
[plaintiffs’] Bonds” and
·
“when
it enacted [the Lock Law] and [the Lock Law Suspension].”
Both interpretations of the Pari Passu Clause
Therefore,
Court of Appeals for the second circuit can be seen to be applying both
interpretations of the pari passu
clause, ie, the narrow (equal legal obligation)
and the broad interpretation (equal payment obligations). We will expand below
on this explanation. But additionally the Court of Appeals rejected the idea
that the narrow interpretation is the ‘main’ and ‘leading’ interpretation of
the clause with the following words:
We are unpersuaded that the clause has this well-settled meaning.
Argentina’s selective recitation of context-specific quotations from arguably
biased commentators and institutions notwithstanding, the preferred
construction of pari passu
clauses in the sovereign debt
context is far from “general, uniform and unvarying”, Argentina’s primary
authorities and Argentina itself appear to concede as much:
·
“[N]o one seems quite sure what the clause really means, at least in the
context of a loan to a sovereign
borrower”…
·
“The leading commentators on sovereign contracts acknowledged that there
exists ambiguity as to the meaning of this clause” …
·
“In the state context, the meaning of the clause is uncertain because
there is no hierarchy of payments which is legally enforced under a bankruptcy
regime”.
Into the
meaning of Pari Passu
After
this denial of the existence of a leading interpretation, the Court of Appeals
referred to the meaning of the pari passu
clause, in probably the first important judicial decision on this type of
clause ever:
Once we dispense with Argentina’s customary usage argument, it becomes
clear that the real dispute is over what constitutes subordination under the pari passu clause. Argentina contends the clause
refers only to legal subordination and that none occurred here because “any
claims that may arise from the Republic’s restructured debt have no priority in
any court of law over claims arising out of the Republic’s unrestructured debt”. Plaintiffs, on the other hand,
argue that there was de facto
subordination because Argentina reduced the rank of the plaintiffs’ bonds to a
permanent non-performing status by passing legislation barring payments on them
while continuing to pay on the restructured debt and by repeatedly asserting
that it has no intention of making payments on the plaintiffs’ bonds …. We
disagree with Argentina because its interpretation fails to give effect to the
differences between the two sentences of the pari passu clause
… Instead, we conclude that in pairing
the two sentences of its pari
passu clause, the FAA
(Fiscal Agency Agreement) manifested an intention to protect bondholders from
more than just formal subordination. The first sentence (“[t]he Securities will
constitute ... direct, unconditional, unsecured, and unsobrdinated obligations
...”) prohibits Argentina, as bond issuer,
from formally subordinating the bonds by issuing superior debt. The second
sentence (“[t]he payment obligations
... shall at all times rank at
least equally with all its other present and future unsecured and
unsubordinated External Indebtedness”) prohibits Argentina, as bond payor, from paying on other bonds
without paying on the FAA Bonds. Thus, the two sentences of the pari passu clause protect against
different forms of discrimination: the issuance of other superior debt (first
sentence) and the giving of priority to other payment obligations (second
sentence).
The
circuit court added:
The record amply supports a finding that Argentina effectively has
ranked its payment obligations to the plaintiffs below those of the exchange
bondholders … In short, the combination of Argentina’s executive declarations
and legislative enactments have ensured that plaintiffs’ beneficial interests
do not remain direct,
unconditional, unsecured and unsubordinated obligations of the Republic and
that any claims that may arise from the Republic’s restructured debt do have priority in Argentinian
courts over claims arising out of the Republic’s unstructured debt. Thus we
have little difficulty concluding that Argentina breached the pari passu clause of the FAA.
But: there are two examples of payment options
But the Court of Appeals also highlighted one very
important aspect regarding the ruling from judge Griesa and the effective
application of the pari passu to the
case, particularly how the clause should be applied given the payments
scheduled for December 15 2012 under the Exchange Bonds and the owed and unpaid
amounts to the plaintiffs:
… the Court of Appeals stated that it is unable to
discern from the record precisely how this formula is intended to operate, and
further stated: “It could be read to mean that if, for example, Argentina owed
the holders of restructured debt $100,000 in interest and paid 100% of that
amount then it would be required to pay the plaintiffs 100% of the accelerated
principal and all accrued interest. Or it could be read to mean that, if such a
$100,000 payment to the exchange bondholders represented 1% of the principal
and interest outstanding on the restructured debt, then Argentina must pay
plaintiffs 1% of the amount owed to them”.
Remanding
Therefore, the Court of Appeal remanded the case back
to judge Griesa to clarify how the formula must be applied and also the extent
of the injunctions over Bank of New York and other agents in the payment chain.
The Fourth Griesa Ruling: “The bomb became
atomic”
On November 21 2012, the judge Griesa issued its
remanded judgment, addressing the two issues raised by the Court of Appeals.
The district court also lifted the stay it had imposed on his ruling from March
5 2012, in practice requiring Argentina to comply with the decision that it had
to pay the plaintiffs in full by December 15, 2012, facing the risk to incur in
a payment default in case of a lack of compliance with it.
The Second Court of
Appeals´ Order: “Stopping the bomb clock for the moment”
Right
after Griesa’s remanding, the Court of Appeals issued an order staying the
execution, and also scheduling filings of briefs from parties as well as amici of them. The order said:
“It is hereby ORDERED that the November 21, 2012
orders of the district court entered in relation to this matter are all stayed
pending further order of this Court.
It is further ORDERED that the appeal from the
November 21, 2012 orders of the district court is expediated nostra sponte, with appellant’s papers filed by December 28,
2012; opposition papers filed by January 25, 2013; and reply papers filed by
February 1, 2013. Parties granted amicus or intervenor status shall file their briefs by
January 4, 2013. Oral argument for appellant and appellees shall be at 2 p.m.
on February 27, 2013.”
The Hearing (February 27): Multiple debates, the
“lawyer dream”, more labyrinths but not single outcome
On
February 27 an important hearing took place in which the Court of Appeals used
it to take oral arguments from the different parties after the period to submit
briefings. The hearing was long and
tense, full of legal argumentation and reasoning (“no chance to have your mind
not lucid enough”). The consensus was that the plaintiffs came up with a better
outcome. Being present, my opinion about it was not necessarily that one as I
had some doubts about the two issues discussed - the ratable payment formula
and the extent of the injunctions.
The Third Court of Appeals´ Order (March 1): “Hold on, we want to know more, or ... since we already know how our future ruling will look like, we will sort of ambush you.”
Two
days day after the hearing, the tribunal issued a court order requesting
Argentina to file a presentation with a specific payment proposal. The order
had its cause in a dialogue that took place in the hearing between the judges
of the panel and Argentine counsel regarding the particular terms of an
eventual payment proposal mentioned in the hearing by said lawyer.
The Argentina Filing: payment proposal
In response to the court order, Argentina filed its
payment offer on March 29.
Terms based on the 2010 Restructuring
The payment proposal was based on the 2010 restructuring
as it included the same two bonds issued in said transaction – pars and discounts.
Par Option: Under the Par Option, plaintiffs would receive
Par bonds (“Pars”)
due in 2038 in a nominal face amount equal to their
Eligible Claim.[9] The Pars pay interest at a
rate that rises from 2.5% to 5.25% per annum over the life of the bonds. In
addition, plaintiffs would receive an immediate cash payment constituting past
due interest (“PDI”) on the Pars for the period of December 31, 2003 to a
current term as of the implementation of the Order (the same period for which
the Republic compensated in its 2010 restructuring). Finally, plaintiffs would
receive GDP Units in an amount equivalent to the notional amount of their
Eligible Claim. The GDP Units will provide additional annual payments to
plaintiffs going forward (until either 2035 or a specified payment cap
(“Payment Cap”) is reached, whichever comes first) whenever Argentina’s Gross
Domestic Product (“GDP”) growth exceeds certain predetermined levels (approximately
3% per year). The Par Option is designed for individual, retail plaintiff bondholders,
as they are limited to $50,000 per series of bonds.
Discount Option: Under the Discount Option, plaintiffs would
receive Discount
bonds (“Discounts”) due in 2033 that would be
discounted relative to the Eligible Claim, but accrue interest at a
considerably higher rate than the Pars – 8.28% per annum – and increase in principal
amount over time. Part of the interest would be capitalized starting from the
original issue date of December 31, 2003 until December 31, 2013 when the
Discounts begin to pay interest in cash in full. In addition, plaintiffs would
receive PDI in the form of bonds due in 2017 (“Global 17s”) that pay interest
at a rate of 8.75% per annum. Finally, plaintiffs would also receive GDP Units
in an amount equivalent to the notional amount of their Eligible Claim and any
associated payments until either 2035 or the Payment Cap is reached, whichever
comes first. Discounts are not limited, and plaintiffs can opt for the Discount
Option for the full amount of their Eligible Claim.
Regarding interest that would have accrued and been payable on the pars
or discounts
from December 31, 2003 to approximately the date of issue to plaintiffs,
under the par options it would be received up front in a single cash payment,
while participants in the discount option would receive it in the form of
Global 17s.
Argentina also proposes GDP Units that expire either in 2035 or when a
payment cap (as included in the offer) is reached, whichever comes first.
Equal Treatment Argument
The filing expressed that the proposal fulfills the court’s dual
objectives to satisfy the pari passu clause: non-discrimination in payment
priority and equal treatment among bondholders.
The proposal also indicated that it is a voluntary option as plaintiffs
can choose between being paid “equally” on the same terms as the exchange
bondholders, or obtaining, and seeking to execute on, judgments for the full
amount of their claim. But, according to Argentina, plaintiffs cannot use the
pari passu clause – a provision plaintiffs claim protects against creditor
discrimination – to compel payment on terms better than those received
by the exchange bondholders.
Arguments
This Proposal would provide plaintiffs with significant compensation,
and –
unlike the “100 cents on the dollar immediately” formula adopted by the
court below – is
consistent with the pari passu clause, longstanding principles of
equity, and the Republic’s
capacity to pay. Argentine used the following arguments as well:
First, the Proposal will have
the immediate effect of putting either cash or easily monetized debt
instruments in the hands of plaintiffs.
Second, in contrast to the
formula adopted below, the Republic’s Proposal is consistent with the
Republic's ability to pay.
Third, the Proposal’s terms are
supported by the pari passu clause in the Republic’s bond documentation. That
provision states that the relevant securities “shall at all times rank pari
passu . . . among themselves” and that the “payment obligations . . . shall
at all times rank at least equally” with other unsecured and unsubordinated
External Indebtedness of the Republic. FAA 1(c) (A-157). The Court held that
this language does not even require “ratable payment,” October 26 Decision at 1
(SPE-268), let alone payment in full. Under the October 26 Decision’s discrimination
finding, plaintiffs have a right under the pari passu clause to be treated
commensurately with performing debt, not better their contractual right to full
payment is not under the pari passu clause, but the payment and acceleration
clauses.
Fourth, longstanding equitable
principles command that where a remedy is not set forth in the contract being
enforced, all debt holders be treated equally.
Implementation
Argentina states that, “if the Court
agrees with this Proposal, the Executive Power commits to take all steps
necessary to implement the Proposal, including submitting to Congress a bill
that gives the Executive the ability and powers necessary to implement it.
Legislators from both chambers of Congress, and members of both the governing
party and the opposition, have publicly stated that they are willing to
collaborate with the Executive in bringing a definitive solution to Argentina’s
defaulted debt. The Executive therefore expects that the necessary legislation
will be promptly enacted.”
I think
that the Argentine proposal is consistent with the existing limitations arising
from the 2005/2010 indenture trust agreement (the so called Most Favoured
Creditor and Rights Upon Future Offers clauses that we will see next in this
report). The court of appeals is or should be aware of those limitations. That's
why one might hope the Court Order dated March 1 was not some kind of 'judicial
ambush' - requiring something that they knew Argentina is prevented from
offering (full payment of the principal plus accrued interest). If the judges
from this panel have in mind the 'Griesa payment formula' and still asked
Argentina a proposal taking into account that Argentine counsel´s proposal
during the hearing was very clear about what Argentina is allowed to offer, it
would not speak well of how the panel managed itself in this aspect.
The Four Court Order: “No en banc, it is just us”
On
March 27, just two days before the deadline for Argentina to file its payment
proposal, the panel rejected the en banc appeal that Argentina had presented on
November 13 against the Court of Appeals´ October 26.
The Fifth Court Order: Or the non-sense petition - “We
know what you will respond, but want to give you the chance to change your
mind... and reduce your claims! (What?)”
On April 1, the Court of Appeals issued an additional order asking the
Pliantiffs-Appelants to respond the judicial presentation filed by Argentina.
The order said: “It is hereby ORDERED that Plaintiffs-Appellees shall file a
response to the payment proposal submitted by the Republic of Argentina on
March 29, 2013 by April 22, 2013.”
In order to put this order in context, we need to
track its origin, which is the last paragraph of the previous order from the
Court of Appeals dated April 1. Such paragraph said: “Should a response be sought from any other
party to Argentina’s submission, a further order will issue from the court.”
B) First need: do you really understand the pari passu
discussion? A need to fully understand it. Of course, if you do, please skip
it.
The text of the pari passu clause under the Defaulted Bonds
was written during the 1990s and reflects the trend of the international
capital markets at the time. It reads as follows:
The Securities [ie, the bonds] will constitute ... direct,
unconditional, unsecured and unsubordinated obligations of the Republic and
shall at all times rank pari passu and without any preference among themselves.
The payment obligations of the Republic under the Securities shall at
all times rank at least equally with all its other present and future unsecured
and unsubordinated external indebtedness (as defined in this Agreement).
A significant judicial
and academic debate is ongoing about the meaning of the term pari passu. First of all, pari passu is a Latin phrase that
simply means ‘equally’ (or ‘share and share alike’) – but in the context of
contracts leaves much open to interpretation. Of course the issue arises only
when there are problems with the payment of the bonds and creditors decide to
query the clause before the courts. Outwith defaults, in practice the markets
had not paid much attention to the content of the clause, considering it as yet
another miscellaneous clause in the ‘back side’ of the bond terms and
conditions (even though it is neither miscellaneous nor in the back side). That
is, of course until the ‘bomb’ exploded first in a case involving Peru in 2000
and now in the very influential case affecting Argentina.
The initial and main
problem with the clause is that it is not self-explanatory so needs to be
interpreted in order to be applied. Usually for the sake of a common
understanding of clauses by the parties to a contract, lawyers include
definitions of every important term of the contract in order to minimize future
uncertainties and provide a level of certainty to the agreements that finance
and business requires. The pari passu
clause is not self-explanatory and therefore is open to interpretation,
pointing to the need for it to be rewritten to give certainty to the markets in
future bond placements. But no change has yet been made yet.
Two main
interpretations of the clause prevail, one more orthodox, the other more
unconventional.
According to the
orthodox interpretation, considered by legal experts to be the leading
interpretation, pari passu means that
two debts issued without legal subordination between them may not be
subordinated by the debtor by enacting legal resolutions (mainly from the
national congress) that have that effect. This is usually known as the ‘narrow’
interpretation, whereby an issuer would be prevented from passing legislation with
the effect of subordinating one debt over another debt, both ranking equally at
the time they were issued. This theory states that the ‘correct’ interpretation
of the pari passu clause in sovereign
debt is that it is limited to the legal subordination of debt. This interpretation prevails
even though it there is no favourable, definitive jurisprudence or unanimous
and vast academic opinions to support it.
An alternate theory is that the purpose of the clause is to oblige the debtor to treat unsubordinated debt the same way, including, as the main feature of such equal treatment, an obligation ‘to pay’ the debt similarly, proportionally or concurrently. According to this theory – defended by some scholars and courts but historically the minority position – subordination also includes the actual practice of debt management of a debtor, which could include the making of selective payments of the same type of unsubordinated debt. In other words, this interpretation might in practice prevent that kind of selective payment and debt management – that is to say, if a debtor has two debts outstanding of the same legal character (unsubordinated) it may not pay one and not pay the other. Such a sovereign debtor must pay them both in total or proportionally if the money available for payment is not enough to pay them, or default against both totally.
The main source of the
second interpretation was an affidavit from Professor Andreas F Lowenfeld (a
law professor at New York University School of Law) which was filed in 2000 in
the Elliot case against Peru.
Lowenfeld´s opinion was as follows:
“I have no difficulty in understanding what the pari passu clause means: it means what it says -- a given debt will rank equally
with other debt of the borrower, whether that borrower is an individual, a
company, or a sovereign state. A borrower from Tom, Dick, and Harry can’t say
“I will pay Tom and Dick in full, and if there is anything left over I’ll pay
Harry.” If there is not enough money to go around, the borrower faced with a pari
passu provision must pay all three of
them on the same basis. Suppose, for example, the total debt is $50,000 and the
borrower has only $30,000 available. Tom lent $20,000 and Dick and Harry lent
$15,000 each. The borrower must pay three-fifths of the amount owed to each one
– i.e. , $12,000 to Tom, and $9,000 each
to Dick and Harry. Of course the remaining sums would remain as obligations of
the borrower. But if the borrower proposed to pay Tom $20,000 in full
satisfaction, Dick $10,000 and Harry nothing, a court could and should issue an
injunction at the behest of Harry. The injunction would run in the first
instance against the borrower, but I believe (putting jurisdictional
considerations aside) to Tom and Dick as well.”
Of course, the main
differences between the two theories is that under the narrower interpretation
(equal legal obligation), a sovereign debtor would only breach it if it passes
legislation with the effect of subordinating one debt under another one (which
in practice and until the Argentine case had never occurred in the modern era
of sovereign debt markets). In the case of Argentina, the so called Lock Law
prompted the violation of the clause, under the narrow interpretation (equal
legal obligation).
On the contrary, under
the broad one (equal payment obligation), one sovereign could not default (stop
paying) on one given debt and continue paying other debts (if it did the courts
would eventually attach the flows of payments directed to the debt being paid
to pay the defaulted debt, which is precisely what is being judicially
discussed in the Argentine debt.) This
practice of selective payments is more common in the modern restructurings and
in future may continue happen.
We believe that the
markets should adopt one theory (it is very likely that it would be the narrow
one) and specify in very detailed and specific language how the clause would
operate. Otherwise, the courts will be open to interpret the clause and may
come to different conclusions until a case is decided by the United States
Supreme Court or similar tribunal in the main international markets of
sovereign debt bonds.
Now, as part of the
2005 and 2010 exchanges, Argentina did change the pari passu clause of the Exchange Bonds (compared to the content of
the clause of the Defaulted Bonds). The change was intended to delete a
paragraph referring to the ratable payment or equal payment obligation,
ultimately with a view to reduce the risk posed by the case of Elliot v Peru in
2000 (replicated in the current case against Argentina). The change, however,
did not define the term pari passu
itself or how the clause was to be applied, so fell short of accomplishing the ultimate
goal of achieving clarity.
The Defaulted Bonds
included these two paragraphs. The first paragraph can be interpreted to be
referring to an equal legal obligation (narrow interpretation); the second to
equal payment obligation (broad interpretation):
The Securities [ie, the bonds] will constitute ... direct, unconditional,
unsecured and unsubordinated obligations of the Republic and shall at all times
rank pari passu and without any preference among themselves …
The payment obligations of the Republic under the Securities shall at
all times rank at least qually with all its other present and future unsecured
and unsubordinated External Indebtedness (as defined in this Agreement).
But the
Exchange Bonds did not include the words ‘payment obligations.’ Instead the
clause was drafted as follows:
The Securities will constitute the direct, unconditional, unsecured and
unsubordinated obligations of the Republic. Each Series will rank pari passu with each other Series, without any preference one over the other by
reason of priority of date of issue or currency of payment or otherwise, and at
least equally with all other present and future unsecured and unsubordinated
External Indebtedness of the Republic.
C) Second need: sorry but I don’t think you know how the
existing Argentine indenture limitations (Most Favoured Creditor and Rights
Upon Future Offers) work. If I am wrong don’t read these paragraphs, sorry
again.
The terms and conditions of the Exchange Bonds
obliged Argentina not to offer the holders of Defaulted Bonds payment terms
better than those offered to the holders of Exchange Bonds.
This clause was denominated ‘Most Favored Creditor’
and was written as follows:
Argentina
reserves the right, in its absolute discretion, to:
·
purchase,
·
exchange,
·
offer
to purchase or exchange, or
·
enter
into a settlement
in respect of any Eligible Securities (bonds subject to the change) that are
not exchanged pursuant to the Offer (in accordance with their respective terms)
and, to the extent permitted by applicable law, purchase or offer to purchase
Eligible Securities in the open market, in privately negotiated transactions or
otherwise.
Any
such purchase, exchange, offer to purchase or exchange or settlement will be made in
accordance with applicable law. The terms of any such purchases, exchanges,
offers or settlements could differ from the terms of the exchange offer.
Holders
of New Securities will be entitled to participate in any voluntary
purchase, exchange,
offer to purchase or exchange extended to or agreed with holders of Eligible
Securities not exchanged pursuant to the Offer as described below
... .
The clause deliberately
left out the word ‘settlement’ in the final sentence of the
paragraph. Interestingly this word was included in a prior draft of the
prospectus, so it must have been deleted from the clause in the final version
for some reason – possibly to exclude its application to privately or
judicially negotiated agreements (especially given the already considerable
amount of litigation and arbitration involving Argentina since its default in
2001).
Given this vacuum in
the terms and conditions and because there were some discussions in the
international markets about the extension and effectiveness and therefore the
real legal value of the clause in this respect, the markets showed a reluctance
to participate in the offer and as a reaction Argentina passed Law 26,017 (known
as the “Lock Law”) during the days of the 2005 exchange offer. According to the
decisions of the New York courts seven years later, this law set out the path
to the breach of the pari passu
clause.
The main sections of
the Lock Law stated the following:
·
Section 2 — The National Executive
Power may not, with respect to the bonds (to be issued in the 2005 exchange
offer) … reopen the exchange process established in the [2005 exchange offer].
·
Section 3 — The National State shall
be prohibited from conducting any type of in-court, out-of-court or private
settlement with respect to the [2005 Exchange] bonds ... .
·
Section 4 — The National Executive
Power must … remove the bonds … from listing on all domestic and foreign
securities markets and exchanges.
The Most Favored
Creditor clause contained in the trust indenture is accompanied by a related
clause with the name of Rights Upon Future Offers which states the following:
“Under the terms of the Pars, Discounts and
Quasi-pars, if following the expiration of the Offer until December 31, 2014, Argentina
voluntarily makes an offer to purchase or exchange or solicits consents to
amend any Eligible Securities not tendered or accepted pursuant to the Offer,
Argentina has agreed that it will take all steps necessary so that each holder
of Pars, Discounts or Quasipars will have the right, for a period of at least
30 calendar days following the announcement of such offer, to exchange any of
such holder’s Pars, Discounts or Quasi-pars for the consideration in cash or in
kind received in connection with such purchase or exchange offer or securities
having terms substantially the same as those resulting from such amendment
process, in each case in accordance with the terms and conditions of such
purchases, exchange offer or amendment process.”
Summing up the
clauses:
1)
Exchange bondholders will be entitled to
participate, until December 31, 2014, in any voluntary purchase, exchange, offer to purchase or
exchange extended to or agreed with hold-outs. Of course, after that date
Argentina may carry on voluntary offers with better terms to the hold-outs,
without being obliged to extend those better terms to the exchange bondholders.
2)
But
exchange bondholders will not be entitled to (i) compensation (proceeds, bonds
and/or any other benefits) arising from settlements that may be entered between
Argentina and hold-outs if the Lock Law is suspended or derogated, and (ii)
payments from Argentina in order to comply with definitive and firm judicial
rulings issued from competent tribunals, including without limitations, the New
York courts.
D) The Upcoming Judicial Decisions – Long/short
continuum of possibilities
First Pending Resolution: Determination of “Ratable Payment” (“Sorry, of what?”)
First Pending Resolution: Determination of “Ratable Payment” (“Sorry, of what?”)
1)
Griesa
Formula: 100% cash in one instalment (“todo
junto y ahora”)
If the
Panel has the 'Griesa Formula' in their minds, then they will reaffirm a
ratable payment based on a payment of 100 per cent. It is not decided yet whether
it would be in just instalment, which could too severe, or proportionally over
time. This eventual ruling would be based on the fact that the plaintiffs´
Defaulted Bonds have been accelerated and therefore the basis of the claim are
the original bonds, which would include the principal plus accrued interest
until the eventual payment date, and therefore the actual amounts due and
payable are those, compared with the amounts due and payable under the Exchange
Bonds, which are the principal and interest payments in accordance with the
payment scheduled of those bonds. This ruling would be based on the fact that
the two kind of debts (Defaulted Bonds and Exchange Bonds) are of different
nature, and thus they are entitled to receive different flows of payments.
2)
Second Example of the Court of
Appeals´ Ruling: 100% cash but proportionally (“all, but with time”)
Under
this option, the Panel would rule that Argentina is still required to pay the
complete amount of the claim (principal plus accrued interest), but not in one
unique instalment but concurrently with the payment of the Exchange Bonds,
which means throughout the life of those bonds, which would be a combination of
the payment schedule of the globals, pars and discounts. The basis of this
ruling would be that even though the plaintiff debt has been accelerated, there
would be no legal grounds to make them payable in one instalment but, under the
equal payment pari passu interpretation, fractionally with the payment of the
exchange debt.
3)
“Pari Passu on Account”
(“collect like the exchange bondholders, and find other assets to attach for
the rest of the claim”)
This term
“Pari Passu on Account” means that the ruling about would recognize the
complete amount of the claim (principal plus accrued interest), but under the
application of the pari passu and ratable payment formula would only determine
that the amounts that Argentina would need to pay the plaintiffs, when
Argentina pays the exchange debt, would be based on the fraction of the latter
payments. According to this eventual decision, the amounts unpaid would not be
derogated but continue to be outstanding and payable, and it would be a matter
of the plaintiffs trying to accomplish attachments on different assets.
4)
Pari Passu: Cram-down
(“absolutely confusing”)
Another
possible judicial outcome would be that the Panel reinterprets its
understanding of the pari passu clause, which is not this instance to
eventually doing so, and rules that under the application of the pari passu
clause (in its “equal payment obligation” aspect”), the holdouts would not be
entitled to receive more money than the exchange bondholders, and therefore the
total claim of the holdouts (100% of principal plus accrued interest) would be
reduced to the same percentage that is due to the exchange holders.
5)
Equity: Cram-down (“collection
action clauses, retroactively)
Under
this eventual outcome, the Panel would rule the same way than in prior point 4
above but under different legal grounds. Instead of eventually using the
application of the pari passu clause to reach such an outcome, it would use
elements of equity, as asked by Argentina.
6)
Equity/ Asking of Evidence to
determine Argentina´s Payment Capacity: Forcing the parties to negotiate with a
“fall-back” decision from the Court (“show me your money, and then we´ll see”)
Eventually,
the Panel could consider that in order to determine the appropriate ratable
payment it must carry on a previous analysis, which would be the determination
of the actual payment capacity of Argentina given the amount of the plaintiffs´
claims and the potential other lawsuits from the so called “me toos” (the rest of holdouts). If this is the case, the ruling
would require such prior determination, and based on that, the Panel would then
define the amounts to be paid given such payment capacity.
Second Pending Resolution: Extent and Application of
the Injunctions (“the world is not enough?”)
Of
course the second aspect that the Court of Appeals must determine is the extent
and application of the injunctions to third parties, particularly Bank of New
York and DTC.
1)
“Effective Ruling”: Attachment
of payments (“bomb explosion”)
The
Court of Appeals may confirm Judge Griesa´s ruling dated November 22, 2012 and
enjoy “the world” as it was described by the markets. In this case, the ruling
would become effective and enforceable against any payment flows that the Bank
of New York would receive from Argentina.
2)
“Abstract Ruling”: Lifting of
the attachment of payments (“last second, movie-like, deactivation of the
bomb”)
In this
case, the Court of Appeal would not enjoy BNY on the basis that it would
respect the existence of the trust agreement entered into between Argentina and
said institution in 2005. A decision like this one would mean that the eventual
ruling requiring it to pay 100 per cent (in either way – Griesa´s Formula or
concurrently throughout the life of the Exchange Bonds) would become
'abstract', which is without execution powers.
Coming Up:
What´s next I: Options under the different
judicial outcomes
What´s next II: Another en banc appeal?
What´s next III: Appeal to the U.S. Supreme
Court: Legal Procedures, Likelihood of Certiorari, Conditions and Possible
Outcomes
What´s next IV: Why a new exchange is possible
and is the best option for the holdouts, and how to do it
CONTACT INFORMATION:
Eugenio A Bruno
Garrido Law Firm
Tel 00
54 11 4 850 4000
