A. The Most Famous
Case in the History of Sovereign Litigation: NML v The Republica of
Argentina
B. The Most Recent
NML Brief and How it May Force Argentina to Default
Sovereign Debt Litigation: Decoding NML Final
arguments against the Republic of Argentina and why litigating so hard
may be counter-effective to plaintiffs´ goals when the defaulting debt is
large
Eugenio A Bruno
Director TIG Americas
Partner - Garrido Law Firm
April 23, 2013
A.
The Most Famous Case in the History of
Sovereign Litigation: NML v The Republica of Argentina
NML v Argentina is a case that takes place before the New York
federal courts and as such it is a long-lasting and very demanding and
stressful legal battle for the Argentine population, economy and
financial as well as to the plaintiffs. As its effects may have certain
significant effects to the sovereign debt markets (less than originally
expected to me however) the case is also closely followed by scholars, emerging
market investors, finance government officials from other countries,
multinational financial institutions, among others.
Under the case, NML, four other investment funds and 13 individual
investors have obtained three favorable cases, two from a district court
and one from a circuit court. The former rulings were issued by judge
Thomas Griesa and the latter by a panel of three judges from the Court of
Appeals.
There are two main legal discussions that are happening under the
case, both of which are novel - the meaning and extent of the pari passu clause and, as a way to
enforce judgments against Argentina (which as a sovereign debtor receives
the benefits from the protection of the U.S. Foreign Immunity Sovereign
Act that, in practice, means that a sovereign bond plaintiff may obtain
favorable rulings against a country but never be able to collect on those
judgments and therefore be at the mercy of the debtor), the attachment of
flows of payments directed from Argentina as issuer to the holders of
Argentina debt bonds that is being paid by the country. Those payments
are transferred through the Bank of New York.
A significant discussion under the case is whether the Bank of New
York is trustee for the exchange bondholders, agent for the Republic of Argentina
or both. The eventual decision about the nature of the Bank of New York
will have an important effect on the outcome of the management of the
debt situation by Argentina because if it is decided that said
institution is effectively enjoined by the court´s decisions, Argentina
would be prevented from continuing paying the exchange bondholders and therefore
a risk of a new default would eventually increase unless Argentina
decides to pay the court ruling (very unlikely from political and finance
reasons) or it carries on an arrangement with the exchange bondholders to
change the place of payment (from New York, the current place of payment,
to a given country in Europe or even Argentina as some reports have
indicated),
but which is very difficult for legal reasons.
The three rulings in favor of the plaintiffs refer to the pari
passu discussion.
But only two of them refer also to the attachment of the payment to the
exchange bondholders and both are from the court of appeals, which means
that the circuit court has not issued an opinion about it yet.
What is very remarkable about the case is the determination from
both parties to stick to its stances and arguments, which raise the
stakes under play, presents continuous drama to the different particular
legal developments under the case (including to the simplest ones) and
defer to the courts the resolution of this dispute, as opposed to
negotiating a potential settlement. Deferring all to the courts, which of
course is in several occasions the purpose of lawsuits, may be dangerous,
in these highly complicated sovereign debt cases because a negative
outcome to Argentina, for example, may force the country to incur in a
new default. But this eventual consequence of a negative judicial outcome
against Argentina must also be analyzed from the eventual consequences to
NML and the other plaintiffs under this case. It is my impression that the
plaintiffs would be also facing a dire situation based on the potential
fact that they will not receive the money from their eventual positive judgments
as Argentina has indicated that it will not pay them.
It may thus be a lose-lose situation, even more under a potential chaos given
by the default, unless something is worked out between Argentina and NML
(which Argentina is refusing to a great extent)
or the U.S. Supreme Court accepts an appeal right away, which I think
will happen and therefore the legal battle would continue for additional
months. However, at the end of the day if Argentina ends up losing all
appeals and is force to pay and it does not as its principal officers and
counsel have indicated several times, NML and the other plaintiffs in
this case will not collect on the judgments. We will expand the reasons
of this understanding hereby.
B.
The Most Recent NML Brief and How it May
Force Argentina to Default
The brief filed by NML and the rest of plaintiffs on April 19,
2013
is a sign of the utmost determination shown so far by the hold-out
creditors against Argentina before courts as such brief is the last
filing by them prior to the upcoming judgment from the U.S. Court of
Appeals of the Second Circuit of New York, and includes important legal
points relevant not only to this particular lawsuit but also to certain
areas of sovereign debt litigation which have a high degree of
uncertainty. Those legal points are discussed hereby, along with comments
from me related to each point. This way, each argument used by NML is
copied and analyzed from this author.
1) Argentina's defaulting stance and complete lack of respect to
principles of rule of law, and U.S. laws and courts
This is the first argument of NML. It reads:
"With its latest submission in this Court, the Republic of
Argentina continues its long and consistent pattern of defaulting on its
contractual obligations, defying the laws of the United States (which its
contracts expressly invoked), and showing contempt for the courts to
whose jurisdiction it unreservedly submitted. The government of Argentina
plainly believes the rule of law does not apply to it."
These arguments have been used several times and respond to the
finance terms of the Argentine proposal, filed on March 29, 2013,
which offered payments with large discounts compared to the moneys
recognized to NML by the court judgments both from the district and
circuit courts. Of course, now NML is using words that have more
emotional tone perhaps, addressed probably more to the “hearts” of the
three judges of the panel of the appeal court than to their minds (of
course these arguments have deep legal reasoning behind them and also aim
to the minds of the judges).
2) Unilateral and coercive restructurings
"Argentina undertook a 'unilateral and coercive approach to
[its] debt restructuring, rejecting practices that have allowed other
'[sovereign bond restructurings' to be “resolved quickly, without severe
creditor coordination problems, and involving little litigation.”
I think there are three comments to make. First, I don´t agree
that the restructurings were unilateral and coercive as there were
consensual and voluntary agreements with more than 92% of the holders of Argentine
debt in default. The defaults of sovereign debt and moreover a continued
lack of payment and prolonged debt restructurings based for example in a
denial to resolve the default for three years, as it was the case of
Argentina, present very difficult options for the holders of said debt.
Those difficult options are based on very weak contract rights under all
sovereign bonds to sue and collect on the eventual favorable judgments
they may obtain because sovereigns' assets are protected by the FISA and
therefore attaching sovereigns' assets has proved to be a mission
"almost" mission. The cases against Argentina is a clear evidence
given that after ten years no
plaintiff has been able to collect on the more than 500 existing
judgments.
This aspect, coupled with a lack of willingness to pay during
three years (from 2002 to 2005, and thereafter up and until 2010 when
Argentina launched the second restructuring) and a lack of capacity to
pay argued by the Argentine's government, balances the bargaining power
towards Argentina as debtor of the defaulting bonds against its
creditors. Therefore, without effective collecting weapons, the options
of the holders of Argentine defaulting bonds against Argentina to force
it to pay and/or restructure vanishes. But several times this is how a
sovereign default may unfold and therefore the holders of the defaulting
bonds, confronted with exchange offers from Argentina (such as the ones
in 2005 and 2010), must make a business decision about whether or not
they would participate in the swaps. But I don´t think that the
acceptance of the restructurings by 92 per cent may be considered
coercive as they still had the option of rejecting them and continue
litigating. This is at the end of the day a business decision. The fact
that almost eight per cent rejected the swaps is an indication that some
of the holders decided not to accept them. By the same token, the
restructurings were not unilateral as they were not imposed by the
government of Argentina by changing through an unilateral act (i.e. without the approval of the
exchange bondholders), the terms and conditions of the defaulting bonds.
Through a unilateral restructuring, strictus
sensu, the debtor either changes the terms and conditions of the
bonds or eliminate them and issue new ones, without any acceptance from
the counterparties, in this case the bondholders. This is absolutely illegal,
but Argentina just did not do it.
Another way to see it is an analysis of the term 'unilateral' from
a negotiating standpoint. Usually a sovereign in default may approach its
defaulting problem through two manners: (a) negotiating with its
defaulting creditors (who act represented by steering committees for
example) the terms and conditions of the new payment scheme or, (b) alternatively,
designing a payment proposal unilaterally and with mere consultations
with the defaulting bondholders. Both ways are legal, and the grounds for
the effectiveness of either manner consist of a combination of political,
economic, financial, strategic and legal reasons. In any event, it is up
for the sovereign what decision to make in this respect. In the former
case, the proposal would be "negotiated and bilateral", while
in the former the proposal would be "not negotiated and unilateral".
But from this standpoint, there is nothing illegal about which road the
sovereign may elect to take. It would be a business decision from the
sovereign, and the ultimate analysis would be the outcome of the offer
and the eventual litigation associated with it.
I agree, though, that the practices used by Argentina have not
helped to resolve the default quickly, but that was the explicit aim of
the Argentine government back in 2005 due to its unwillingness to pay and
its own alleged lack of payment capacity. Argentina, for political and
economic reasons, decided not to resolve the default quickly.
Again there is nothing legal or illegal about it, it is just that
you need to deal with consequences, whatever they might be, and in the
sovereign debt litigation and restructurings those are not clear and
uniform.
I also agree that due to the Argentine stance of (a) rejecting a
bilateral negotiation with a steering committee and other bondholders, (b)
deferring the solution of the default, (c) and more importantly, because
of the significant initial losses of its restructuring proposal (when it
was formally made almost three years after the default), there was large
litigation, which, of course is taking several years and probably will
take many more down the road. These are some of the consequences we
mentioned as the business decisions that the sovereigns may take.
In this sense, the Argentine restructuring debt situation is
unique as the amount of the current defaulted bonds (summing up principal
and interest) exceeds USD 20 billion. And here probably lies a big
problem for the plaintiffs, because said amount appears impossible to be
paid by Argentina, even in the hypothetical case the government would
have “willingness to pay.” For example, if one compares the amount of the
debt in default of Argentina, with the defaulting debts of all other
countries that have defaulted on their external bonds, there is a
difference of "several ceros" (the average of the previous
holdout debts, excluding Greece, is around USD 200 million).
This means that NML and the other plaintiffs may have put themselves in a
legal tramp, which is eventually obtaining favorable rulings, but unenforceable
even if they win the discussion about the injunctions over the Bank of
New York.
The consequence could be a lack of collection but with a potential new
default (depending upon the appeal to the U.S. Supreme Court) that would
prevent everybody from receiving their payments (exchange bondholders and
judgment creditors). It is a gamble to force Argentina to pay their
judgments (but ignoring that the "me toos"
would also sue under the same legal grounds so an actual payment of the
NML ruling may not isolated from the other potential claims) instead of
defaulting altogether if Argentina losses on all grounds. Argentina
should issue a new exchange and then eventually reach an agreement with
the remaining holdouts, which would be few if Argentina obtains favorable
rulings regarding the injunctions on the Bank of New York.
3) Pari Passu: Equal
Rank Obligation and Equal Payment Obligation
"In keeping with that approach, Argentina refused to comply
with its explicit commitment to treat its “payment obligations” on the
bonds held by Appellees “at least equally with . . . its other . . .
unsubordinated External Indebtedness".
I agree that the Lock Law
violated the traditional interpretation of pari passu (equal rank obligation). But the Court of Appeals
went on by taking a new interpretation (equal payment obligation), of
which there is a legitimate legal dispute. In this respect I am not sure
about the legality of novel interpretation of the equal payment
obligation. Continued litigation for sure on this topic.
4) Capacity to Pay
"The district court found as fact that Argentina had ample
resources to pay
Appellees, as well as the Exchange Bondholders, and that the
balance of the equities overwhelmingly supported the remedy
ordered."
I don´t think this has been resolved that way definitively.
Besides, even though we are talking about USD 1.47 billion (as the amount
of the claim as of March 31, 2013 according to NML), which by itself is a
huge enough, there exists the "me toos", who were already
mentioned, that increases the debt in default to more than USD 20 billion
(principal plus accrued interest). Out of this amount, 2/3 is subject to
New York law, while the rest is subject to European and Japanese laws.
But there is a claim filed by more than 50.000 individual Italian
bondholders (for more than 1.5 billion) before the arbitral tribunal of
the World Bank (ICSID), whose representatives have indicated that they
will enforce the lauds in the New York courts. Thus, almost 90 per cent
of the defaulting debt will be subject to the jurisdiction of the New
York courts.
This increases the likelihood of a "rush to the courts"
from a significant number of "me toos" if NML is paid, which
puts in danger the finances of Argentina, as it has less than 40 billion
in reserves at the Central Bank.
The NML brief refers to this point but with an interesting degree
of ambiguity, trying, probably that this topic does not turn into
something relevant. They mentioned that the eventual claims from other
hold outs are a matter of different cases and whose outcomes may refer to
the NML decision. If NML refers to cases in New York they are exactly
similar to its case.
5) Right to reject the large "haircuts"
"The Court further held that Appellees “were completely
within their rights to reject the 25-cents-on-the-dollar exchange offers”
that Argentina had made in 2005 and 2010."
I think we need to discuss three points relating to this
paragraph. First I agree that under New York law a voluntary exchange
(restructuring swap) as the two ones carried on by Argentina, the holders
that desire to holdout from them maintain such right, which may not be
impaired. Therefore a voluntary and bilateral restructuring may not be
converted into a "coercive and unilateral" one. Second,
this defense is of course a self-acceptance that the Argentine debt
exchanges were not coercive and unilateral. And third, that the real
"haircuts" suffered so far by the exchange bondholders are not
75 cents on the dollar as argued by the NML brief. The reason for this
allegation is that Argentina has paid, in addition to principal and
interest, significant amounts of money on account of the so called GDP
warrants, which are financial derivatives that give the bondholders the
right to receive additional amounts if Argentina grows more than 3.3 per
cent per annum. Since Argentina has effectively growth more than that
percentage during several years after 2005, the real losses are lower. In
fact, the losses may only be 15 per cent.
6) The new Argentine proposal contemplates losses of 85 per cent
"Argentina offers to eliminate those obligations in return
for new, deeply-discounted, potentially unenforceable, and unmarketable
paper, payable decades hence. Indeed, according to Argentina’s own math,
those new securities would be worth less than 15% of what Argentina owes
on the FAA Bonds.”
I think the explanation is correct because against a ruling of USD
1.47 billion (due to accrued interest since November 22, 2012), in cash
in one installment, Argentina offered the bonds mentioned by NML, and
therefore the proposal is below the judgment amounts.
Argentina, however, was never in position to make a payment proposal
with a value higher than what was offered in its proposal. The reason is
the application of a clause included in the terms and conditions of the
exchange bonds denominated "Most Favored Creditors.”.
Any offer with better terms to plaintiffs, would need to be offered to
the exchange bondholders. Who would pay that bill?
7) Contempt Threat
"Argentina’s response manifests yet again its contempt for
its obligations, the laws of the United States, and the orders of U.S.
courts....Argentina’s counsel declared that Argentina would not
“voluntarily obey” any order “other than” the one it proposed. This is
exactly how Argentina has dealt with creditors for the last decade:
unilaterally dictate pennies-on-the-dollar “exchange offers,” and
threaten to pay nothing if the offer is rejected. Argentina has now
treated the Court the same way; that is the very antithesis of “good
faith.”
Regarding this paragraph one should distinguish the substance from
the form. From a substance standpoint, Argentina has legal limitations to
offer holdouts better conditions than the 2005 and 2010 restructurings.
Additionally, Argentine counsel received political instructions not to
make a better proposal as well. On the contrary, if one looks at certain
forms used, perhaps certain words expressed by Argentina counsel in the
hearing that took place in February 27, 2013
probably were not necessary and the cause was the "heat" of the
moment. But the legal limitations do exist.
8) Is it the best strategy by NML?
The strategy probably will not get NML to where they want: get
paid, all and now. Why? Because Argentina does not have the financial
resources to deal with the 20b of claims. The average judicial claim
collected through courts against sovereigns (from Peru to Brazil, touching
Africa) is USD 200, several ceros lesser.
We still believe that the discussion of the ratable payment
will favor NML, but that there are legal uncertainties about the decision
on the injunctions and may not rule out that the Bank of New York is not enjoined
by them.
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