Argentina ruling to hamper sovereign restructuring plans

Author: | Published: 13 Nov 2012
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Governments could have a tougher time agreeing restructuring plans with creditors following a landmark US court ruling on Argentina’s sovereign debt default of 2001.

The October 26 Court of Appeal ruling in NML Capital v The Republic of Argentina affirmed and remanded an injunction issued by a US district court against Argentina for not paying holdout creditors.

Argentina had issued exchange notes valued between 25 cents and 29 cents on the dollar to the 91% of creditors who agreed to restructuring plans in 2005 and 2010. Its government has made all scheduled payments to exchange noteholders, but has paid nothing to bondholders that opposed the restructuring plans.

The decision will likely make it more difficult for sovereigns to agree to restructuring plans with creditors, because it incentivises holding out, according to Jay Westbrook, a bankruptcy law professor at The University of Texas School of Law.

An amicus brief, filed by the US Justice Department in support of Argentina, argued that a ruling in favour of holdout creditors would effectively enable a single creditor to thwart the implementation of an internationally supported restructuring plan.

The circuit court rejected this notion. In support, it cited the overwhelming majority of bonds issued under New York law with collective action clauses, which legally bind holdouts to restructuring plans agreed to by a supermajority of creditors.

Westbrook, however, said he is not sure this will be the case.

"The court has changed the leverage between the bondholders and the sovereign in a very dramatic way, and that may make it much less likely that bondholders will accept exchange offers in the future," he said.

The decision hinged on an interpretation of the bond agreement’s pari passu clause. This clause, according to the October 26 ruling, says the securities will constitute direct, unconditional, unsecured and unsubordinated obligations of the Republic and shall at all times rank pari passu without any preference among themselves.

Buenos Aires-based Baker & McKenzie partner Gabriel Gómez Giglio said the clause does not necessarily imply equal treatment. "To me, the pari passu clause is not a sharing clause...It doesn’t mean equal collection of credits."

Rather, he said, it means credit cannot be subordinated.

More to come

Intermediary banks, like the Bank of New York Mellon, could be in a difficult position on December 2 when Argentina might make payments to exchange holders and not holdout creditors in defiance of the appellate court’s decision. The district court is now considering whether intermediary banks would be in violation of the injunction as indirect facilitators.

Gómez Giglio said the Argentine government might be considering the idea of making payments to exchange holders through intermediaries in other jurisdictions, which would not necessarily follow the US court’s injunction.

"The issue of whether such change of agent of payment would imply a breach of the new bond terms and conditions remains open," he said.

Investors, particularly distressed investors, will be watching closely for Argentina’s next move. The government has been public about its opposition to the US courts’ decision, and payment to holdout creditors is thought a highly political as well as an economic issue in Argentina. Appeal to the US Supreme Court is expected.

See also:

'Imminent Argentina debt default?’

'Bilateral investment treaties for foreigners holding Greek debt’

'What a US court decision means for sovereign immunity’