The legal struggle over
Argentinas payments to its bondholders will cast a long
shadow over the countrys relations with creditors, and
will shape the terms of future bond issuances in Argentina and
beyond, Argentine lawyers and other sources said.
The legal and fiscal mess was
ameliorated slightly, at least in the short term, by a U.S.
appeals courts surprise ruling Wednesday night to suspend a federal judges
injunction barring Argentina from paying bondholders unless it
also paid holdouts that had rejected a restructuring plan and
demanded all funds they are owed.
As a result of Wednesdays
ruling, Argentina will not have to put $1.3 billion in escrow
by December 15 to pay the holdouts, and arguments over payments
to holdouts will be heard again on February 27. But the
insistence, or some would say the intransigence, of holdouts
such as the Elliott Management hedge fund underscores why the
terms of this bond issuance were deeply flawed, and why debt
transactions in the future are likely to include certain
provisions while omitting others.
The Argentina case is very particular, said
Diego Serrano Redonnet, a partner at Perez Alati Grondona
Benites Arntsen & Martinez de Hoz in Buenos Aires. He noted
that sovereign bonds typically include collective action
clauses (CACs) providing that if a certain majority of
shareholders approves of a restructuring of payments, the
minority must abide by that decision.
Unfortunately, in the case of
Argentina, the bonds did not have this feature, and that is
what made this terribly complex, he stated. If
Argentina's sovereign offering were more along the lines of
Uruguays, for example, then Elliott Management and the
other holdout shareholders, representing about seven percent of
the total, would be subject to the majoritys decision
under the CAC, noted Redonnet.
I think the issue is broad and
may have an institutional impact that goes beyond
Argentina, Redonnet observed.
Mariano Miranda, a partner at Brons
& Salas in Buenos Aires, agreed and said he was not
surprised by the appeals courts pragmatic decision to
defer the matter of the holdouts until a hearing set for next
When Argentina issued these
bonds, they decided to be subject to New York law. They will
have to implement actions in the future to avoid the current
situation, he said.
In Mirandas view, the repeated
statements by Argentinas president and ministers of their
unwillingness to pay the holdouts is not due to a lack of funds
to make the payments, but has to do with complex political
issues. The Argentine government that took office in 2005 is
making a point of asserting independence and resisting policies
implemented by the International Monetary Fund throughout the
1990s, he said.
Those policies treat Argentina as a
vassal state and are sometimes dubbed economic
colonialism by their foes.
The Argentine administration's
staunchly independent stance goes hand-in-hand with big plans
for bond issuances in coming months and closer economic ties to
countries such as Venezuela. But Fitch Ratings ranking of
Argentinas international law bonds has just sunk to
CC, eight levels below investment grade, Miranda
noted. In such circumstances, it is hard to envision bond
issuances without a CAC providing flexibility to the issuer and
lowering the risk of a default or the type of protracted mess
seen in recent days.
While CACs may be a likely feature
of bond issuances going forward, that does not mean they are a
pat solution. In fact, they may cause as many problems as they
Jay Westbrook, a bankruptcy law
professor at the University of Texas School of Law, described
what he sees as the serious dangers in their
"The abuse risk is that there could
be a combination between certain of the bondholders, and the
sovereign country, to favour these bondholders in exchange for
getting this done in a way that's disadvantageous to the
remaining bondholders," Westbrook said.
In a domestic bankruptcy court, a
judge may well be willing to listen sympathetically to
complaints from those bondholders who are in the minority, he
noted. But in Westbrook's view, an even more serious
possibility is that a CAC that has force under one indenture
may not bind bondholders holding under a different indenture.
He suggested that the district court's decision on Wednesday
underscores the need for international debt resolution
mechanisms that can assist countries and their creditors when
debt restructuring is necessary.
Westbrook agreed with the Argentine
lawyers about the far-reaching ramifications of the current
"The implications of the case go far beyond Argentina,
because these issues can come up with lots of countries finding
themselves in a default position," he said.
A US sovereign debt specialist who
spoke on condition of anonymity identified a further
consequence for bond issuances that is likely to result from
the current stalemate. Investors could shun foreign-law bonds
with pari passu clauses, he noted.
If you think that the pari passu clause strengthens the hand of the
holdout creditors in a restructuring and youre pretty
sure that you would be going along with a restructuring, you
dont want the holdout to have any more weapons in hand
because the money they take will be money that would have gone
to you, the specialist said.
Redonett said that although we have
yet to see how events will play out between now and December
15, he finds it highly unlikely that Argentina will want to
risk a technical default. So, in the absence of CACs, Argentina
is still likely to find itself in a precarious position both
economically and politically once again, a fact that
underscores the likelihood of bond issuers incorporating CACs
or similar contractual mechanisms going forward.
Argentina ruling to
hamper sovereign restructuring plans http://www.iflr.com/Article/3116885/Argentina-ruling-to-hamper-sovereign-restructuring-plans.html
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