What the Fighting's All About in Argentina Vs. Holdout Creditors

Tuesday, 04 Dec 2012 07:04 AM

 

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For the last decade, Argentina and its holdout creditors have sparred in U.S. courts over the country's 2002 debt default. The creditors are suing to be repaid in full after spurning two debt swap offers accepted by about 93 percent of bondholders.

The holdouts, including U.S. hedge fund Elliott Management, have won several billion dollars in court-awarded damages. But they have collected very little since Argentina refuses to pay and U.S. sovereign immunity laws protect most of its assets from seizure.

President Cristina Fernandez, a combative center-leftist, has vowed she will never pay the holdouts but will keep honoring the bonds issued to other investors during the 2005 and 2010 restructurings.

This flies in the face of two U.S. court rulings, which say Argentina must pay both sets of investors simultaneously.

Argentina says it will not comply because its own laws bar it from paying the holdouts, which would put the onus on U.S. banks and other third parties that process Argentine debt payments to enforce the court orders. Argentina has appealed and vowed to take its case to the U.S. Supreme Court if necessary.

The uncertainty over how this could play out has torpedoed Argentine debt prices and raised fears that Latin America's No. 3 economy could default on its debt again.

Here are some facts about what is in dispute in this complex case:

EQUAL TREATMENT

Nearly a year ago, U.S. District Judge Thomas Griesa ruled that Argentina violated the "pari passu" bond provision requiring that it treat all creditors equally when it paid investors who accepted the debt swaps while refusing to pay the holdouts. He said they should all be paid simultaneously.

This ruling favored plaintiffs including Elliott affiliate NML Capital Ltd. and the Aurelius Capital Management funds, who had sued over an estimated $1.33 billion in defaulted bonds.

Argentina appealed this ruling and most market analysts thought it would prevail. But on Oct. 26, the 2nd U.S. Circuit Court of Appeals largely upheld Griesa's decision and sent the case back to him for clarification on two points.

The lawyers representing Argentina say the ruling would be grossly unfair to creditors who got about 30 cents on the dollar in the swaps.

They also say it could spark a new Argentine debt crisis by jeopardizing payments on up to $24 billion of restructured debt if third parties, including banks and clearinghouses, are forced to disrupt these flows to comply with the court orders.

Finally, Argentina argues it could undermine the ability of other governments to restructure debt in the future.

The U.S. government agreed, saying in a friend-of-the-court brief that Griesa's ruling "could enable a single creditor to thwart the implementation of an internationally supported restructuring plan, and thereby undermine the decades of effort the United States has expended to encourage a system of cooperative resolution of sovereign debt crises."

But the 2nd Circuit Court of Appeals rejected that argument, saying most new bonds include collective action clauses which eliminate the threat of holdout litigation by requiring that all creditors accept a restructuring if it is approved by a supermajority.

The court also contended that countries like Spain and Greece, plagued by debt problems, would not be affected by the ruling since they have no bonds issued under New York law.

The panel of three judges said Argentina has enough money - including over $40 billion in foreign currency reserves - to pay the holdouts and the restructured debt. But Argentina says its "Lock Law" passed in 2005 bars it from paying the holdouts without prior congressional approval, making compliance with the U.S. court ruling illegal under Argentine law.

The Lock Law was cited by the appeals court as evidence of Argentina's discrimination against the holdouts under "pari passu." In its latest filing, Argentina indicated it could propose amending the law if the court agreed that the holdouts should be paid on the terms of the 2010 debt swap.

Fernandez's allies control both houses of Congress and could likely ensure the amendment gets approved.

Argentina petitioned for a rehearing on the pari passu issue with either the same panel of 2nd Circuit judges that ruled in October, or with the entire court. The court has yet to respond.

STAY ON GRIESA'S ORDERS

In February, Griesa first issued a payment order obligating Argentina to pay the holdouts when it next paid the exchange bondholders. But the following month he agreed to stay, or halt, that order pending Argentina's appeal.

On Nov. 21, however, he lifted the stay, arguing that Argentine officials had made statements showing they had no intention of complying with the court ruling. He ordered that Argentina deposit the $1.33 billion owed to holdouts in an escrow account by Dec. 15.

On that same date, Argentina must pay about $3 billion on its growth-linked GDP warrants, issued during the debt swaps.

Argentina sought to halt Griesa's Nov. 21 order and the appeals court agreed to reinstate the stay until it resolves appeals on the matter. It set a timeline for briefing and scheduled a hearing in the case for Feb. 27.

The decision eased fears that Argentina could default in the coming weeks, but the holdouts said it was too lenient and gave the government more time to plot a way around the court rulings.

Their lawyers asked the appeals court to order that Argentina post a security deposit of at least $250 million as a condition for keeping the stay in place. It said if that were not possible, the court should consider expediting the appeal so it can be resolved this month.

The appeals court must respond to this latest emergency petition, and weigh the appeal of Griesa's Nov. 21 orders by Argentina and the bondholders who accepted the swaps.

PAYMENT FORMULA

In its Oct. 26 ruling, the appeals court asked Griesa to clarify how the "ratable" or proportional payment that he ordered would work.

The appeals court said it was not clear under his formula if the holdouts should get paid 100 percent of what they are owed when Argentina pays 100 percent of what it owes to exchange bondholders on any given day, or if they should get paid a smaller percentage if what the exchange bondholders get represents a tiny fraction of the outstanding debt owed to them.

Griesa responded that Argentina would have to pay 100 percent of what it owes the holdouts, or about $1.33 billion, if it pays 100 percent of what it owes to the exchange bondholders on a given day — even if the latter sum is much smaller.

The appeals court has yet to review Griesa's clarification on this point.

THIRD PARTIES

The appeals court also asked that Griesa explain more precisely which third parties would be required to uphold the court's ruling if Argentina refused to comply.

The judges said there was some confusion about how the payment order would apply to third parties and to intermediary banks specifically, which they said should not be subject to court injunctions under U.S. law.

Argentina seized on this concern when asking the appeals court to halt Griesa's Nov. 21 court order, saying it would cause "extreme harm to numerous third parties," including Bank of New York Mellon Corp., which acts as trustee for the exchange bondholders.

The appeals court agreed to let BNY Mellon and the exchange bondholders themselves participate in the case as interested non-parties.

The financial institutions that help process Argentina's payments to exchange bondholders are loath to be placed in the middle of this dispute since it could be costly for them and could compromise their commitments to their clients.

In his Nov. 21 opinion, Griesa named the different institutions along the payment chain used by Argentina to service its restructured debt. He said intermediary banks would be expressly excluded.

The appeals court has not reviewed this response yet either.

© 2014 Thomson/Reuters. All rights reserved.

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