A Pseudo-Bankruptcy Proceeding for Sovereigns

25 Mar 2013

Let’s talk again about NML v. Argentina. again. There have been some developments since we last visited this litigation, on February 26. The developments give some apparent importance to a date now almost upon us, March 29. So now certain bond traders, hedge funds, other financial institutions, and their lawyers are waiting with bated breath to see what Argentina will come up with on or by that day.

The Story So Far

In 2001, Argentina defaulted on its sovereign debt.  It has repeatedly declared since then that it will make no payments on the bonds that were then outstanding, bonds with unpaid principal and prejudgment interest amounting to at least $1.33 billion.

In 2005 and again in 2010, Argentina redeemed those old bonds for new unsecured and unsubordinated debt at very significant discounts.  As a result, the holders of Argentina’s bonds are now split into two warring groups: those who accepted the exchange, and those still holding the old, 20th-century bonds.

The latter (especially NML Capital) claim, in the ongoing litigation in New York, that until Argentina starts paying them, it shouldn’t be permitted to pay the Exchange holders, either.  The contractual basis for this is the pari passu (equal footing) language in the issuing documentation.

NML won in the district court, and won again before a three-judge panel of the appellate court, except that the appeals panel expressed last autumn expressed “concerns about the injunctions’ application to banks acting as pure intermediaries in the process of sending money from Argentina to the holders of the [post-default] bonds.”

On November 28, the appellate court stayed the district court’s orders, allowing Argentina to continue to make payments to its favored bondholders while the appellate court thrashed out issues of remedy.

A Hearing and a Scorecard

On February 27, the day after our last discussion on point at AllAboutAlpha, the three judges heard two and half hours of arguments about remedial issues in the case. The courtroom was packed for this argument, evidencing the intense interest this case has generated well beyond the usual small corner of the bar involved in sovereign debt restructurings. Indeed, there were two overflow rooms.

What follows is a list of the central participants in the ensuing remedial argument, and their contentions:

Argentina:  Urged once again the contention, specifically rejected by the court, that pari passu does not mean equal payment.  The court showed no interest in returning to this question.

Perhaps more promisingly, counsel argued for “inter-creditor equity,” which it described as a policy of “haircuts all around.” To some it sounded a bit as if Argentina, via counsel Jonathan Blackman, were pressing upon the court a quasi-bankruptcy role.

Bank of New York Mellon: BNY Mellon argued that the district court’s injunction had deprived it of due process of law by threatening it with contempt of court for discharging its normal functions as an indenture trustee (and transferring money to holders of the Exchange bonds in accord with Argentina’s instructions).

The judges did not seem receptive to this argument. Indeed, two of them suggested that any attorneys involved are reckless if they are in fact counseling BNY Mellon that it could lawfully make a payment to the Exchange bondholders while the injunction is pending.

Exchange Bondholders: Counsel for the Exchange bondholders, David Boies, also argued that BNY Mellon should not be subject to the injunction. He stressed that if the court takes the position NML wants it to take, the pay-everybody-or-nobody position, then Argentina will respond by paying nobody, that is, by another default, one in which the Exchange bondholders will be the innocent victims.

He, too, sounded like someone speaking to a bankruptcy judge, in urging a practical approach to divvying up an estate’s assets.

After the Hearing

Two days after the hearing, on March 1, the court entered an order that sought further information and argument from Argentina. It really did seem by this point to be trying to create a New York centered bankruptcy/restructuring system for sovereigns. The March 1 order instructs Argentina to provide “the precise terms of any alternative payment formula and schedule to which it is prepared to commit” and what “assurances … it can provide that the official government action necessary to implement its proposal will be taken….”

The court gave Argentina until March 29 to submit responsive material in writing. Oddly, it didn’t provide specifically for responses to that submission from other parties. It said that if it wants a response to Argentina’s submissions from other parties, it will let them know, “a further order will issue from the court.”

Now, as the days tick down toward the 29th, seems as good a time to wonder: what is going on?

As Anna Gelpern wrote in the estimable Credit Slips blog: “Circuit court judges are not in the business of issuing orders for laughs – if they thought there were no answers that Argentina could give and they could accept, they would not have asked the question.” [To be complete, that remark is only a small part of Gelpern’s quite ambivalent blog entry, in which her only conclusion is that one can read the “tea leaves” in mutually inconsistent ways.]

The lawyers for Shearman & Sterling, who have done commendable work keeping not only their clients but the interested part of the world up on the details of the case through their website, have made the point that the next interest payment to the Exchange Bondholders is due in the week of April 1. Since Argentina doesn’t have to file its paper until the 29th, it seems unlikely there will be an instant turnaround from the court, the November 28th stay will remain in effect at least long enough to get the next payment in the hands of Boies’ clients.

My own inference – and a quite tentative one since I have been wrong about this litigation before – is that the panel has something Big up its sleeve. But in order the this panel to be in a position to pull anything out of that sleeve, Argentina will have to cooperate and offer a compromise on the 29th.

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