debt restructuring | paulhunterjones

The Holidays have come and gone. I hope that everyone enjoyed themselves and that you took some time out from celebrating to reflect over the direction of your lives. We have our own unique paths in life to follow. I must make some changes in my life if I am going to obtain my goals and be a better person. I wish everyone the best of luck for 2013.

Let’s return to the issues at hand and see if we can resolve some of them in 2013.

There have been some significant developments in the long running litigation between NML Capital and the Republic of Argentina. In my last post on this contentious litigation I reported that Judge Griesa of the Federal District Court, Southern District, New York State had addressed the issues that the Federal Appeals Court of the Second Judicial Circuit had remanded to him for clarification. Judge Griesa’s ordered Argentina to pay the plaintiffs what they are owed on their defaulted bonds. The District Court crafted a payment solution in which monies paid to the trustee for the exchange bond holders would be diverted to pay the plaintiffs. In a sense the District Court crafted a levy against the debtor’s assets here in the U.S. If Argentina attempts to get around (again) the court order the Republic would default on the bonds held by the exchange holders.

It should not have come as a surprise to anyone that Argentina on December 28, 2012 filed (again) an appeal with the US Court of Appeals for the 2^nd Circuit seeking to overturn Judge Griesa’s order. The appeals court issued a temporary stay of the lower court’s order and set oral arguments for February 27, 2013. The will decide the case sometime in early summer.

For the time being Argentina will be able to pay the exchange bond holders without having the trustee divert money towards the satisfaction of the Plaintiffs’ judgment(s). The appeals court accepted briefs as friends of the Court from the exchange bondholders, involved banks and other concerned persons. Importantly, the United State once again submitted papers in support of Argentina’s overall position; that it, as a sovereign nation, has an absolute right to force a re-negotiation of debts on bond holders. According to the Argentine position anyone who fails to take part in the restructuring stands to lose their investments. The Justice Department in its papers again argued national political concerns over accepted legal theory and law. According to Justice Department lawyers the Executive branch’s policy goals take precedent over Argentina having to obey the lawful commands of the federal judiciary.

One has to question the fairness of allowing Argentina to unilaterally decide which of its creditors it will pay and which ones will receive no payment. I do not believe that the US government would take such a position if it was the creditor that was having its investments controlled by a foreign nation’s political whims.

I think that the US should use it power to insure that its private equity companies are paid on investments that they have made in foreign governments’ sovereign debt. Promoting private investment in foreign debt offerings seems to be a good policy when it ultimately relieves the American taxpayers of having to bare the risks of such an investment. America should not promote a policy that effectively ends private investment in sovereign debt. Private companies cannot and should not take the risk of investing in sovereign debt if the issuing nation can unilaterally change the terms of the investment or simply not pay on the investment.

In another important development in the NML Capital v. the Republic of Argentina litigation the exchange bond holders filed suit with the New York State Court of Appeals. The legal action seeks a declaratory judgment over the legal definition of the pari passu clause in the bonds, which is at the heart of the dispute raging in federal court. The plaintiffs in this new case argue that the interpretation of the clause is a matter of state law. Accordingly, the plaintiffs urge New York State’s highest court to accept the case and decide the legal significance of the clause. In this respect the plaintiffs are correct, but that does not mean that only a New York State court can definitively resolve the issue. The exchange bond holders seek a ruling that declares that all bondholders should be treated equally. It is unclear that the state’s highest court will accept the case or how it might rule if it does. For many reasons I doubt that the state Court of Appeals will issue a ruling contrary to the federal court’s interpretation of the clause. The judges who sit on the Empire State’s Court Appeals will not relish their roles as “appellate judges” who must review Judge Griesa’s order.

In my opinion the exchange bond holders have good reasons to fear losing (again) their investments if Judge Griesa’s orders are ultimately sustained. I do not believe that any holder of Argentine debt is confident of being paid according to the terms of his bonds or a forced restructured agreement. Lately, the South American former economic power has developed a harsh and belligerent stance towards its creditors and foreign investors. The Argentine President along with other high-ranking governmental officials have repeatedly stated that Argentina will never pay NML Capital and the other plaintiffs monies that the US judiciary have declared to be due and owing. Argentina has engaged in the expropriations of foreign investments without fair and reasonable payment for the taking. It is obvious to everyone that Argentina has simply stopped playing by the long establish rules.

On the other hand the investors who comprise the plaintiffs in the federal case have good cause to suspect that the exchange bondholders are working to help Argentina circumvent Judge Griesa’s orders. The New York State filing by the exchange bondholders supports this suspicion. In the end the exchange bond holders and the NML Capital plaintiffs are going to find themselves in the same untenable position; Argentina is not going to pay anyone (again) and blame the US for preventing it from making proper payment.

The US Administration should realize that the Argentina’s tactics and complete disregard for American judicial mandates weakens Wall Street as the world’s financial center, pits American investment companies against one and other and diminishes the country’s status as a world leader in finance. The idea that one (including an entity) should pay his or her just debts should be fully embraced by America and exported in the name of free and sustainable commerce.

It is ironic that the US is advocating that Argentina and nations in general be granted flexibility in refinancing their external debt. The credit rating agencies are quickly running out of patience with the US’s continued failure to deal with its own burgeoning debt problem.

Litigation stemming from Argentina’s 2001 massive sovereign default has taken place in U.S. federal courts for over a decade. Because most of the plaintiffs are located in New York City and the terms of the bonds specifically grant subject matter jurisdiction to New York State, the cases have been heard in the state’s Southern District Federal Courts. The eventual outcome of these cases will leave one party content and satisfied that justice has been served. The other party will probably pursue all legal remedies to continue the fight. Unfortunately justice is often viewed in its subjective and political form. In my opinion the core legal issues of the cases have become somewhat obscured by the constant political posturing of Argentina.

On October 26, 2012 the United States Court of Appeals for the second circuit (the Court) decided the case of NML Capital v. the Republic of Argentina. The Court affirmed in part and remanded in part the lower court’s decision that was entered by Federal Judge Griesa of the Southern District. In the case Judge Griesa ruled against Argentina in granting the applications of the Plaintiffs. Much to the chagrin of Argentina; its fiery pronunciations of sovereign integrity and legal quasi political arguments that it had a sovereign right to force restructuring upon debt holders were judicially debunked by the District Court.

It appears that after a decade of avoiding payment on bonds that were not restructured the time has finally come for the former South American economic power to pay up what it owes bondholders. Argentina last paid interest in 2001 on these non-exchanged bonds. There has been an abundance of sensationalism and drama at ever stage of the litigation. Yet, the legal issues have always relatively clear cut. The underlying facts of the case have never been in dispute. In its simplest terms; Argentina borrowed money that it did not repay and now must repay.

In a well reasoned opinion the Court decided the issues before it while crafting a remedy. A panel of three circuit judges concluded that the Judge Griesa’s decision on the law and novel equitable remedy were correct and appropriate. Importantly the appellate court found that the lower court’s judge did not abuse his discretion in granting the Plaintiff’s applications. The Court agreed that Argentina violated the terms of the bonds that were issued to NML Capital and other the plaintiffs. The subject bonds that were originally issued decades ago did not contain subordination clauses. In fact the bonds specifically contained an equal treatment clause that prevented Argentina from discriminating against the Plaintiffs in favor of holders of later restructured debt. The Court referred to the relevant paragraph in the bonds as the “Pari Passu” clause. This provision required that

“[t]he securities will constitute…direct, unconditional, unsecured and unsubordinated obligations of the Republic and shall at all times rank pari passu without any preference among the themselves. The payment obligations of the Republic with the Securities shall at all time, rank at least equally with all of its other present and future unsecured and unsubordinated External Indebtness…”

After having sustained the lower court’s ruling on law based on the undisputed facts the Court considered Judge Griesa’s award of equitable relief to the Plaintiffs. In this respect the panel of appellate judges cited many examples of Argentina having done everything within its sovereign power to legally avoid paying the Plaintiffs on the bonds that they held. The Court agreed with the lower court’s conclusion that Argentina could not be trusted to make the required payments or respect the Court’s orders. Consequently the Court affirmed the lower court’s granting of the restraining orders and injunctions. The Plaintiffs had clearly established that they would suffer irreparable harm if they were not granted the relief that was requested. In my opinion, based upon the facts presented to Judge Griesa, the Court had no choice but to affirm the granting of the equitable relief. It was conclusively established that Argentina by executive and legislative pronouncements had enacted measures that prevented the Plaintiffs from ever receiving any payment for or on their non-restructured bonds. Importantly, the Plaintiffs’ cause of action actually arose when Argentina continued to discriminate against the Plaintiffs’ and their rights to repayment. The Court remanded the case in part to Judge Griesa “for proceedings as are necessary to address the operation of the payment formula and injunctions applicable to the third parties and intermediary banks.”

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