Pari Passu | paulhunterjones

In December 2001 the world saw Argentina voluntarily walk away from its debt obligations. In a storm of nationalistic rhetoric the country defaulted on billions of dollars of sovereign debt. The massive default caused the Argentine economy to collapse. The difficult economic times drove more than half of the country’s population below the poverty line. Not surprisingly; international lenders and institutions have been reluctant to again lend money to the country. It must be stated that since the default Argentina has reached agreements with about 90% of the bondholders. The investors have been offered a small percentage of their original investment and had their defaulted bond exchanged for new ones. The country has twice restructured the new debt. Some of these exchange bondholders had to believe that receiving something for their investment was better than receiving nothing. They might be right, but only to a limited extent.

It did not come as a surprise to the commentators and experts that investors would eventually grow weary and suspicious of Argentina’s constantly restructuring its debt. These restructurings were basically forced upon the exchange bondholders. The restructure terms clearly favored Argentina. In October 2009 Japan’s finance minister criticized the South American country over its debt restructuring scheme(s). He accused Argentina of not negotiating in good faith with it creditors. Has Argentina ever respected the interests of its bondholders?

Photo Eduardo Di Baia, AP

About 10% of the original bondholders decided to sue to recover their complete investment(s). In a earlier post I discussed the torturous and never-ending path of the litigation. I also considered the significance of Argentina’s latest appeal in the 10 year legal battle with the 2001 bondholders. I believe that the courts have finally reached their limits with Argentina’s refusal to pay on money judgments while continuing to litigate the same legal arguments over and over. The courts are aware of President Fernandez’ public declarations that Argentina will never pay “vulture funds.”

On February 27, 2013 the U.S. Court of Appeals for the 2^nd Circuit (Court) heard oral arguments on Argentina’s latest appeal. The presiding judges made it clear that they were not there to interpret the terms of the bond contracts but to enforce them. The Court dispensed with any notion that Argentina might have had about litigating de novo the underlying case. The issue before the court centered on the federal court’s imposed repayment scheme. The attorney for the Argentine Republic intimated that his client would be amenable to payment but under a different scheme. This limited and qualified suggestion of a possible settlement of the payment issue intrigued the Court. The judges directed appellant (Argentina) to file its plan for the cancellation of the plaintiffs’ judgments. The order was as follows:

At oral argument on Wednesday, February 27, 2013, counsel for the Republic of Argentina appeared to propose that, in lieu of the ratable payment formula ordered by the district court in its injunction and accompanying opinion of November 21, 2012, Argentina was prepared to abide by a different formula for repaying debt owed on both the original and exchange bonds at issue in this litigation. Because neither the parameters of Argentina’s proposal nor its commitment to abide by it is clear from the record, it is hereby ordered that, on or before March 29, 2013, Argentina submit in writing to the court the precise terms of any alternative payment formula and schedule to which it is prepared to commit.

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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.